By Julian Box, Calligo
Few disagree that expanding managed recurring revenue (MRR) is a principal goal for most MSPs. The MRR business model leads to, among other things, predictable revenue and cash flow, increased scalability, and a higher customer lifetime value. MRR also serves as a critical metric for investors who prefer to see cash flow and total revenue coming from recurring revenue compared to one-time transactions.
The fact is almost anything can be turned into a recurring revenue provided an MSP is creative, willing to disrupt processes, and doesn’t mind challenging the status quo.
Before rushing to convert non-recurring revenue (NRR) into MRR, perhaps because you have inherited NRR revenue streams from acquisitions, you must first step back and think carefully about whether a managed services offering even makes sense. Remember, that NRR probably has been delivered as a project to date for a reason. By keeping this in mind and asking five specific questions, you’ll be able to evaluate whether an activity can – or even should – convert into an ongoing service for which a customer would be willing to pay a recurring fee.
Can The Service Be Performed On An Ongoing Basis For At Least A Year?
If you find yourself providing a customer with an ad hoc service that is regular and constant, it is likely a good candidate for conversion to an MRR service contract. Start by identifying a package of activities to be performed repeatedly month-to-month or quarter-to-quarter over 12 months – the typical minimum benchmark for any MRR contract. Also, ensure that whatever those activities look like, their outputs will be evident to the customer (e.g., they see the service taking place, activity is reportable). This way, the customer understands what it is receiving in exchange for paying a monthly invoice.
Is The Service Comprehensive Enough?
Part of the value of entrusting an entire function to an outsourced provider is the knowledge that all its needs and requirements are catered for in a single package, and only extraordinary circumstances require additional charges.
However, if you are finding that the way your service is consumed means that exceptions are becoming the rule, what you really have is a loyal project customer and a managed service contract that is serving more like a preferred supplier agreement.
Remember, businesses prefer predictable, consistent monthly budget allocations to plan further ahead and invest more efficiently. By creating a service that encompasses most of a customer’s needs in a specific area and then delivering that service in a consistent and repeatable framework, you reduce customer frustration from unexpected expenses and create a stronger foundation for future upsell or cross-sell.
Is The Service Repeatable And Scalable?
Predictability is vital – in the actions performed and the resources required. Why? The whole point of a managed service is not only constant income but also the ability to easily scale. By building a set of predictable activities and processes that can be repeated, refined over time for efficiency, and even eventually automated or run through monitoring technology and exception reporting, you will be able to move beyond a service offering customized for a single customer to having one that can be quickly implemented for additional customers no matter their size.
Is The Service Unique?
Always look to develop a service not traditionally offered as a managed service. Doing so increases the value you offer customers and, as a result, allows you to charge premium prices. Many MSPs look a lot alike because they provide the same thing. The only way they can differentiate themselves is by lowering fees which decreases margins. The lone winner is the customer. By bringing something new to the table, you’ll define your business as something different and stand above your competitors.
Can The Service Be Clearly Defined?
When developing a new MRR offering, the number one best practice is to create a crystal-clear service definition that spells out what your MSP will do, what your customers will do, and what you will do together. Doing so allows you to build out your team and processes. You know what to do, who should do it, and when. More importantly, a good service definition firmly establishes in advance what a customer can expect on a monthly or quarterly basis in return for paying its invoice. Drawing a clear line in the sand leaves no gray areas, avoids scope creep, and keeps unhappy customers who think they should be receiving more at bay.
The Key To Success: Patience
One final piece of advice: Don’t let your eagerness to lock down a managed service opportunity come back to haunt you. I’ve seen too many providers ultimately regret moving too fast to get a signed contract. Without taking the time to address the five questions thoroughly, you risk committing yourself to a long-term contract for an imprecise offering that you can’t repeat and scale and won’t work well in practice. The result is an unprofitable managed service and a tense customer relationship. Only by combining patience with introspection will the NRR to MRR transition be successful.
About The Author
Julian Box is the founder and chief executive officer at managed data services provider Calligo. Box founded Calligo in January 2012 and is responsible for delivering Calligo’s vision of building a client-centric business, delivering managed data services that optimize every stage of the data journey, while ensuring that privacy continues to be at the heart of the organization and its services. He has over 30 years of experience helping organizations streamline operations through the innovative application of technology.