Managed Service Providers: Don't Make This Mistake When Building Your As-A-Service Offering

posted by Jackie Schmid on Monday, February 25, 2019 in Unified Communications and IT Blog

There is no way around it. If As-A-Service wasn’t the “thing” before, 2019 is the year of As-A-Service for Managed Service Providers, UC providers and Audio Visual shops. Just last week, Arlin Sorensen, the father of MSP best practice sharing, stated in his daily email, “the days of long term contracts will likely change as the buyers become younger and more friendly to a subscription rather than longer term commitment.”

Don’t believe him? Look no further than your own technology providers. Microsoft did this ages ago with Office 365, but most recently firewalls are being pushed to you “As-A-Service”, BDRs are offered “As-A-Service” and before long, more big-ticket items like servers will be offered “As-A-Service.”

This shift is enabling Managed Service Providers to sell packages that are more inclusive of the hardware elements that were traditionally more difficult to get their customers to buy. Unfortunately, some MSPs are missing the opportunity to incorporate Hardware as a Service and sell more products, which might be hurting them more than they realize.

How Does Your MSP View Product Sales?

Are hardware sales an afterthought to your business or are you proactively standardizing on equipment through product sales?

We’ve walked dozens of MSPs through an As-A-Service Operational Maturity Level tool we developed in conjunction with Service Leadership, and discovered the opportunity some are leaving on the table.

When we evaluate Solution Providers with that OML tool to understand their position on product sales, we put them into five buckets. Take a quick moment to identify where you’d fall.

  1. We’re not in the product business, don’t sell it much or often.
  2. Product recommendations are made to get a client’s environment most efficiently supportable. We allow customers to buy from us at cost/low margin, or to acquire hardware themselves. We don’t view product sales as an important profit center.
  3. We recommend and sell product, but allow customers to decide when to acquire hardware. Product sales are important, but not a primary financial driver to our business.
  4. Product sales are deliberate; our clients largely adopt the technologies we recommend.
  5. Product sales are vital to our profitability and long-term business success (though resale may not be the majority of our revenue). Clients largely adhere to our standards and recommendations.

Three Pitfalls of Ignoring Product Sales

If you are intentionally avoiding product sales as part of your offering, you should be aware of the dangers.

The first pitfall is that it will cost you more in the long run. Managed Services clients who are running whatever hardware and software they want will drive up your service calls, and with that the cost for you to provide them service. This is the basic principal of standardization, which we’ll dive into a little later.  

The second pitfall is leaving the door open to your competitors. If you aren’t providing them the hardware and equipment they need to run their business, and they recognize it isn’t a great use of their time and resources, they will likely find somebody who does procure, configure and sell the devices they need. What are the chances that same company also provides Managed Services?

The third pitfall is leaving money on the table. If you aren’t incorporating hardware sales as a revenue stream, you could be providing web giants like Amazon or consumer distributors all the margin that you should be getting.

The Benefits of Proactively Offering HaaS

On the flip side, there are a number of Managed Services companies who have cracked the code on product sales. They don’t consider themselves product-first companies, but they are using a Hardware as a Service model to achieve some major business goals.

Higher MSP Standardization and More Profitable Service Delivery

Standardization is critical for MSPs who want to grow profitably. If all you are doing is managing your clients’ chaotic IT environments, you may lose your mind, your best technicians and engineers, and potentially your business.

Even if you aren’t enforcing standards, offering a consistent set of products over time leads to more standardization, but it might not be enough.

This helpful article from Service Leadership explains the best practices to begin standardization. There is actionable advice including how to identify which products you’ll standardize and are non-negotiable for new customers.

If and when you get to the point where you are enforcing standards, and clients are running on consistent pieces of the network, you’ll begin driving down the cost of service. For example, if every client is running the same firewall, then your technicians are intimately familiar with the ups, downs, pros and cons of the product and how to quickly address the issues.

A few years ago, we worked with MSPCFO to look at the service efficiency and profitability on clients who were sold hardware versus clients on basic Managed Services agreements. We looked at 16 end-user customers who were sold GreatAmerica Hardware as a Rental® (HaaR®) contracts. That is where there is a hardware component as well as Managed Services – similar to what you’d see in a Hardware as a Service deal.

What they found is that when products were bundled together with services, the labor profitability improved, and in some cases significantly. Some of the customers were so efficient that profitability improved by almost $50 an hour.

Happier Clients

The benefits of standardization extends far past you, your team, and company health, your customers will be happier, too. A client running an old, slow machine will be more frustrated while attempting to get their work done. In addition, if it takes your team too long to resolve issues, they are going to become more and more disgruntled. On the flip side, if your customers are operating with little interruption from their technology – they are going to be happier.

Higher Business Valuation

Over time, implementing an intentional product sale strategy will lead to overall higher business valuation.

Business Valuations and EBIDTA are higher with product resale and HaaS

According to Service Leadership data reported out in a webcast in 2018, improving product resale can increase overall revenue by 33%, increase EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortization) by 31%, and provides 12.5% in higher business valuation.

Using As-A-Service to Sell More Products

Managed Service Providers who use the market shift to sell more products and standardize with a Hardware as a Service model are going to win. The As-A-Service model lowers the barriers to get clients to adopt the technology that will produce a win-win relationship. Since you are already asking them to write a monthly check for support, why wouldn’t you use that opportunity to provide them a more stable and supportable environment by bundling in their firewall, BDR, devices, servers, or any other hardware you are providing?

How Financing and Hardware as a Service Impacts Profitability with Product Sales

So what role does financing and GreatAmerica play in the world of product sales, standardization, and As-A-Service? A rather large one for MSPs who are in high-growth mode, in fact!

When Service Leadership reviewed performance of GreatAmerica customers, they found that as a company sells more product through a finance vehicle, the margins increase on both products and services.

Change in Gross Margin and Ebitda Service Leadership from Product

Image Above: Service Leadership shares the impact on Product and Infra Services GM%, and adjusted EBITDA % as the MSP increases the proportion of their product revenue driven through GreatAmerica Financial Services (GFSC).

Many are seeing incremental adjusted EBITDA growth when they are financing more than 10% of their product. In addition to the photo above, Paul made the following observations:

  • Product gross margin percentage goes up because clients are less price sensitive in monthly payment form.
  • Infrastructure services gross margin percentage goes up because the client adopts standards more quickly, improving the MSP’s efficiency.
  • Infrastructure services gross margin percentage goes up because managed service fees combined with product payments are more difficult for the client to cross-shop.

“Either top performing MSPs are doing more product sales with GreatAmerica, or doing more product business with GreatAmerica enables MSPs to have higher performance.”

- Paul Dippell, CEO of Service Leadership.

When we asked Bryan Currier, President of Advantage Technologies, about how product sales through financing has impacted his business he said, “Products allow us to produce an end-to-end solution, and we not only get margin on the products but there is a wraparound service on those products. I guess the best way to put it is: I couldn't imagine our business running the way it does if product was not a core part of our strategy.”

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About The Author

Jackie Schmid is the Director of Strategic Marketing of the Unified Communications & IT Group at GreatAmerica Financial Services located in Cedar Rapids, Iowa. Jackie is responsible for building brand awareness and gaining strategic relationships through creative marketing. Prior to joining GreatAmerica, Jackie worked in the TV News industry as a producer and executive producer at the local CBS and FOX stations where she helped shape the programs delivered to the market. Jackie’s finance career began in 2011 when she joined GreatAmerica to support the sales team serving the Office Equipment space.

  1. hardware as a service
  2. managed services
  3. standardization
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