by Josie Heskje on Monday, December 02, 2013
Last month I had the pleasure of interviewing Managed IT Services guru, Paul Dippell, CEO of Service Leadership, on the general opportunities and challenges of getting into Managed IT Services for the office equipment provider. This time, we’ve turned our focus to one of the most challenging aspects of Managed IT success— effectively selling it!
Historically, office equipment dealers have a great deal of success selling products. However, selling Managed IT Services requires a solutions sales approach, customer conversations at the C-level and discipline regarding the ideal prospect for Managed IT Services. These are just a few of the nuances of Managed IT Services sales success. With Paul Dippell’s extensive and successful background growing, buying and selling Managed Service Providers (MSPs), his perspective on selling Managed IT Services is fresh and may be just the insight you’ve been searching for.
GreatAmerica/Josie Heskje (Question): Paul, it’s tough for some dealers to sell managed services to their existing customers. Should they set up a special initiative to pursue new customers specifically for their managed IT offering?
Paul Dippell (Answer): We do recommend you pursue new customers for Managed IT Services, of course. But we strongly advise you to leverage your key asset— your existing customer base. About 20% of your existing customer base is likely to need and buy top quality Managed IT Services. They match the customer profile the top performing MSP down the street is pursuing, so you’d better sell them first! Most office equipment dealers would, I think, admit that the toughest Managed IT Services sale isn’t to the traditional customer, it’s to their traditional sales rep. Office equipment sales reps are smart— if they think the Managed IT Services isn’t of good quality, they won’t risk “their” known good accounts on it. So the key is service quality. If the office equipment rep thinks the Managed IT Service experience for their customer will be good-to-great, they’re happy to sell it. Why wouldn’t they be? A lesser obstacle is who they are calling on in the account. Again, as above, proper sales support solves this problem.
Q: Some office equipment dealers have 1,000s of traditional equipment customers under contract. Does this mean that they’re all potentially good managed IT customers?
A: As we noted above, about 20% of them match the profile of good Managed IT Services customers. I should tell you that inexperienced MSPs – and there are unfortunately many out there – make many of the same mistakes as office equipment dealers trying to get into the Managed IT space. They try to sell to the wrong customer profile, they frequently underprice, and so on. So what’s the right customer profile? What the top performing MSPs look at is what we call the “IT buying style” of the customer. Regardless of customer size or industry, there is a segment – about 20% of the customers in any segment – who are highly dependent on IT and who are savvy enough to know it’s smarter for them to focus on their core business and find a partner they can trust whose business is IT operations. This is true in the enterprise space, mid-market and SMB. Some other traits of these high-IT-criticality buyers are: the computer users are costly employees and they use computers (and tablets and smart phones) all day long to serve customers. The C-level in this business – if they’re smart enough to know they should not waste time running their own IT – will pay good money for good service. If this sounds like the profile of most professional services firms, you’re right. Many of them make good Managed IT Services customers. Financial services and healthcare are also good hunting grounds. But every industry has that 20% segment that has the right “IT buying style”. Look for the aggressive CEO who wants to grow and deliver great service himself or herself, and who has the presence of mind to see that they shouldn’t try to be good at IT, even if they could be.
Q: Some office equipment dealers think they should set up a separate sales force for their managed IT services solution. Is this something you recommend?
A: We see this frequently and recommend against it because it doesn’t work well. More to the point, it’s not necessary. It doesn’t work well because it confuses the customer – why do I have two sales people calling on me? It also creates two sales costs where one will do. To the extent your separate IT sales force is successful it creates a potentially bigger problem. Because their IT operations are of more consequence to the customer than their office equipment operations, the customers will gradually pay more attention to the IT sales person than the office equipment sales person. This can create stress among your traditional sales team. A costly sales “proof of concept” isn’t needed. This tends to overspend on sales resources and underspend on technical resources which are more critical at the early stages. The office equipment sales team, properly supported by an existing executive leading the initial MS sales charge, can sell Managed IT Services very well, with less sales cost and less friction than fielding two sales teams.
Q: What resources do you feel are important for a traditional copier sales rep to have, in order to be successful selling Managed IT Services?
A: It’s generally not advisable to try to teach traditional sales reps how to sell Managed IT Services. The process requires too much time and commitment. The top performers instead teach their traditional reps to pre-qualify the customer for Managed IT Services and generate interest among the pre-qualified in having a follow-up meeting with the Subject Matter Expert (SME). Using a “quick qualification” approach, the sales rep can provide the SME with enough insight for them together to determine if a “four-legged” sales call is merited. As we previously discussed, this will be true with about 20% of traditional copier customers. The “four-legged” sales call is then the most efficient way to close the richest, safest deal in the shortest period of time. In addition, because you are investing in a Managed IT Service “factory” so to speak, with material upfront costs, your traditional sales incentive plan has to transition to including a minimum threshold of Managed IT Services deals. It doesn’t have to be a lot, but it does have to be unavoidable by the rep.
Q: What is a best-in-class sales compensation model for Managed IT Services in the office equipment environment?
A: The top performing MSPs, ironically, are those that implement a “hunter” model which is closer to the traditional office equipment model. That is, the sales rep is responsible for both generating leads and taking inbound leads, then qualifying, proposing and closing them – again, with proper sales support – and then moving on. Because IT is so complex, there’s a tendency that’s counter-productive to growth, for the rep who closes the deal, to “babysit” the closed account to ensure the monthly commissions, which takes time away from new account selling. So the top performing MSPs pay them one time to close the deal and move on. The top quartile in profitability spends about 10% of gross margin dollars on sales W2. If the rep sells a $3,000 a month account at 50% gross margin on a 3 year deal – all typical numbers for a top quartile MSP – that’s about a $5,400 one-time commission for closing the deal. A good rep can close as many as 2 deals a month – that’s net new, not converting existing accounts. So that’s about $130,000 a year in income for a good rep. In practice about 40% of that is base pay, so the one-time commission is less, but those are good numbers in the MSP business, and good “gravy” so to speak, for the office equipment rep.
Q: For the office equipment dealers that have been in managed IT services for a couple of years and experienced some initial success, but perhaps flattened out a bit, do you see plateaus in this business regularly? What can a provider do to overcome a plateau in managed IT revenue?
A: We segment MSP business units into five Operational Maturity Levels© or OMLs: Beginning, Emerging, Scaling, Optimizing and Innovating. Without direct help, an acquisition or a partnership (or some combination), it usually takes about five or six years to get to OML 3, called Scaling. At this stage, Managed IT Services profits are probably around the median I mentioned above, and – if SMB customers are the focus – they have only about thirty to fifty fully managed customers. Ironically, the journey to OML 3 is often so difficult that by the time the MSP gets there, they’re often convinced they’ve reached the peak. So although they could scale, they don’t have a good idea of how fast or how far. So they kind of flatten out. Some, however, push on through and find out the next level of maturity, OML 4, is where the real sales growth happens. They figure out the broader picture—not just how to deliver but how to market and sell. At the end of 2012, about 21% of MSPs were at OML 4 or 5. These are the owners who are driving impressive growth while delivering top quartile profits. They often have 150 to 250 fully managed accounts, and some are a fair bit bigger than that.
To go back to a previous question, can you see why we recommend office equipment dealers consider their 1,500, 5,000 or 20,000 accounts their key asset? If 20% of 5,000 customers are the right profile, that’s 1,000 good Managed IT Services customers. At conservatively $2,500 a month each they’d comprise a $30 million a year business, easily putting you in the top 100 small business MSPs in the country. At today’s valuation multiples, that would be perhaps a $40mm asset which, if performing at the threshold of top quartile profitability, would be throwing off about $5.4mm in cash flow. Focus on service quality and provide the right sales support to your existing reps, and you have a formidable advantage over the top performing MSP down the street, who is calling on your 20% right now.
NOTE: Paul Dippell will be co-facilitating a dealer panel session at ITEX 2014 with David Pohlman, GreatAmerica Financial Services. The session is being held on Thursday, March 13th at 8:30 AM and is titled, “How Do I Profitably Sell More Managed IT?—Sales & Marketing Best Practices.” Dealer panelists include Jeff Boate, Perry ProTECH, and Trevor Akervik, Marco.
Paul Dippell is CEO of Service Leadership, Inc. a leading solution provider and IT vendor consultancy and publisher of the Service Leadership Index, the foremost industry benchmark. Prior, at USBX Advisory Services, Paul established its IT M&A practice. At All Covered, Inc., he led M&A and Integration. He then founded a successful mid-market IT services firm with two private equity raises. At Xerox, Paul was VP of Managed Services, serving F500 customers worldwide, and regional VP for one-quarter of the divisions' field operations. Prior, he was National VP of IT Operations Consulting at CompuCom, a $2BB IT solution provider.