by Josie Heskje on Thursday, October 31, 2013
ImageSource Magazine (Written by Josie Heskje)
The business of Managed IT Services is filled with challenges and opportunities. Office equipment dealers are finding that starting and scaling in this arena takes discipline and dedication. Opportunities include providing high value and creating stickiness with customers while realizing healthy margins and generating recurring revenue streams. GreatAmerica, through its subsidiary, Collabrance LLC, has worked first-hand with many IT solution providers through their challenges and opportunities over the past four years. In addition, industry expert Paul Dippell has worked with the GreatAmerica Communications and Data business unit for several years, and more recently with our Office Equipment business unit. He’s helped our solution providers successfully navigate the Managed IT Services business model.
Paul is founder and CEO of Service Leadership, Inc., a management consultancy to companies in or seeking to be in Managed IT Services. His company also publishes the Service Leadership Index® of IT Solution Provider Performance, an operational benchmarking and financial diagnostic tool. You understand his value, if you’ve worked with Paul, or seen him speak at any number of IT and office equipment industry events. Paul’s 30 years of experience in building, running, acquiring and integrating IT companies, combined with his leadership experience at All Covered and Xerox Connect make him uniquely qualified. GreatAmerica is pleased to introduce Paul to our office equipment dealers heading down the Managed IT Services path.
I recently sat down with Paul after an educational session on Managed IT Services hosted by GreatAmerica and Collabrance, to ask him a few questions.
GreatAmerica Question: You’ve done a lot of financial benchmarking. What is best-in-class financial performance for a good MSP?
Dippell Answer: In our benchmarking we calculate the MSP’s Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), then we adjust to make sure that expenses include fair market compensation for the owner’s role as an executive in the company. If you were in the top one quarter of the MSP population by EBITDA percentage in 2012, you would have earned 17.6% adjusted EBITDA or better. In Q2 2013, that threshold number was 18.9%. So one quarter of the MSPs are earning pretty good money. Median adjusted EBITDA in Q2 2013, by the way, was 8.3%.
Q: What competitive advantages does the office equipment dealer have over the MSPs as they enter into the IT space?
A: There are two clear advantages. One is that most office equipment dealers have sales teams that know how to hunt for new accounts. The majority of MSPs would tell you they struggle new account sales. For the most part, they come from a technical, not sales, culture. Certainly some are great at selling, but many are frustrated. The other advantage is that very few of them understand leasing, so most IT product sales they make are capital expenses for the customer. This is especially impactful in the MSP business because to successfully scale and deliver service quality at a profit, the top performers have learned they must standardize equipment across the customer base. Leasing makes that, if not easy, at least easier.
Q: Do you see any specific disadvantages an office equipment dealer might face getting into managed services vs. a business that enters the space from scratch?
A: Not at all. But let me share what might be a useful perspective. Back in the 1980s and early 1990s the first service offerings in the IT business were insurance-type maintenance contracts. Many IT resellers made out very well on these flat-fee maintenance agreements. Then the popularity of these diminished because the equipment itself became so cheap and reliable. Today, the “old guard” who is still around, learns Managed IT Services very quickly as compared to the folks who started in the late 1990s and 2000s. Why? Because the “old guard” knows all about selling and managing flat-fee agreements and the newer folks do not. Office equipment dealers inherently know about flat fee agreements.
Q: It seems like it can take some time and a lot of investment to build a Managed IT operation. With your extensive background with Mergers & Acquisitions, what should our dealers know about the pros and cons of buying a local MSP?
A: The M&A market for MSPs has been fairly active for the past few years and we think this will continue for some time. One reason is because owners are starting to understand that it’s not easy to scale up an MSP. Buyers want to scale faster, and sellers want to accelerate the potential return from the investment they’ve made and later possibly get another bite of the apple.
The key things we’d suggest buyers look out for are these. First, make sure the seller is addressing the same target customer profile as your traditional business. Managed IT Services operations tend to be good at serving only one customer size segment at a time. So make sure the MSP you’re looking at is selling to the same size customer as your traditional business sells to, so you can cross-sell your traditional offering to their customers while you sell their Managed Services to yours. Second, compare your Managed IT Services pricing to theirs carefully. Theirs should be at least equal to yours – for the same customer – and probably higher. The reason for this is that inexperienced MSPs – and there are unfortunately more than a few – tend to mistakenly underprice their offerings. If their customers are accustomed to lower prices than you need, few will convert to your plan. Worse, you may inadvertently convince your sales people that your prices are too high, if they see the acquired accounts at lower prices.
Q: Other than building Managed IT business themselves, or buying an MSP, the other option is partnering to get into this business. From your perspective, what are the pros and cons of partnering?
A: There are strong pros and only a few cons. The Managed IT Services business is a process-intensive business and there is no school or handbook for all the processes you need to build and maintain. It takes a lot of time to build what we call the “services factory” to deliver quality, profitable Managed IT Services that will reliably keep the customer’s network running. By partnering with one of the so-called Master MSPs, you can use whatever parts of their “services factory” that you’d prefer to not build right away, and put your brand name on it. This can be a time, risk and expense saver. You can leverage your strengths – your installed base of customers and your sales team – and let the Master MSP shoulder much of the operational risk.
The downside, of course, is that you won’t be building your own “services factory” during this time. However, you can offset this by writing the contract such that you can smoothly transition out to your own facility later, once you’ve reached critical mass and safe revenue. Interestingly, many top performing MSPs who have built in-house operations, transition to using Master MSPs even when they’ve achieved considerable scale. They transfer risk to the Master MSP and focus on selling and account management. In either case, you have to pick your Master MSP carefully, of course, as you would any partnership. I’d suggest focusing on their commitment to service quality and their financial staying power.
Q: As our copier dealers invest in Managed IT services, they’re hearing that the cloud could reduce their clients’ needs for these services. Is this true?
A: That’s the sales pitch from the cloud vendors, to be sure, because it’s a seductive one, to anyone who owns and operates IT assets, as just about every business today does. Unfortunately, in my opinion, cloud will instead increase demand for Managed IT Services. About every five years or so in the IT business, the vendors proclaim a “paradigm shift in computing”, to use the golden phrase, which promises to dramatically reduce IT operating costs and deliver a richer computing experience. Without fail, a richer computing experience is delivered, and without fail, operating budgets of IT departments go up, and the revenue of MSPs goes up. We’re already seeing this among the MSPs that are actually serving customers who have largely “gone to the cloud”. Why? Because cloud is more complex, not less: more network links, more software spread around more locations at greater distances, more vendors that need to be managed. The cloud customer needs someone to help them – the MSP – more than ever. The top performing MSPs are capitalizing on cloud.