Is the master MSP business model still relevant?

posted by Search IT Channel on Wednesday, December 26, 2018

Master MSP companies have long been known for helping channel partners launch their managed services businesses by offering services to their end customers in areas where they lack expertise.

 

The master MSP business model, which began about 2002, offered channel partners services like a network operations center(NOC), help desk, and remote management and monitoring (RMM) software if they didn't want to host their own instance, said Charles Weaver, CEO of MSPAlliance, a managed services industry association based in Chapel Hill, N.C. Master MSPs also typically provided 24/7 service, he said.

In today's world of software as a service (SaaS) and cloud, just how relevant are master MSPs?

It depends on who you ask.

"[Master MSP companies] had a legitimate place in our professional history," Weaver said, but today, "it's a very different landscape, because there are not many master MSPs anymore. It's largely a business model that's becoming extinct.''

All ticketing platforms today offer hosted versions of their software, so there's no need for an MSP to maintain that, he added. And thanks to the cloud, there is no longer a need to offer the round-the-clock availability that MSPs felt pressured to offer in the early 2000s.

Charles Weaver, CEO of MSPAllianceCharles Weaver

"There are more options in pricing and availability being offered by MSPs now to their customers as they have grown and matured," he added.

Master MSP model remains relevant

But Paul Dippell, founder and CEO of Service Leadership Inc., which benchmarks and publishes reports on IT solutions providers, said the master MSP model remains relevant. He said he expects it to become "increasingly relevant."

The master MSP model's value proposition of offering infrastructure so an MSP doesn't have to build their own is still useful, he said.

Paul Dippell CEO of Service Leadership Inc.Paul Dippell

"It's possible an assumption has been that if I'm a solutions provider and I work with a master MSP that I will have a lower profit margin than if I build my own" infrastructure, said Dippell, who has three master MSP clients. He believes that assumption is false.

"I think it's possible, in some cases, that using a master MSP will result in greater profit and growth," he said. "We have data to suspect that's true in some cases," which he said is currently being modified and will be released in 2019.

Dippell said an example would be when an MSP expects to add more customers and win new contracts and so hires an additional technician in anticipation of that. But you'd need several contracts to cover the new hire's payroll and related expenses, he said. It takes the average MSP about one year to gain eight or nine new contracts to cover the expenses of that new technician, he said.

"So I'm trying to grow my company and not go out of business and get eight or nine contracts, and I take a big risk and hire a new guy and pray I can close all those deals," he said. "For that whole year, I've trashed my profitability." If you use a master MSP, you can conceivably reduce your labor costs because you don't have a help desk or service center, he said.

"I only pay [the master MSP] based on the exact number of customers I have. So I just pay them a little more every time I get a new contract. That's an example of how using a master MSP could be more profitable."

Another reason for the increasing relevance, he said, is that it is very hard to find talented IT people. If you use a master MSP, you don't have to worry about hiring or managing new staff.

He added that "the research and development requirements to be an MSP continue to escalate -- meaning, I have to come up with increasingly complicated solutions in an increasingly complicated environment around cloud and other areas. And that research and development expense is expanding. If I use a master MSP, I use less research and development."

Yet, one of the negatives to using a master MSP is that they don't offer anything that differentiates themselves from others. "I suspect that's partially true," he said, "but ... I still own the account management and field service relationships and the virtual CIO [vCIO] relationship."

Approaches to using master MSPs

Different partners may use the same master MSP in different ways. Some use everything the master MSPs offer, while others use only a small percent of their services. "There's definitely different ways to skin the master MSP cat," Dippell said. "Some are super luxury, and some are bargain basement."

Some master MSPs offer an 'a la carte' approach where channel partners can pay for discrete services, such as monitoring or software patching and upgrades.

But then there are comprehensive, high-end, "Neiman Marcus-level guys" who say, "'We'll do everything: help desk, service operations center and we'll answer the phone as you and you just go on site when something is needed,' " he added.

Generally, master MSPs charge by the user or by the number of devices and/or locations, he said.

Jeff Blount, vCIO at Cobb Technologies, a technology provider headquartered in Richmond, Va., said his company partnered with Collabrance, a master MSP based in Cedar Falls, Iowa, "to allow us to build our MSP business faster and also to immediately gain the wealth of knowledge from a proven leader in the MSP world."

Collabrance acts as "an extension of Cobb Technologies for our managed IT services," he added. "We both work through the prospecting, evaluating, proposal, onboarding and ongoing management of customers."

Cobb pays a flat monthly fee, based on factors that include the number of users and servers, he said. "There are very few and rare instances of hourly billing. When these do happen, we pass these bills on to our customers."

Hannah Erb, account executive at Collabrance Hannah Erb

The main benefit for Cobb is that the company doesn't have to invest time and money into software and processes to build its own NOC, he said. "The only 'con' I can think of would be the limitation Cobb has to expand the technology stack to other products," Blount said. But he added that "Collabrance is very open to discussing new products and vetting those products."

Collabrance "is continually creating value by enhancing our offering based on feedback from our partners and other MSPs in the industry," Hannah Erb, account executive said.

Consolidation of power

The RMM vendors have "really started to take on a lot of the characteristics of the master MSP to consolidate the relationship" with their managed services business partners, Weaver said. They have done this by enhancing their traditional licensed software business to include other services, such as SaaS hosting, NOC and help desk.

"That's why you don't see many autonomous master MSPs floating around out there," he explained. "Yesterday's RMM [vendor] has become today's master MSP, because they're not just providing software ... they're [entering] more and more into services."

While the advantage of using a master MSP is it can significant accelerate an MSP's time to market with a full managed services offering, "it should be, in my view ... a short-term fix," Weaver said.

In addition, the regulatory environment is discouraging outsourcing critical aspects of IT, he noted. "The regulatory market is requiring greater discipline around transparency and vendor management, especially if you outsource outside of the country." It's becoming increasingly important to fully vet vendors and strategic third parties and know to what extent they have access to data, he said.

The master MSP model has 'mutated'

Weaver also said the traditional master MSP business model "has mutated. We don't call it master MSP anymore, but [rather] outsourcing to a third-party service provider. And that's very, very common." He said he's now seeing a lot of mature MSPs with good processes, documentation and tools being asked by customers to offer security services beyond traditional firewalls, such as analyzing logs and telling customers if their network is being penetrated.

However, "a lot of MSPs don't have a SOC [security operations center] where they can go through that volume of data and analyze and report on it, so they're outsourcing and creating relationships with other MSPs who also have a SOC or SIEM [security information and event management] capability," he noted.

But Dippell said you shouldn't assume the master MSP model is no longer relevant if one or two go out of business. "I wouldn't take that as an indicator that the master MSP model isn't relevant. Yes, some will go out of business and some will do great. Buyer beware."

 

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