There’s been a lot of talk lately about a fundamental change in the MSP industry, and the subject may seem overwhelmingly complex. The change taking place is quite evident, but what’s inside the tornado? What is the force behind this change happening?
Understanding the underlying impetus will enable businesses to make more educated decisions where to drive their companies. Let’s demystify this change and put it in a very easy to digest format, as the core of the change is actually simple.
It is not our shortest Blog but I promise worth the read. You will see the change taking place and how it could help you drive enormous growth in the next couple years. So fasten your seatbelts!
We are going to use one of my favorite thinking tools to analyze and understand the situation: The Business Model Generation framework. We use this method nearly every day, to understand our customers and their business, brainstorm new business ideas, etc. We like it because it is very simple, very straightforward, and separates complex systems into simple components.
We’ll start by showing you the current typical MSP business model and why this model was the right answer for the market needs in the past. Then we’ll look at how the core of market needs have changed and the resulting changes that have been made to the business model.
Think way back to when computers first came into the commercial environment and dramatically changed how we do business. These were large and complex systems and unwieldy from a technological perspective. For so many tasks somebody technical was needed to finish the process - to convert a picture, scan a document, set up a network, or just save a file. These tasks needed to be more user friendly and the users to become adept in these environments. The problem to overcome in was technological complexity.
So the IT support companies came to the scene and solved the problem of technological complexity. They have been evolving since, and the most mature format of this service is the Managed Service Provider model.
Let's analyze the classic MSP model, particularly to see how all the aspects of the current model are working together. We will then see how a small change on one part of the business results in adjustments in every field of the model.
The core value proposition of an MSP is reducing the complexity of technology. This is the ultimate goal and the value they are delivering to their customers. It can be stated in various ways: "run your business smoothly", "peace of mind”, "security and compliance", or "strategic IT design and decision making". Every company has its own style but all promise to reduce the complexity of the technology in their client's environment.
In order to fulfill this promise, IT managed services providers first create a so-called "Outsourced IT Team" service, which includes all the human resources as an independent unit. Clients do not have the necessary skills or resources to manage these teams.
Second, they provide an "IT infrastructure": design it, build it, manage it, and support it. The infrastructure includes all the switches, servers, desktops, and gadgets and all the software elements on them.
Very simply, this is the core value proposition: reduce the complexity of the technology with outsourced IT staff and IT infrastructure.
Regarding size of client company staff the sweet-spot for the traditional small IT companies can range from 20-150. Below this it’s hard to standardize the service and the budget is too low, and beyond it those businesses usually have their own IT department.
The typical sales method for MSPs is word of mouth referrals. As with doctors and lawyers the performance of the provider is judged on criteria unmeasurable by the customer and in industry jargon that no outsider understands. This makes trust and reputation essential factors. An MSP could lose a client by dropping the ball on a deadline, or by neglect, but without these catastrophes it has been a comfortable space to be.
Most IT managed services providers do have some form of website; not so many have a blog or other educational content. However, these are very unlikely to create a "marketing engine", or to excel at collecting and managing leads. Also, most are made by the owners or directors, whose only frameworking tool is a "network assessment tool" which helps them discover the IT infrastructure of the client and give recommendations based on that.
The Service Desk drives the main relationship between the MSP and its clients. While the most important elements in its service quality are the response time, the personalized services, and dedicated resources, many IT companies have outsourced this function and had a hard time afterwards.
In our terminology, account management is still part of the Service Desk, because it’s the management part of the service. Still, some MSPs claim to be vCIOs, though it’s likely that this service was made a part of the MSP package just to improve sales.
Moreover, Virtual CIOs have tended to concentrate on IT infrastructure planning and design, or on doing quarterly "business reviews" and neglecting other parts of the business. They operate without a process-driven separate service offering. The clear loss from this is that very few MSPs will get a call if from a client with a business problem. The client will call once they’ve solved the business problem and they need a new server. Instead of being a business advisory role in most cases it’s one of technology infrastructure advisory.
While there are several models, there are only three main functions within service delivery: software, hardware, and service areas.
Among existing service areas, there are projects, system developments, NOC, and Service Desk. Some companies separate the project work and maintenance; others some separate NOC from Service Desk.
The HW/SW sales have typically driven the projects, and every 2-3 years major developments were taking place. These developments drove an enormous amount of fixed base revenues for the service providers.
Key resources are those that if taken away bring the company to a stop. For MSPs, the key resources are the human capital, client contracts, relationships, and experience and knowledge base of service delivery.
Partnerships have been an overrated area of the business. The software and hardware vendors have been pushing this. They have to sell and MSPs became a channel for them, so they worked everything to sell through that channel. Fancy conferences and sticky account managers were replete until the Cloud era had come. Then as I think you know most of them turned away from that channel sooner or later.
Other more valuable partnerships were based on service delivery software. PSA and RMM solutions directed the quality and the efficiency of service delivery. These companies invested heavily to educate and help IT companies.
The primary costs of the Managed Service Providers are Tools, HR, Infrastructure, and some back office administration. Because owners are operating these companies (5-25 people) personally, they have a very healthy, lean cost structure. Of course increased headcount, overhead, and marketing and sales departments for larger organizations (25+) changes the cost and margin structure.
In terms of revenue streams the most prominent have been the resource-based ongoing revenues, which could be Time and Material, Block of Hours, Retainer, or Recurring service models. Next are the project-based revenues, which usually include fixed costs. On top of these there is a shrinking margin of hardware and software sales.
So, this is the traditional MSP 1.0 model. I have spoken with around 100 MSPs in the last few years. I have read most resources and we have built two MSP-related companies.
Business model design demands the ability to see the patterns and the changes around these whole sets of building blocks. We have to see the precise nature of changes as well as other parts of the business model have to change to adapt.
So let's see what has changed in the last few years related to the classical MSP 1.0 model:
1. Using technology is gets less complex
The user experience of mobile devices has driven an enormous change in reducing the complexity of technology. Just five years ago the method of sharing pictures included taking a photo, downloading it, converting it to Jpeg, and then copying it to a USB drive. Now my parents are doing that all with their mobile devices. Just take the picture, edit if you want and easily share it through Instagram or Facebook.
The cloud democratized technology. Everybody can get the latest CRM platform with the swipe of a credit card. There are no implementation plans, consultants, or hefty projects needed. You can just start today and emerge.
Further the current generation of users is now much more comfortable with technology. The complexity of the technology became not just absolutely simple (like using iPhone), but also relatively simple to learn and adopt. Generation X and Y are more willing than ever to search online to solve problems themselves without calling a help desk.
2. Management of technology gets more complex
The market has fragmented. There’s both a multitude of applications around the web solving problems, and numerous corporate and private problems looking for solutions. These realities are often prevented from meeting, however. Both client companies and vendors are specialized in niches, and the sheer numbers make getting together difficult to manage.
The impact of technology on businesses is greater than ever before. Everything is wired and a single point of failure could run a company out of business. Consider CodeSpace: a small company hosting websites, where a hacker was able to erase all their data, including backups. CodeSpace was forced to close their doors. Having a clear vision of all aspects of security, applications, access, vendors, costs etc. is still a management challenge.
The IT budget has also increased because many things that were outside of the IT budget are now included in it. Managing this budget is a complex issue as IT is no longer a technology challenge but a management one.
IT is clearly a strategic asset. It is not the infrastructure but the applications, the adaptability, and the culture are what the company is using,. It can be a differentiating factor among the competition based on costs and customer experience.
So the two major changes that have taken place are, first, the complexity of technology has been declining and second, the management complexity of technology has been increasing. These trends are interdependent and supporting each other.
The problem is that these two factors work against the current MSP model in a big way.
The first is undermining the basic value proposition of an MSP by removing the technological complexity. With demand decreasing, the services that the MSP delivers are devalued. It’s the first thing MSPs are witnessing: fewer client calls and some IT decisions are being made without them.
This is a typical "Red Ocean" scenario, meaning the competition is increasing and the market is commoditizing. This is not a good place to conduct business.
The second trend is creating a new demand, but this demand has not manifested as service requirements yet. There isn’t yet a mainstream service around the problem, so clients aren’t shopping around. While there are still opportunities to solve problems for companies but they aren’t able to translate the myriad choices into a service they want to buy.
Hence this is a typical “Blue Ocean” opportunity. There are few to no competitors. The market is wide open for influence and education and unique value propositions can be made, a new service can be developed, and at a higher value.
However, as you will see, you have to pay a price as well. A switch from the current model is no mean feat and there are many obstacles down the road. This is a higher risk, higher margin model.
If we can properly read all these changes, we then have to design a new business model around them to make a viable business.
So let's have a look at the so-called MSP 2.0 model. In this chart everything green is new, the orange is of reduced value and everything red is going to be obsolete based on the new model.
The New Value Proposition
Our new value proposition is geared to reducing the complexity of the management of technology. That means our goal is to manage all technology-based business areas - to make the client more competitive through the use of technology. We achieve this in three ways:
“Management" is all about making decisions, creating strategies, planning accordingly, and executing projects. We have to create services around these three building blocks following the principle of the value proposition: We are going to comprehensively handle all the aspects of these management issues on behalf of the client.
This is not entirely new; every MSP has been doing some of this in one area or another. However, this puts it in perspective of the two major shifts. These must be fully fledged service offerings, and not just something we do for our clients as a side offering.
The New Customer Segments
We have to seek out companies with more complex operation. This kind of service has not been developed for larger groups so we could have 150 to 500-member organizations as targets as well. We may not drive their whole IT strategy, but we could be a part of the Sales, Operation, or HR-related IT strategies. These are also small companies within larger ones with a particular focus. Harvesting those projects could be very profitable.
Also, we have to understand that being thought leaders, and not interested only in infrastructure, could open a lot of doors to larger organizations. This solves the problem of hearing “we already have an IT department” from larger potential customers.
The New Sales Channel
If we want to sell this new value proposition, we are going to face new challenges. Nobody is buying it now, period. There is no such service around, and the market is still uneducated on these terms.
In order to be able to sell, we have to educate the clients, and we have to "reframe" them. For education, we need to create content and distribute it. A blog is a better start than books and case studies and is a common and effective avenue for content and inbound marketing.
Our value proposition is to increase something that is very intangible. The competitiveness with technology is a pretty fuzzy term. However, the actions and ongoing activities driving competitiveness can be measured. This is "ITCq" (IT Competitiveness quotient); a measuring of all the things related to well-managed technology. Using this tool makes it very easy to start a conversation with prospective clients.
Starting a conversation is one thing but closing deals is another. For that, the different workshops are a great option. We provide services to show our expertise, and then we can move on to important quick-win projects. Those projects are our foot in the door; and after successfully closing those projects, we can open up many other services. This is a seeding rather than a hunting sales approach, with the understanding that clients need time to adopt.
The new client relationships:It is now apparent that our new core service offering is totally centered around a true virtual CIO role. The True vCIO deals with all aspects of the technology, not just infrastructure.
This role is going to fulfill all the needed high-level management roles, communications, and interactions. It creates all the IT strategies, roadmaps, budgets, and operational plans and manages all the projects needed to execute the strategy. This role is going to drive the perception of our services. The switching cost is considerable - we can still drop the ball on the delivery side if our vCIO isn’t dynamic - but if we stay active and communicate well, we have nothing to fear.
This is a business analyst or IT consultant role. If you don’t yet have one, hire someone with this skill. Set processes and job descriptions in place so you can train and set expectations for his or her performance.
The New Key Activities
What are we going to doing differently on a daily basis? One thing is for sure: we are going to sell less equipment and classic software licenses. Instead, we are going to aggregate services and sell cloud-based applications based on a different business needs.
Because the vCIO services are now standing on their own, not attached to an MSP contract, we need to incorporate an "IT management framework" that comprises all the processes and deliverables that IT management now does and the vCIO is working on. The IT management framework is like a small ITIL, or any other framework, but more practical and automated.
We are using our own 7C IT management framework for that reason. The ITCq is the tool which measures all of the activities we have in the 7C framework. Implementing that sort of framework produces a decent revenue and creates a very visible form of ongoing services to maintain and further develop the client’s IT competitiveness. It contains yearly strategy, planning, budgeting, and auditing, based on templates and best practices. Everything goes into the software that clients can access, and which we can use to make what we bring more tangible and visible to the clients.
Because we are creating IT strategies, someone has to manage them. This includes overseeing all the IT projects the client is doing, but it could also be the specific third-party project management of a larger solution.
We will continue operating our NOC, Helpdesk, and traditional IT infrastructure services as long as it makes sense.
New Key Resources
The key resources of the traditional model have not changed and only one is added. The IT management frameworks are now a huge value. The clients have locked in and we are driving the heart of their business. Looking at your company valuation, this will be the highest component in two to five years.
New Key Partnership
Here the change seems to be slight, but the importance isn’t. You could create a marketplace of cloud application providers. These could be niche players (solving a problem for a vertical) or general players (Google) in your marketplace.
The goal is to get some commission based on the sales of those services. As a vCIO, you are making decisions on behalf of the client, which means you are going to face problems and look for solutions. Your marketplace is the set of solutions looking for problems. You are the interface between the two worlds, coupling problems with services.
If you think five years into the future, 75% of an average client's budget will come from cloud-based solutions. It’s not difficult to calculate how much money an MSP could make based only on recurring commissions. A general cloud-based provider (Salesforce, Google, or Microsoft) could offer 8-10% of the sales recurring. A smaller niche provider could leave 20-30% of the sales on your side. Revenue could be coming in every month with just these partnerships.
This is a cloud broker model. However, we are not brokering just traditional cloud service providers, but every software company, because everybody will be switching to a cloud-based delivery model in the near future.
New Cost Structure
Nothing has changed. We are probably paying more to create marketing content, education, and to train ourselves and our staff.
New Revenue Streams
Plenty of new possibilities here.
Revenue streams: the vCIO and IT management framework implementation projects have significant power. These projects create all the prerequisites for IT management including procedures, processes, strategies, plans, contracts, and agreements with vendors that have to be created to manage the environment.
The maintenance of the framework is all about the ongoing virtual CIO services themselves. These are yearly, quarterly, monthly, or even weekly cycles of work - predictable so they can be planned in advance, and then charged for fixed recurring monthly fees.
All the other projects we have to manage could be based on block hours of the vCIO or on fixed projects. They could be projects we are doing as MSPs or those of third parties that we are managing.
The recurring commissions may start as small at first, but in three to five years could compose half of all our resource-based income without any related costs. Just imagine 33 percent of your whole revenue is independent of anything you do at that point: these are commissions.
So MSP 2.0 model is a very straightforward model using clear value propositions related to the real market trends.
The sales process has to be adopted in the early stage of the market. Delivery must incorporate a new role. Processes and procedures must drive the new role, instead of doing it ad-hoc, to gain recurring predictable and scalable service revenues.
A new way of connecting problems to solutions comes from the nature of the vCIO role. Creating such a marketplace is a natural move to make the business more predictable and scalable.
These are two big trends of technology - it’s becoming easier to use while management of all the choices is more complex and creating a tornado. If you think you are going to be able to stay only a 1.0 MSP, cloud and reduced complexity is going to put you out of business. If you are not getting into IT management, you are missing the boat.
The new model will enter into the mainstream in the next few years. As it does the incumbents will have tremendous advantage over new entrants. The learning curves, the thought leadership, and the processes are hard to copy or implement quickly. In my opinion, someone who invests now and spends the next few years developing this model would be reaping the profits in the following 5 to 10 years.
During the next session, we are going to talk about the specific MSP 2.0 related Projects, Ongoing Services, and the natural adoption of the model in 12-24 months, so stay tuned. Subscribe to the Blog alert on the top right to make sure you get the new articles.
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