Establishing a Managed Services Business: A Detailed Guide to Help You Succeed
A Managed Services business isn’t dependent on technologies and knowledgeable technicians alone. Just like any other project, running a successful managed services business requires strong understanding and strategy, as well as a solid service delivery model.
This guide to establishing and running your own Managed Services business is designed to help you ask the right questions and get started in the right direction with your new venture.
Key Questions Explored
- Why should I read this guide?
- Why is this a viable option?
- What are the types of MSPs?
- What is the scope of business?
- What are the top 5 reasons for clients to hire MSPs?
- How do I identify my clients?
Why should I read this guide?
Managed services is a rapidly increasing field, which means that this is the right time for IT support and consulting professionals to get in the game. That being said, starting a new business or venturing into managed services can be overwhelming.
This guide walks you through some crucial aspects of getting started on your Managed Service Provider business so you don’t have to walk into this with more questions than answers.
Why is this a viable option?
The MSP business is a very attractive concept, especially for those with a background in technology. The facts and figures below will explain why this industry is positioned for growth.
According to research, the managed services market is expected to grow at a Compound Annual Growth Rate (CAGR) of 11.1%. Experts say that with the rising IT infrastructure and growing regulatory compliance, the MSP market is set to grow from USD 152.45 billion in 2017 to USD 257.84 billion by 2022 – that’s nearly double the size in less than six years.
Digital technologies like Artificial Intelligence and advanced analytics are making their presence felt in the talent-acquisition industry arena, but cloud-based technology remains the fastest-growing deployment type in the managed services market.
According to a recent poll, MSPs operating in North America can look positively to the future as demand for their service increases. A global report by BCC Research shows that 32% of the market was made up of companies in the insurance, banking, and financial services sector. Government, public service, and healthcare was the second-ranked MSP vertical. Clearly, regulatory compliance and data management are important drivers for MSP adoption.
Interestingly, infrastructure services form the largest sales segment of the managed services market at 47.1%. Network and security services follow with the demand set to increase as hackers are constantly changing tactics and developing new threats.
Managed services is one of the fastest growing segments of the technology industry, growing roughly at the same rate as cloud solutions. Not only do we see substantial growth in managed services, the profitability of managed services is dramatically higher than cloud solutions. Most hardware and software companies are combining managed services with their subscription models which enables easier consumption of newer technologies while reducing operational and financial risk.
Managed IT service providers are in high demand for a few fundamental reasons:
1. The procurement, installation, integration, and maintenance of technology is a time-intensive exercise that requires subject matter expertise. Few small-to-midsized business owners are willing, much less able, to take it on themselves.
2. The costs associated with hiring full-time IT help are often more than small-to-midsized businesses are willing to bear.
3. Many businesses are pleased to treat their technology infrastructures as operating rather than capital costs, and they benefit from the relatively predictable monthly expense of an MSP.
What are the types of MSPs?
Managed Services Providers differ in the range of services they offer, scope or size of business, size of the target customer, and amount of responsibility they can undertake.
In today’s market, there are three distinct types of MSPs, each having their own unique value proposition.
1. Low-Level MSPs
Low-level, or pure-play, MSPs provide services limited to monitoring network and application performance. Some MSPs in this category might also provide infrastructure services like data storage, security, and testing. Pure-play MSPs take little responsibility for their clients’ businesses initially, extending offerings only as needed.
2. Mid-Level MSPs
These MSPs offer a variety of services to clients with service-level agreements (SLA) with a higher degree of responsibility. MSPs at this level can be quite extensive, providing installation and upgrades, software patches, web hosting, network provisioning, and other services along with basic performance monitoring and reporting.
3. High-Level MSPs
High-level MSPs can offer the full range of traditional managed services, shaping the technological identity of clients. They help to choose appropriate storage, hardware, security level, application suites, and more. While these MSPs can be one-stop shops for clients, they can also offer lower levels of service depending on the client’s needs and budgets.
What is the scope of business?
Managed Services Providers have evolved from offering remote IT infrastructure support to offering remote firewall administration, security-as-a-service, mobile device management, managed print services, and more. Under IT services, common services involve network monitoring and security, connectivity and bandwidth, disaster recovery, and virtualization. MSP solutions might extend to desktop and communications, help desk and technical support, and mobility.
IT MSPs and HCM (human capital management) platforms also cover systems management and software production support as well as maintenance, authentication, Human Resources, and payroll. Then there are internet services providers who offer communications services like VoIP and supply chain management.
TSIA’s definition of managed services is: the practice of outsourcing day-to-day technology management to a third party. This includes technology monitoring and notification, operation and optimization of technology solutions and, last but not least, full OpEx subscriptions to technology wrapped in a managed service known as “Managed XaaS”. In order to effectively offer these solutions, a managed services business must have a highly standardized service catalog, a sales force deeply trained in managed services, a scalable delivery operation, a managed services specific platform and set of tools and a managed services specific customer success organization. The financial model for managed services is also dramatically different than that of a product-driven business (manufacturer or product reseller), therefore a strong focus on recurring revenue-centric financial metrics is critical.
That’s a difficult question to answer in brief. Virtually any service that can be outsourced for a monthly fee can be offered as a managed service. Most MSPs offer, at a minimum, IT infrastructure sales, service, and support, including network and device-level monitoring and maintenance, on a subscription basis. The business is model typically dependent on driving MRR (monthly recurring revenue) through user-level subscriptions to various managed services. Increasingly, operationally mature MSPs are also adding consulting and vCIO services to the mix.
What are the top 5 reasons for clients to hire MSPs?
Managed services are equally beneficial to SMBs (small to medium businesses) and larger organizations. Here are 5 ways your MSP can help:
1. Hassle-Free and Affordable Support
Qualified and experienced employees come at a price, and small to medium-sized businesses might not be able to afford it. Going through the process of hiring employees and retaining the good ones is difficult as well. By contrast, hiring people within a particular field works out to be more cost-effective. Since MSPs have knowledge of job requirements, certifications, and industry jargon, it’s easier for them to pull in the right talent and pass on the benefits to clients.
2. Proactive Support and Maintenance
Managed IT services providers don’t just give clients round the clock support – they support their clients by being proactive. This means being able to identify issues before they escalate and lead to downtime. Uninterrupted monitoring paired with continual updating ensures that clients don’t have to compromise business productivity.
3. Customized Solutions
MSPs can evaluate a client’s existing tools, systems, and processes to create customized IT support solutions. By understanding a client’s limitations, unique workload, and performance requirements, service providers can offer expandable solutions for changing needs.
4. Predictable Pricing
Unplanned and urgent repairs can take their toll on budgets, adding to the stress of running a business. In-house teams might not be well-versed with the possible IT solutions for the various technical issues, meaning unneeded expenses could escalate. MSPs are the better option as clients know their fixed monthly costs and exact charges for services.
5. Access to the Best
Along with the benefit of having a team of qualified personnel at their disposal, clients gain access to newer IT service technologies they can’t otherwise implement. MSPs need to be equipped with the required knowledge and tools to provide businesses quick solutions, enhanced security measures, and more at an affordable price.
These are the primary reasons customers buy managed services:
1. Reduce risk in operation of complex technologies
2. Improve operational efficiencies
3. Improve cost of operations (including operating expense predictability)
4. Accelerate investments in next-generation technologies
Subscription-based IT sales, service, and support defer IT infrastructure costs over the term of the engagement. Generally, outsourcing IT infrastructure procurement, installation, integration, and support is significantly less expensive for a small-to-midsized business than sourcing IT and employing a full-time IT professional. Most estimates peg the amount saved on IT professional salaries alone at more than $2,000 per month for a 100-employee business. Service level agreements that are rarely, if ever, matched by full-time employees are another benefit. After-hours, weekend, and holiday support are typically part of the package.
Certifications are another (and often overlooked) advantage of hiring an MSP. Because managed service providers represent a host of technology vendors, they’re subject to maintaining certification on products and services which are constantly evolving. In contrast, in-house IT professionals are rarely held to such a level of accountability.
In short, MSPs bring end users more intellectual capital and higher levels of service at significantly less cost.
How do I identify my clients?
Identifying clients is important so you don’t waste time trying to close a deal with someone who has conflicting opinions, needs, or priorities. Your ideal client would be someone who knows that investing in managed IT services has the potential to transform their company and elevate its success. Working with a client who views IT and related services as nothing more than a necessity will only make it harder for both of you to develop.
You can’t decide if your business will be a good fit if a potential client is hesitant to share important details about their company. Speaking to your client about their budget is a must and something that should be discussed early on. If a client doesn’t have the money to sync their business needs with your pricing model, they aren’t right for you. Watch out for warning signs like clients who sidestep budget questions or those who can’t show you the initial payment.
It is also vital to be able to identify what problems the client is trying to solve. You have to decide if you have a solution in place to address those problems and if you can resolve issues in a timely manner.
What can clients expect from MSPs?
With the advancements in technology, business solutions have become increasingly complex for organizations to put in place by themselves. So they’re turning to MSPs to take care of their non-core operations, remove regulatory compliance overheads, and implement processes and tools that can reduce risks.
And as a business grows, it has to deal with increasing data volume. Companies across the globe rely on MSPs to manage data center operations as well as data storage and backup processes with a range of uninterrupted IT support services.
How do I set up a business strategy?
Setting up a business strategy means defining the tactics and methods you’ll use to manage your business. Strategy is concerned with the resources you have at your disposal and the results you want. Formulating quality, customized strategies is all about deploying or allotting your available resources to achieve your objectives.
Since there are many players in the industry, new MSPs must consider basic factors that drive competition: the threat of new competitors and substitute products or services, the bargaining power of buyers and/or suppliers, and rivalry among existing players. In response to these different factors, your business strategy can undertake focus, differentiation, or cost leadership.
Keep your value disciplines in mind (operational excellence, customer intimacy, and product/service leadership generation) to serve as the basis for your business strategy.
How do I choose the right tools?
There are a variety of project management tools based on software architecture, which means you have to choose one that’s right for a business’ unique needs. As a service provider, you need to understand each type of tool along with its uses and benefits, then compare transaction and lifetime costs of each management tool before making a decision.
Single-feature products for small-time providers to help with integrating disparate solutions
Simple to install, configure, and use, but inadequate when it comes to implementing a complete IT systems management strategy
With rich features, these tools are ideal for managing software applications and network devices
These come with feature sets to suit small, medium, and large businesses and give service providers a greater level of control to perform a range of tasks
A cost-effective way to monitor, manage, maintain, secure, and backup systems with cybersecurity best practices.
How do I price for profit?
Given the lack of a unified standard for pricing managed services, you have the opportunity to create a flexible pricing model. Doing so allows you to offer benefits to clients while maintaining profit margins. Of course, there are a number of factors to consider when developing a pricing model.
You have to know the total cost of delivery to clients – for individual services as well as bundled ones. Don’t lose money just to get ahead of the competition. Work on understanding operational areas to drive down costs, consider market rates, and calculate cost differences between hiring in-house staff and availing your business services.
Your pricing model will largely depend on your target audience. For small- to medium-sized businesses, you’ll need to keep prices low and competitive. But you can raise the bar if you’re offering specialized services for compliance with specific regulations, such as in the healthcare sector.
Advancements in technology happen all the time, and they are bound to impact the costs of services. Knowing the benefits and challenges of implementing technology in the sector you’re targeting is highly important. Remember that if you’re targeting larger companies, the scope and depth of your services will increase, which will further require you to put newer, reliable technologies to use.
A key benefit of managed services is that they allow the client’s business to grow while adapting to their changing needs. Make sure that your pricing model remains effective and profitable by regulating costs.
Some common pricing models are:
1. Per-User Pricing Model
Designed for businesses that have employees working on several devices
2. Flat-Fee Pricing Model
Focuses on customer experience and offers a flat fee for services
3. A La Carte Pricing Model
Allows service providers to give optimized solutions to clients by choosing only the services they need
4. Monitoring-Only Pricing Model
Designed for businesses that don’t need much support and maintenance; providers track client infrastructure for a fee and charge extra for support
5. Tiered Pricing Model
Allows providers to offer different managed service plans to clients.
What are common pitfalls?
While rewarding, starting an MSP business is not easy – there are a lot of ins and outs to learn as you go. The unknown can cause many headaches if you’re not prepared to maneuver around drawbacks. Trying to list all the possible issues that could lead to a downfall is impossible, but there are a few major things to watch out for.
Focusing Only on Technology
It’s not enough to have sound technical knowledge alone; you also need to have a deep understanding of sales and marketing. From your client’s perspective, the quality of your service is going to be the most important part of your business relationship with them – not the kind of products you use. So if you deliver the most advanced technologies but fail to resolve client issues, the relationship is bound to fail, followed by your business.
Over-Promising and Under-Delivering
Under-delivering is a possible outcome when you over-promise things to clients. The other possibility is that you do deliver, but you have to over-perform which can cost you more money or exhaust your resources (i.e., employees). As your operations grow, catering to requests and favors will only make your service delivery inefficient and costlier. Set expectations with a clear, detailed, and well-structured SLA to establish the best possible relationships with your clients.
Not Being Understandable
If you want your business to grow, throwing around jargon and buzzwords, amplifying or fabricating industry experience, and other tricks won’t work. Buyers in the market know what they want and can identify the real contenders. So don’t pretend to be something you aren’t; build on real experience and be someone relatable.
Starting Too Big
Making estimates that aren’t grounded in reality or backed by facts can lead to imbalances. Don’t put yourself into a cash-flow crisis by going all out right from the start. Start small, work on building your reputation, and expand gradually. And don’t let your want for increased sales cause you to compel clients to sign up for extensive services when they want something specific. Provide what the client wants, win them over, and build on your relationship.
Growing Too Fast
Amassing growth or making big decisions without a proven growth model can burn you out with increased debt, cash flow problems, and more. Investing in new hires, training, salary and benefits, infrastructure, etc., on the basis of quarterly projections can be a serious blow if those projections don’t come true. Extra expenses eat into profits, slow down operational efficiency, and also leave you with underutilized employees.
What can I achieve with a successful managed services business?
Yes, owning and running your own business gives you independence and flexibility as well as a sense of fulfillment. But when it comes to running a Managed Services Provider business, there’s the added benefit of being helpful to other businesses.
MSPs offer organizations better control over assets and a higher quality of service, allowing clients to focus on core tasks and increase productivity. A lower cost of operation means you get to pass on benefits to clients while still earning profits.
Companies can achieve substantial revenue growth and, if the right models are employed, strong profitability. Managed services also drives greater predictability of future revenue streams. Most companies are achieving net-new MS revenue growth for new customers as well as substantial revenue growth from their existing customers resulting in a compounding growth in recurring revenue. Managed services customers also have higher satisfaction levels with their suppliers and see their managed service provider as a trusted advisor for future technologies and services.
Success is defined by the entrepreneur. The current majority of MSPs are small lifestyle businesses that generate under $1 million in annual revenue while earning owners and stakeholders a comfortable living doing rewarding work for their clients. Mid-market MSP organizations, those in the $5-10 million range, are a fast-growing segment of the managed services industry due in part to a healthy merger and acquisition scene.
As MSPs grow and mature operationally, success is measured less in terms of ownership income and more in terms of solution and associate scalability. In any case, MSPs whose annual revenue is driven by MRR enjoy far healthier EBITDA and business valuation than their pure-play value-added resale and break/fix peers.
Running a managed services business isn’t as much about finding the right solutions and hiring trained professionals as it is about blending your technical talents with a sustainable and profitable business strategy.
With this guide, we’re sure you’ll strike the balance.
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