In our second Service Leadership Webinar of 2024, industry experts, Mitch Leahy, VP and General Manager at GreatAmerica Financial Services, Peter Kujawa, VP and General Manager of Service Leadership, Inc, and Dave Clark, VP of Strategic Sales at AIS, covered the critical strategies that Managed Service Providers (MSPs) need to elevate their game. Whether you joined us live or are catching up now, we’re excited to share the highlights with you in this blog.
Current State of Dealers Evolving into IT: How to Measure “Best in Class”
In the webinar, we talk about the term "best in class". When we talk about best in class, it’s important to understand what this term means and how to measure it. Peter Kujawa with Service Leadership breaks it down for us:
The definition is straightforward: they focus on profitability. While there are many Key Performance Indicators (KPIs) that MSPs and other businesses track, Service Leadership specifically looks at the top 25% of companies in each business model based on their profitability. They then analyze the performance characteristics of these top performers and use these benchmarks to compare everyone’s performance.
For instance, when discussing best in class service gross margin, they first identify the most profitable 25% of companies and then determine their service gross margin.
Recent Industry Performance Insights from Peter Kujawa
Looking at the most recent data, although Q3 figures are not yet available, for Q2, the entry point for best in class was a profitability of 16.3%, with the average for the bottom quartile being 23.1%. The entry point for the bottom quartile was a slim 2.2% profitability, with an average loss of 2%. This highlights a significant gap between the top performers and those struggling.
Addressing Common Myths
There’s a common myth that no MSPs are making money in Managed IT Services today. However, the data shows that many MSPs are thriving, with an average profitability of 23.1% among the best in class.
Managed IT Services can be a significant driver of growth and profitability for these dealers. Unfortunately, some dealers, particularly those in the bottom quartile, tend to remain there longer. This is often because standalone MSPs can’t afford to operate at a loss for long, whereas larger businesses can subsidize losses in their smaller divisions.
Success Across All Sizes
A key takeaway from Peter’s insights is that success in Managed IT Services isn’t necessarily about size. Regardless of the size of an MSP, profitability is achievable. At least 21% of MSPs in every size range are best in class, while at least 22% are in the bottom quartile. Success is achievable at any size; it’s about how the business is managed.
Building Best Practices: Measuring Operational Maturity Level (OML)
Peter Kujawa discussed how his company, Service Leadership, Inc., measures operational maturity level (OML) and its correlation with profitability. Companies with an OML of 338 or higher are considered best in class, while those with an OML of 29 or lower tend to fall into the bottom quartile. Improving the operational maturity level of a managed service business can significantly enhance its profitability.
OML is measured on a scale from one to five, with everyone starting at level one. Initially, businesses are in startup mode, focused on generating revenue and being flexible with customer types, offerings, pricing, and tech stacks. As businesses grow and acquire more customers and employees, they often find themselves at OML two, a challenging stage nicknamed “the pit of despair.” The goal is to progress to OML three as quickly as possible, where customer retention improves, profitability increases, and the business becomes more enjoyable to run. Achieving OML three is where companies start to see best in class profitability.
For Dave Clark, a critical part of AIS’s success was assessing their OML and that of their clients. This helped them align their services with their needs and continuously improve their offerings. Knowing where you stand and where your clients are in their OML journey is essential.
Challenges in the Dealer Channel: It’s Not Easy Money
Peter, who ran an MSP from 2010 to 2021 before joining Service Leadership, Inc., shared his experiences and insights. His previous company was a Service Leadership, Inc. benchmarking client for 10 of those 11 years. After a successful turnaround, they were acquired by a large regional dealer. Peter frequently heard the misconception that Managed IT Services would be easy money. However, he found this notion frustrating because, despite having a large client base and strong sales skills, many clients were not a good fit for IT services. Selling Managed IT Services requires different strategies than selling office equipment and delivering low-quality IT services can jeopardize customer relationships.
While Managed IT Services can add recurring revenue and profit, they can also be a drain on the business if not managed correctly. It’s crucial to address these challenges to make sure success in the Managed IT Services sector is possible.
Defining Your Target Customer Profile (TCP)
- Identify Key Characteristics: Start by determining the size and businesses you are equipped to serve effectively. This could range from small firms to large enterprises, each requiring different tools, tech stacks, and skill sets.
- Know the Specific Needs of Your TCP: Different sizes of businesses will have varying requirements for uptime, security, and IT support.
- Align with Financial Goals: Choose a TCP that, when closed in reasonable numbers within your geography, helps you achieve your financial goals. This ensures that your efforts are both strategic and profitable.
- Pick Your Customer Segments: Which segments are crucial to your business? Knowing this helps in maintaining and growing relationships with the most valuable clients.
- Narrow Down Key Criteria: What’s the non-negotiable criteria for your TCP? For example, while the number of employees can vary, other critical factors must align with your business model and goals.
Executing your TCP Strategy
- Hone Your Offerings: Tailor your services to capture the maximum IT wallet share from each customer.
- Co-managed IT services: These relationships have proven to be a great relationship model and increase MRR.
- Set Your Technology Standards: to align with the needs and expectations of your TCP to ensure that there’s consistency and reliability in your service delivery, which is very important for maintaining high-quality standards.
- Motivate your sales team: Focus exclusively on your TCP through targeted incentives and clear guidelines.
- Be disciplined: Reject prospects that don’t fit your TCP. This helps maintain focus and ensures that resources are spent on the most promising opportunities.
Executive discipline is also highlighted as a crucial factor in maintaining focus on your TCP. It ensures that the entire organization is aligned with the strategy and that deviations are minimized. You can make sure your efforts are targeted, efficient, and aligned with your goals by executing a well thought out TCP strategy.
Paid Assessment in Sales
Dave Clark joined this session to discuss strategies for optimizing your MSP Sales Engine. The group discussed the important role paid assessments should play in growing your MSP business.
One effective strategy for identifying high OML clients is through selling paid assessments. High OML companies often conduct paid assessments before providing a quote for managed services. This is what helps filter out non-strategic buyers and ensures that only serious clients who value IT investments are engaged.
Paid assessments are crucial for several reasons:
- It’s an expensive process: Conducting a thorough assessment is an expensive process that utilizes valuable engineering resources and time. Charging for these assessments means you avoid wasting resources on clients who aren’t serious about investing in their IT infrastructure.
- Strategic IT buyers: Clients willing to pay for assessments are more likely to be strategic IT buyers, as they understand the value of a detailed evaluation of their IT environment.
When comparing MSPs, clients notice the difference between those who offer quick, free assessments and those who conduct thorough, paid evaluations. This method needs high-quality engineers who perform a comprehensive analysis, including network health, security gaps, and infrastructure needs. Doing a detailed report at the end of these paid assessments also adds significant value, whether the client chooses to proceed with your services.
How Financing Fits in the Picture
As we wrap up our recap of the discussion, GreatAmerica VP and General Manager Mitch Leahy explained why it’s important to look at how financing can play a pivotal role in closing sales and improving your profitability.
Once you have identified the right TCP and have the right sales team in place, the next step is to make sure that your offerings are both attractive and financially viable for your customers.
Transitioning the Sales Mindset
A key aspect of integrating financing into your sales strategy is shifting the mindset from traditional cash payments to more flexible financing options and this is especially true for your sales team. Many end users are accustomed to paying cash, but presenting financing options can often be more beneficial for both the managed service provider and the customer, because it helps in closing the sale and protects your margins.
Here are a few benefits of financing options:
- Higher Profits: Flexible options like cost-per-use, bundled services, consumable packages, and rebate programs can make it easier for your customers to acquire your solutions.
- Differentiate Your Business: Position your business as a provider invested in your customers’ growth and success, building that strong relationship and improving your business’s reputation.
- Grow Customer Loyalty: Financing options create a sense of “stickiness” with your customers, meaning more loyalty, trust, and repeatable business.
Read more here: Top 5 Ways Your Business Benefits from Financing
Offering As-A-Service Models: Hardware as-a-Rental® (HAAR)
Transitioning to an As-A-Service model involves rolling all upfront costs into a manageable monthly payment. This includes everything the customer would typically pay for on day one, such as hardware, software, consulting, installation and training costs. By presenting these costs as a single monthly payment, you make it easier for customers to budget and manage their expenses.
Not so sure on the difference between leasing and As-A-Service? Read our blog here.
HaaR® is a win-win for both you and your clients. Technology buyers value predictability, and with HaaR®, they can enjoy a consistent budget, support, and regular refreshes without any surprises.
Click here to learn more about HaaR®.
Educate Your Sales Team
Educate your sales team about offering financing plans that cover all costs from the start, simplifying the sales process and making the value proposition more attractive. It’s also a great idea to collaborate with financing companies to create master contracts that break down costs into per-user charges. You not only streamline the process for your customers but also make your offerings more attractive and accessible.
Increase Profitability
Lastly, incorporating lease rates into monthly payments can increase profitability. Integrating these rates ensures a steady revenue stream while providing customers with a more manageable payment structure.
Regularly upgrading the tech stack is another key factor in increasing profitability. You can ensure your customers always have access to the latest technology to minimize downtime and optimize uptime. Keeping your clients’ technology current strengthens their operations and reinforces your value as a reliable and forward-thinking service provider.
Discover other As-A-Service solutions with GreatAmerica.
Thanks for checking in to hear the breakdown of our second Service Leadership webinar of 2024, “Leveling Up: A Three-Part Webinar Series!” Remember that this is only a high-level overview of the content discussed, and if you want the full experience with our industry experts’ fantastic insights, you should check out all three recordings here.