Taking Managed IT Services to the Next Level: Plan Well and Hire for Growth

Managed IT services is proving to be a profitable addition to many office equipment dealers’ offerings. Done right, they allow dealers to leverage their existing relationships to realize more revenue from their customer bases, and managed IT services often provide an opening into accounts dealers otherwise wouldn’t have been able to penetrate.

The range of managed IT services a dealer might provide is very wide, and this is both an opportunity and a problem. The opportunity is the ability to keep adding new services to help ensure continued growth. The problem is identifying which new services are right for your customer base and capabilities. Choose wrong, and you risk your reputation as a service provider.

Another option to expand your managed IT services is to increase your capabilities to sell and support what you already offer. Dealers often take a cautious approach at first with managed IT services, and understandably so. Go too fast, and you may outrun your ability to provide the quality service your customers expect. That jeopardizes your core business with those customers and erodes confidence among your sales team.

We spoke with dealers and managed IT outsourcing services to learn what they are doing to grow their businesses. Dealers not yet offering managed IT services, but considering it, should read “Managed Services Do’s and Don’ts: Lessons to Learn Before You Jump In” from the July 2015 issue of ENX magazine.

Why Expand?

The simple answer to the question “Why expand?” is the size of the opportunity. Michael Amiri, director of dealer services at Continuum, an IT management platform provider, believes that the dealer community is well positioned to grow its IT services business. “With their geography, their brand name, their customer base, dealers’ IT services business should be doubling every year just because of their footprint,” he said. “We’re only in the first or second inning of what’s possible in the office equipment industry.”

Greg VanDeWalker, senior vice president of IT channel and services at outsourced IT services provider Collabrance, is also bullish on the managed IT services market. “If you look at Gartner and IDC numbers, on a global scale [growth is] deep double-digits,” he said, adding that Collabrance could see high double-digit growth in 2017, possibly triple-digits. “We’re really seeing things ramp [up] quickly now.”

Most dealers say they got into managed IT because they saw a customer need. “I call it a customer-driven initiative. Customers would call us and say, ‘I can’t scan. I can’t print,’” said Dean Swenson, president of The Swenson Group in Livermore, California. “We were in that unenviable position of saying you need to talk to your IT group, when all that person wanted was help at that moment. That got us saying, ‘How can we structure a program that makes financial sense for us and the client?’” That led to Swenson’s first IT services offerings, which were mainly remote dial-ins where they could check settings or perhaps fix an IP address.

Soon, Swenson got requests for work that required on-site attention. To help meet the growing demand, Swenson looked for a partner and eventually settled on Konica Minolta’s All Covered, in part because The Swenson Group are a Konica Minolta dealer. “All Covered’s national presence allows us to bring more experience, expertise and a greater breadth of services to our clients more cost effectively, and probably with more experience than we could as a local company,” said Swenson.

Andreas Krebs, head of marketing at All Covered, sees project work as a common entry point for dealers. “Dealers usually have limited IT resources when they first start out and therefore they can only offer a few project type services. There usually is no infrastructure, process or applications in place to offer higher level services or even ongoing support.” He sees that ongoing support in the form of help desk, network support and security as the next logical step because it offers the highest value to the client and the largest revenue stream for the dealer.

Most dealers offering managed IT services still see a lot of untapped business within their core copier customer base. “We have about 7,000 customers and we have around 70 managed services customers. We’re at 1 percent, and we think there is significant room to grow,” said TJ DeBello, vice president of sales and marketing at Stargel Office Solutions in Houston, Texas. “Within the next three to five years we think we can make that a $3 million to $5 million business.”

Midwest-based Impact Networking has offered IT services since its beginning in 1999, but until about two-and-a-half years ago, it was only a break/fix, remote help operation. Today, the company offers true managed IT services. “Clients are paying for results and not time,” said Patrick Layton, vice president of managed IT services at Impact Networking. That’s made a big difference in growth and profitability. “We’re usually negative for the first six months to a year on a deal, as we get everything set up. Once it’s set up, it’s in maintenance mode and help desk handles 90 percent of everything for the client. At that point it becomes very profitable,” he said. Unlike Swenson Group, Impact Networking offers its IT services directly. It has an in-house team of engineers, a virtual CIO (VCIO) and its own help desk.

Perhaps the best reason to grow a successful IT services business is its high-margin recurring revenue and ability to lock-in clients. “They are purchasing their entire IT infrastructure from the dealer for a monthly payment,” said Amiri. “[Dealers] want client stickiness, and that’s the stickiest relationship possible, if they have to come to you to turn on their IT every morning at 8 AM.”

The idea of high-margin recurring revenue might be tempting, but Amiri cautions dealers to make sure they are ready before expanding their IT services business. “If they don’t have many IT relationships, I would suggest they stick to the core, at least in their infancy, and get up a nice book of business and a lot of relationships,” he said. “If you’ve got a mature book of IT business, by all means [look to expand]. Just make sure you evaluate your talent. Make sure the VCIO is competent in the new lines of business and make sure you have the right capacity and resources.”

Krebs sees some dealers getting into trouble by going it alone when expanding. “Beyond very basic services it becomes very difficult for any dealer to provide the type of technology services that customers are looking for without the support of an established and trusted partner,” he said.

Growing Size and Scope

Dealers typically start with one or more of three core areas: help desk, servers/networking and backup. The best clues to expansion opportunities might come from the data the dealer collects from its current managed services customers around those areas. “The conversation of expansion starts with the premise of great reporting, which provides a foundation for the dealer to pivot and truly evolve how they can be a technology solutions advisor,” said Amiri.

The client relationship and reporting from the core IT services areas build a foundation for future recommendations, according to Amiri. “It gets you into conversations around cloud, around hardware as a rental, around security. Those are likely not leading questions initially,” he said. “Clients will say, ‘I want to see you support my network, clean it up today, and then I’ll be so much more open to you taking me to the cloud or refreshing my hardware stack.”

Moving customers to the cloud and owning the hardware stack are where the money is. “Do you transition resources that are at end-of-life into traditional hardware again, or do you transition them into the cloud where it makes sense to host some of that IT infrastructure? This is at the heart of what a dealer does best: make hardware recommendations and wrap those recommendations up into a nice neat bow of a lease arrangement,” said Amiri. “SMBs like that better, because cash is king and they don’t want to outlay $10,000 to $20,000 every few years to refresh their stack.” Amiri added that Continuum expects about 30 percent of all hardware devices at its partners’ client sites to be rented. “Some of our more successful dealers are closer to 40 or 50 percent of all their devices.”

What Swenson looks for in new IT services opportunities are recurring revenue and relationships. “One-time projects are not really our focus unless they are going to lead to an opportunity for recurring revenue, help us penetrate a competitive account or bring more value to an existing customer,” said Swenson. Using All Covered, The Swenson Group can take on spot projects with future potential without affecting their ability to serve ongoing contracts.

Identifying those projects is part of the sales process. “We teach our reps to go into an account with a lot of open-ended business questions. One of those questions is, ‘What are your IT initiatives in the next 12 to 18 months,’’” said Swenson. “Sometimes we’ll uncover something like an application development solution. All Covered can perform that remotely so we’re not restricted to resource availability. It’s usually a one-time deal, so it’s not a huge financial windfall. But if I walk into a Canon account, prove ourselves with that solution and bring value, the chances of us getting a seat at the table when the Canon leases come due are much higher.”

VanDeWalker believes one-off projects with your existing IT services customers are important for growing your business. “When projects come along, you have the ability to make significantly more margin, because it’s not so much a question on price anymore or who they are going to go with. They are going with you as the provider to fix the problem. You are becoming a more valuable asset to that company,” he said.

Using a managed service partner with national reach allows dealers to pursue business they would otherwise have difficulty landing. Swenson cites the example of a local law practice with an office in Boston and Dallas. “The unique offering that we have [by using All Covered] is that we have one service-level agreement, one pricing structure, one network operations center and one help desk for all three offices, versus each office having its own MSP with their own skill sets, cost structures and such.”

Swenson recently implemented Office 365 with All Covered for a client in 22 states. “We brought more value to that client and we proved ourselves. If we can transition this successful project experience to a recurring IT support program it would translate to approximately $20,000 a month in recurring services revenue.”

A constant concern for dealers is maintaining a balance in terms of their ability to support what they currently sell and being prepared to take on new clients or offer new services. “You don’t want to over-commit. You can’t be all things to all people,” said Swenson. “Sometimes the sales reps don’t want to hear that. If we bring IT services to a current long-term Swenson Group MFP account and we don’t do a great job, we have vulnerability to actually lose the copier piece even though they’ve been delighted for 10 years.”

To minimize the risks associated with expansion, many dealers opt to use outsourced service providers. These companies typically have programs in place to help dealers enter new areas like cloud services or security. They will provide tools, remote personnel, collateral and other resources that the dealer’s internal technical, sales and marketing teams can use to more quickly gain momentum in a new area. For example, Continuum offers white-labeled white papers around compliance topics such as Sarbanes-Oxley or HIPAA that the dealer can brand and present to customers.

“There needs to be vision and dedication to expand the managed services portfolio. Then there needs to be a strategy in place on how the dealer will sell and deliver the managed service,” said Krebs, adding that All Covered provides help in this area.

Using an outsourced service provider also minimizes the investment needed for a dealer to offer new services. Dealers would likely not have to add staff or develop new tools as they would be provided by the outsourced service provider. An outsourced provider can help a dealer prepare from both the technical and business perspectives. Collabrance, for example, provides sales training, a virtual sales manager, hiring services and an evaluation of the technology stack. “People don’t realize how much technology is out there, and you have to be on top of it every day to make sure you have the best products and services. That takes a lot of time and energy to vet, and sometimes copier dealers aren’t thinking through the investment of just technical expertise,” said VanDeWalker.

Impact Networking chose to provide its own IT services, largely to have direct control over quality of service. “Impact has a very high value brand with a reputation for a high level of service on the copier and software side, and I have to live up to that,” said Layton. “The only way to control that quality is to implement your own best practices and to have your team buy into what you’re trying to do and to operate on that level.”

That presented some challenges, however, especially since those services are offered from 12 different locations. “If I sell [a service] in Madison, Wisconsin, one in Duluth and one in Hammond, I can’t just have one engineer support them. If one engineer did take on every client, we can’t meet our service level agreements,” said Layton.

Layton’s solution was to “hire and over hire” to prepare for what they expected to sell. “We’re still two to three engineers ahead of the game,” he said. “We’re a start-up within this $100 million organization. You [as an engineer] might be asked to go a little bit farther or asked to do something that’s not in your job description as we grow. It’s trial by fire, but now we have a good base with at least one engineer in every location and in most I have three or four.”

Stargel Office Solutions also believes in staffing in anticipation of demand. “What we found is that once we put a good support team in place, even though the revenue wasn’t there to support that number of people, it actually was better to do it that way,” said DeBello. “Our reps had more confidence. If you don’t have a support team out there, [the sales reps] are going to have a hard time telling customers to come on board with our managed network services. My advice is to make sure you can go a year or two heavy on the service side. Your reps are going to buy more into it.”

Stargel has always put a lot of pride in its service capability, which is why, like Impact Networking, it chose to build its own IT services capabilities rather than partner. “You do need to put a significant investment in the technical service side. That’s where our biggest change was over the last year-and-a-half that’s helped our business tremendously,” said DeBello.

Expanding by Acquisition

Pure MSPs tend to offer a wider range of IT services than dealers. VanDeWalker lists what the typical MSP provides:

• Hardware, hardware as a service (HaaS) and hardware as a rental (HaaR)
• Licensing
• Patch management
• Anti-spyware, anti-spam, anti-virus
• Technology planning
• Remote and onsite support
• Virtual services and virtual desktop infrastructure (VDI)
• Remote backup and disaster recovery
• Desktop optimization
• Software as a service (SaaS) and infrastructure as a service (IaaS)

“These are just table stakes, and I think it’s important for the copier channel to understand that this is the cost of entry,” said VanDeWalker. Most dealers start with a subset of these services and eventually build out to a full suite. VanDeWalker believes that dealers have two choices to reach those table stakes: buy an MSP or partner. “It would take too long and you would be further and further behind if you try to build it by yourself,” he said.

VanDeWalker sees dealers having assets that give them an advantage over a pure MSP. “The copier channel is very sales driven with a sophisticated sales process. The IT channel, generally speaking, is not as sophisticated, not as robust, not as process driven.” Dealers can focus on having high-level sales reps selling complete packages. “The other advantage a print company has is its customer list.” An MSP might have 50 or 60 customers and be successful where a copier dealer might have thousands. VanDeWalker estimates that about 20 percent of a dealer’s customer base represents potential IT services business.

Those dealer assets would deliver immediate value to any MSP acquisition as the dealer leverages its sales capability and existing customer relationships. It’s no wonder then that all the dealers we spoke with would consider an acquisition even though most are seeing good organic growth. The Swenson Group, for example, hopes to acquire a local MSP for both its talent and customer base. Stargel Office Solutions is looking to acquire for the same reasons, but also to expand a bit geographically.

Growth Areas

For 2017, the consensus is that security and cloud will be the two biggest growth areas for IT services. This is due in part to greater awareness of the benefits of both among customers. Even for those that don’t yet see the value in strong security and cloud-based infrastructure, it may be in dealers’ best interest to steer clients toward them. The two go hand-in-hand. Cloud infrastructure providers typically have state-of-the-art, multi-tiered security systems that are constantly maintained. It’s usually easy to educate customers on the benefits. For the dealer, moving a customer to the cloud means revenue from the initial data migration and then recurring revenue from monthly data storage fees.

“Even if their data is not in the cloud today, we need to educate our clients on where things are going,” said Swenson. “The rip-and-replace strategies for on-site services and infrastructure will continue to dwindle due to the flexibility and stability of moving to a secure cloud. If we’re not talking about data migration, then someone else is. I envision [cloud] being a growth segment for us and a conversion segment for us when their servers become out of warranty.”

“Cloud is getting to the price point where small businesses really shouldn’t be putting a server in between things like Office 365, virtual desktop and hybrid cloud solutions for manufacturing firms that have equipment that needs to communicate quickly with some kind of database,” said Layton.

DeBello said that Stargel is working with a local data center to develop a better plan to offer cloud services this year. Given that most of its customers are on monthly fees with remote monitoring, Stargel sees an opportunity to layer cloud services on top of that.

All Covered, Collabrance, and Continuum have all made significant investments in their ability to provide security services, and it’s clear why. Companies big and small are more aware of their vulnerability to internal and external threats, and they are more willing to pay for peace of mind.

“Security is on the minds of small- and medium-sized businesses,” said Amiri. “Those that are up to nefarious opportunities are looking for the most weak, and the SMBs can be the most weak.” Small companies that store sensitive data like social security numbers or credit card data are particularly vulnerable. Amiri suggests that the conversation can begin with some basic penetration testing on IP addresses and network compliance to identify possible security holes.

VanDeWalker sees growing demand for managed security services. This might include attempting to hack into a client’s system to find security holes that can be addressed by layering on higher threat-management technology. It also involves behavior modification. “It’s going into a company and looking at the way they set up their desks, the kind of physical security it has. Companies need to be aware of these softer things, and these are great opportunities to add value,” he said.

The ability to deliver managed security services would make the most difference with customers that already have good basic network security in place. In those circumstances, VanDeWalker sees an opportunity for IT service providers to offer additional value and set themselves apart from other providers.

“For us, security has always been inherent, so it’s just a different angle for talking to the client,” said Layton. “All of the products we sell have a security focus. If they don’t have business grade equipment or it’s not sized appropriately, we put that in. Security must be done in layers, starting at the edge and working down to the desktop or end-user device level.  Next generation firewalls and switching, anti-virus and anti-malware protection, spam filtering, and intelligent monitoring tools coupled with strategic user training all help to keep clients’ networks and data secure.”

Part of Impact Networking’s security approach is end-user training. “It’s much more cost effective for me to go and stand in front of a conference room for four hours and talk about safe computing. If that stops one virus from happening, it’s a win for us. We would spend a lot more time with technical people that cost a lot of money to clean that up.”

Words of Caution

By far, the ability to hire and train staff to support growth or new offerings is the number one issue for dealers. That’s especially true in areas where demand for technical help is the highest. The Swenson Group competes not only with other dealers and MSPs for talent, but also with all of Silicon Valley. “It’s hard to get quality people in the San Francisco Bay area marketplace. [All Covered] is growing, we’re growing. We both are working hard to bring in more talent and resources to support our growth.”

All the dealers we spoke with place importance on training the people you already have. A copier service tech, for example, might show interest and aptitude in networks. That person would see the opportunity to gain training and certification in that area as a path upward career-wise. “Our investment in development helps with employee retention,” said Swenson.

While hiring and training is top of mind for many managed IT service providers, it’s really part of a bigger issue: staying ahead of the curve when it comes to trends and technology. Dealers who offer IT services see their continued success dependent on being prepared for the next new technology or client need. That’s why many of them are constantly hiring and training, seeking new partners or scouting the competition for acquisition targets.

Knowing the available technology and what’s in demand is just step one. Choosing which technologies to support is step two. Selecting too broad or too narrow will limit your ability to grow. “You have to declare your major and say here are the technologies we’re going to support,” said VanDeWalker. “You pick a handful to go with and then thoughtfully layer in others as time goes on.”