The road to profitability for purveyors of managed IT services is often colored with red ink. The investments required can be substantial as dealers seek to amass a proficiency level that’s essential to delivering on a true managed IT proposition—one that reaches beyond being a complementary asset to your client’s tech department.
Impact Networking
For the dealer that addresses the SMB landscape, constructing the ideal managed IT beast entails carefully cultivating a platform that’s comprehensive enough to service the needs of the current book of business while peppering in ancillary IT services that provide wider and deeper account penetration. But at day’s end, nailing down recurring contracted revenue will go a long way toward the desired profitability.
With that in mind, we turned to three of the industry’s heavy hitters: Patrick Layton, vice president, managed IT services for Impact Networking of Lake Forest, Illinois; Casey Lowery, chief operating officer for Applied Imaging of Grand Rapids, Michigan; and Trevor Akervik, COO for Marco of St. Cloud, Minnesota. This trio shared critical intelligence regarding profitability, scaling and the road to assembling the ideal managed IT platform.
What do you view as the biggest obstacles to profitability that managed IT providers face?
Layton: It depends upon how mature the provider is and how they operate. Is it full managed only; do they do projects, time and materials; or do they just charge for monitoring? If we’re talking about the small MSP that’s just getting started, I think they need to keep a very tight stack and get really good at basic service delivery. It’s all about delivering on your promises. That includes proactive service and alerting, and providing good reactive service. Are you providing that reactive service—is it your help desk, or is it outsourced? When it’s outsourced, it’s a little harder to manage that customer experience unless you have really good documentation and someone managing that relationship.
The problem lies with those customers who see you as the IT guy and see you as an expense; they’re the ones that really drag down your overall profitability.
– Patrick Layton, Impact Networking
For true managed services, it’s being able to look at the numbers. This includes having access to the data for cost of goods sold and actual work involved in managing the client to set the stage for an agreement. It’s identifying gross profit and really understanding how profitable all your agreements are. You really need to have the guts to get rid of the lower clients that don’t really buy into the delivery model. The problem lies with those customers who see you as the IT guy and see you as an expense; they’re the ones that really drag down your overall profitability.
When you evaluate your average or gross profitability per agreement, it becomes easier to start managing your client base. If you can get to an effective hourly rate for your technical staff, that will help you decide on your pricing. It’s been my experience that a lot of the small MSPs and dealers are still in a race to the bottom, and it’s all about price. I argue all the time that if you’re delivering a quality service, you can charge what you need to charge in order to make money. But people are afraid to do that, and they don’t have the confidence to sell based on value versus price.
Lowery: With every single new venture we get into, our number one issue is geography. Because we span the Midwest and Florida, we have to slowly scale new product offerings based on where we can be most profitable. With managed IT, it’s best to start small and scale gradually so you can learn best practices. Because our rep base is so spread out, they get excited to talk about this new, shiny offering immediately, but there’s so much more on the back end that must be put in place first. Having a geographical rollout plan would help alleviate some of these obstacles.
Akervik: There are four obstacles to profitability that weigh heavily on even the most seasoned managed IT providers. The first is controlling labor costs for any future security event and being able to accurately factor those costs into your core offering. In essence, you need to expect the unexpected and budget for it. The second obstacle is somewhat related to the first. Even if budgets weren’t a top concern when recruiting talent, simply finding sufficient (and proficient) IT staff remains a big challenge. In reality, the expected growth in the field is still outpacing the number of people being trained.
No amount of training will ever be enough in our business, and that presents an additional obstacle to profitability. Technology evolves by the month, and cybersecurity threats can change by the week. This field requires constant adaptation and education; if you’re not careful, that can eat into profits. The final obstacle is a bit ironic. As our industry continues to mature and customers become more familiar with managed IT services, their expectations often overtake reality. In 2022, we’ve grown accustomed to a simple fix for just about anything. But not all aspects of managed IT can or should be simple.
What were some of the best practices that enabled your dealership to scale its platform to the current level?
Applied Imaging
Lowery: This will be our 35th year in business, and through these years, we’ve learned a lot. To be honest, most of it has been trial and error. We’ve learned best practices from making mistakes and learning from them. We develop our own best practices and roll them into the mix anytime we scale.
One best practice would be to take really good care of your customers. If you lose them on the back end, you can’t scale because there’s no growth opportunity. It costs significantly more to market to new customers than it does to retain current customers. On the sales side of things, we did what we do for all new technology: we matched an overlay rep who’s well versed and trained in managed IT with our hardware rep, and we provide technical staff to support the field. We’re constantly making new changes as we see new needs arise and we get more mature on our practices and procedures as well.
If we say we’re going to give customers a business technology roadmap, it’s important to get in front of them on a quarterly basis to make sure we’re on the same page.
– Casey Lowery, Applied Imaging
Another best practice is to hire the right people to take care of the customer. Don’t staff to staff. Staff because they’re the best fit for the role and for taking care of the customer. We always aim to go the extra mile to fix the customer’s challenges and frustrations, not just the problem they’re calling about.
If we say we’re going to give customers a business technology roadmap, it’s important to get in front of them on a quarterly basis to make sure we’re on the same page. If you have a snafu that doesn’t get addressed in a timely manner and it’s close to contract renewal time, it can be problematic.
Akervik: We leveraged our sophisticated IT and copier sales force as well as our relationship with various vendors to be a powerhouse in the market. That strategy may not be possible for newcomers. But one practice that’s not only possible, but required to maintain excellent customer relationships, is continuously adapting your offerings to stay relevant. In just the past three years, managed IT has changed significantly; any growth-minded dealer must stay highly focused and extremely agile.
Layton: Doing it all ourselves is probably one of our biggest differentiators. We don’t outsource anything. We have partners; if we’re supplying disaster recovery through Datto, they’re the partner for hardware and the cloud storage, but we’re managing it and are responsible for clients’ backups. Not everybody can do it that way because it’s expensive. But if you’re outsourcing, you need to build really good SOPs around how you’re managing that offering. I feel you need at least one full-time person playing customer advocate with those partners. It’s really hard to control the quality when you’re just one among a million MSPs in some call center. You can start charging the higher prices when it’s a higher level of service. We were lucky that (Impact CEO) Frank Cucco decided to build this business on the back of our other offerings and allowed us to grow the infrastructure we needed without an equal amount of money coming in. Then it flipped; managed IT is very profitable and we’re growing other businesses the same way. But it’s not a luxury everybody has.
Even if you’re small, considering the security landscape and the number of components you can handle, you have to get really good at automation. It’s the key to maintaining some of that profit margin in really easy, repeatable tasks. Automating also allows you to control security much better in areas such as user onboarding, setting up their accounts and the systems they’ll need access to. With those processes, if you get really strong SOPs in those areas, you can see a big shift in time spent on higher-level tasks.
I see a lot of MSPs fall into a trap in which they don’t have enough of the low-level engineers and enough guidance managing the high-level ones—we suffered that as well in the early stages. We came through it with automation and lots of software integration. It takes a long time to write a detailed SOP on the full onboarding of a client, but once you automate it, you can set it and forget it. But getting there is the hard part. Keep a stiff and narrow stack, work on those things to set your foundation and then you’ll start growing.
Considering dealers that are currently going down the managed IT path, do you advocate building, acquiring or partnering to develop an optimal competence level, and why?
Marco
Akervik: We’d recommend that dealers partner with or acquire providers to start learning the intricacies of managed IT. Ultimately, it may be best to maintain a long-term partnership as opposed to building or buying your way into the space. The industry is moving very fast, and the building process is very slow.
One way some dealers have sped up the process is by specializing in managed IT services for certain types of organizations such as schools or long-term care facilities. With a narrower scope, there’s less to learn, but it still may take 10 years to achieve secure footing in today’s mature market.
Even if budgets weren’t a top concern when recruiting talent, simply finding sufficient (and proficient) IT staff remains a big challenge. In reality, the expected growth in the field is still outpacing the number of people being trained.
– Trevor Akervik, Marco
Layton: For me, I’d do it no other way besides building. The acquisition channel can work depending on what kind of MSP you want to be. If you want to be old-school time and materials, a lot of projects and not really do true managed service, I think an acquisition can work. That’s what a lot of the small MSPs look like nowadays. We’ve purchased just one and only for the talent, not the client base. Most of their business was $3,000 or less a month per client, so they were really small customers. (The acquired MSP) did time and materials, and they were looked at as the clients’ IT guys. If that’s your IT approach, those clients can be transferred over to you. For us, transforming them as true managed service clients gets a lot more expensive. That’s difficult because you don’t have a contract locking those clients in and you’re really changing what made them a customer of that MSP in the first place.
I think the partner route is better than the acquired route if you’re small and just getting started. Hire a couple of really good guys who know what they’re doing. Then get a good partner help desk, hire someone to manage it and start building up those SOPs.
Building it, for me, provides all the control and you get to operate at such a higher level. I’ve worked for other types of MSPs, and working at one that operates at the upper echelon allows you to set minimum agreements for client engagements.
Lowery: When we first started, we tried to build our managed IT path from scratch and were unsuccessful. A lot of that had to do with how much focus we were able to dedicate to it. We’ve done a good mix of all three—building, acquiring and partnering. We’ve acquired for expansion into specific markets because that made a lot of sense to gain the trust of the sales team, which was a big hurdle we had to overcome in the past. We’ve partnered with other master MSPs and master agents to provide services and products for which we weren’t ready to invest human capital. We’ve built upon the acquired businesses to support the growth in the markets. For others, it may be easier for them to build from scratch; I’ve talked to dealers that have done it organically. For Applied Imaging, because of geographic expansion, it’s more of a challenge to do in some areas without acquisitions.
