The Managed Services Business Model
Since 2009, we have been working closely with a variety of companies to help guide their success in this space. Our experience in the IT Services market goes back to the early 90’s. We have outlined items including strategies for entry, organizational structure, targeted services, sales process and client engagement models. We have consistently focused on the appropriate metrics that drive high performance. Based on our experience, we believe dealers will need to develop a business plan, supported by a “time tested” business model, to be successful.
The office technology industry is moving quickly toward the Managed Services business. The channel is primed to make a significant impact into this adjacent space that offers a unique opportunity for profitable growth. The existence of a Managed Services Business Model can help accelerate successful entry into the market. For dealerships that have been in the Managed Services business, the opportunity to utilize historical data and ongoing model enhancements will provide a continually refined roadmap for future success, much as the model for the traditional business has guided success in the past.
Adherence to a time-tested and consistently updated business model template has provided many companies the necessary roadmap to build healthy businesses, or to recognize and make adjustments when appropriate to get back on track.
The same principles apply to the managed services business, with one notable difference. The IT Services business model has been in a constant state of transition, and the key metrics to measure success have changed with it. The industry has moved from business activity that has shifted from project revenue, to hourly billed service and support, then to a managed services model characterized by recurring revenue. As the business has changed, the success measures have changed with it. For example, effective hourly billing rates, revenue per engineer, and billing utilization percentage were primary success drivers in the past. These have been replaced by key metrics such as recurring revenue per seat, number of seats under contract, and gross margin on managed services contracts.
Earlier in the year we introduced the Managed Services Business Model to the BTA channel. The Managed Services Business Model reflects a combined effort with Continuum, the leading managed services platform provider in the IT services market. Continuum has brought years of experience in managing over 500,000 devices in this environment. This depth of operational experience was combined with Growth Achievement Partners’ (GAP) expertise in areas such as P&L Metrics (to include revenue mix, target margin, contribution, etc.), head count (and personnel productivity), average transaction size (dollar and customer size), growth in accounts, activity and pipeline expectations, compensation, and other relevant components.
The Model starts with a consistent Chart of Accounts to record the revenue and expenses into consistent “buckets”. Additionally, the model will include a description of select Key Metrics and Operational Targets reflecting some of the more important “guideposts” that can bring value to dealers. For instance, the most important financial measure for high performance companies in Managed Services is Gross Profit on core Managed Network Services. That number should be approaching, if not exceeding, 60% in order to achieve appropriate profitability levels.
Some additional key metrics that have been built into the Model include:
- Revenue
- The appropriate targets, mixes, and types, and how should those change over time.
- Contracts & Account Expansion</li>
- Seats under management, revenue per seat, and growth expectations via additional products and services.
- Activity & Pipeline
- Sales cycle duration, pipeline metrics, activity targets to achieve Business Model Revenue targets.
- Headcount
- Productivity measures for sales and vCIO personnel, target headcount levels based on seats managed and customers under contract, and personnel mix between sales and operations.
- Compensation
- Who to pay, how to pay, and when to pay as well as target compensation levels as they relate to Gross Profit and Revenue
- Profitability
- Target contribution level, and operational levers to enhance performance.
The Managed Services Business Model also incorporates a focus on next generation services to guide dealers to appropriate strategies to optimize the business. Two notable examples that are important to the Model and reflect the strategic direction are Hardware as a Service (HaaS) and Cloud Services. HaaS reflects providing managed hardware and software on a monthly payment basis. It lines up with a core competency of our industry, selling a payment. Based on our analysis, it is a key driver of success for high performance companies. Additionally, the sale of the appropriate cloud services can bring greater revenue per contract and increased account control. The Business Model will guide participants through issues such as % of seats under HaaS contract, and target gross profit margins on cloud services.
You can find the Managed Services Business Model template at www.growthachievementpartners.com or www.continuum.net/businessmodel. Dealers will also have the ability to provide ongoing financial input, receive quarterly updates, benchmark their performance against others, and participate in future model enhancements and changes.
Acquisition Strategies
Some dealers seek to acquire a company that is currently in the Network Services business. This allows an immediate entry, and hopefully a customer base. It is important to ensure that the acquisition candidate has built the tools, processes, and automation that are traits of a high performance Managed Services Provider. According to industry analysts, less than 40% of the network services companies in the US have fully transitioned to a Remote Services led business model. Many are still in a reactive service or a project based business model. In addition, when reviewing an acquisition, dealers should ensure that the pricing to the customer fits with the revenue and margin requirements that the dealer is seeking. Cultural issues are often an overlooked issue when considering an acquisition. A big portion of the acquisition is the technical capabilities of the personnel, and retention of personnel is a critical aspect of any acquisition of this nature.
We have helped a number of companies successfully analyze, negotiate, acquire, and integrate IT Services companies to accelerate their entry into the business. Two important factors to consider in acquisitions:
- Analysis against the Managed Services Business Model. By comparing the results and direction of the target company to the Managed Services Business Model, a dealer can establish a valuation for the business, and determine financial targets on a post-acquisition basis. The model provides a view of “what good looks like.”
- The presence of virtual CIO (vCIO) personnel. The vCIO is a trusted adviser to your customer. The vCIO plays a critical role in the selling and delivery of Managed Services to your clients. In our experience, this role is critical to the success of the program. In short, this individual provides a “technology road-map” to your customers, and acts as a consultant to the process. When considering an acquisition, ask yourself if employees of the company you are considering can lead a conversation with a business owner of small- to-medium sized business on applying technology to support the company’s business goals.
Even if you are not planning to acquire a company to make a successful transition into the business, adherence to a Business Model and selection of the right technical personnel (such as a vCIO) are critical success factors. As you continue to grow the business, the ability to recruit and select the right personnel, and manage the business through a time tested financial model will significantly improve success in Managed Services.
