A “How To” Manual for Building a Successful Managed Services Business
Not every IT professional has what it takes to run a managed services business. Every year, scores of prospective technology entrepreneurs “hang up their shingle” and begin seeking out potential clients. Many will fail in their first few months of operations, in addition to a fair number of long-established providers that, for a variety of reasons, close their doors every year. There is no guarantee for success in an industry where skill, knowledge, and hard work are a prerequisite.
The managed services market is somewhat crowded but still, according to many sources, underdeveloped. ChannelE2E projected less than 20,000 “successful (i.e., very healthy and very profitable) small business MSPs” in North America, while others have put the total number at more than 100,000. That amount fluctuates wildly from year-to-year as new money and talent enter the managed services community. Venture capital is flowing into the channel, fueling the ongoing MSP consolidation craze and a wealth of new upstarts, and M&A activity is sure to remain strong as long as ROI stays robust
Several factors feed the continued growth and success of the managed services community. First is demand for quality IT support from the largest segment of the business community. There are more than 32.5 million SMBs in the U.S.—an astronomical 99.9% of all businesses—which employ nearly half (46.8%) of the entire private workforce. The vast majority of those organizations rely on third parties to support their IT needs, from workstations, PCs and networks to system monitoring and cybersecurity. According to the SBA, more than 500,000 new businesses open each year, further expanding the market opportunities for industrious and capable MSPs.
Most SMBs have few if any IT resources and often look to channel partners to support many, if not all, aspects of their computer systems and solutions. Few small businesses need or can afford to employ a full-time staff of technology professionals today, especially with the increasing costs of acquiring and retaining quality talent. MSPs provide a practical alternative and, in many cases, offer their clients a more robust skill set to support both their current and future IT needs.
Are You Ready to Build an MSP?
Opening any business can be a major endeavor but starting a technology-driven company adds more complexity to the mix. From the exceptional skills requirements to the unique obstacles involved with marketing and selling recurring IT services, IT entrepreneurs often wear many hats while scaling the business. Prospective MSPs must adapt to constantly changing client preferences, rapid technology shifts, and an increasingly competitive landscape.
Do you have the expertise, knowledge, drive, and commitment for empowering scores of businesses with cost-effective IT systems? Those are just a few of the factors to consider before setting out on an MSP building adventure.
The good news is, you can benefit from the lessons learned by hundreds of thousands of other IT professionals who followed a similar path. For every multimillion-dollar MSP, there are likely thousands of others barely making a profit, with some fighting off creditors while trying to reverse cashflow issues. Leveraging the best practices shared by successful providers helps aspiring managed services business owners avoid costly mistakes and focus on implementing the right processes, tools, and policies. MSPs that follow industry standards typically enjoy a better return on their initial investments than those who rely on more general business guidelines or ignore the advice of seasoned IT services professionals.
When starting an MSP, aligning with like-minded owners is the right (and most efficient) course of action.
Follow a Recipe of Success
As mentioned before, it takes great focus and commitment to construct a successful managed services business. Most of all, prospective MSPs need to have a well-crafted plan of attack and stick to their goals and objectives.
Once you have thoroughly researched your service offerings options, you must clearly identify which services will make up your MSP offering. Most start with a smaller solutions stack that meets the business needs of a couple of key clients or a vertical market, including email and desktop support, remote monitoring and management, data backup/disaster recovery, and cybersecurity. Those offerings typically expand as contracts grow and user needs increase.
Creating a unique services offering is not as difficult as in years past. MSPs can leverage the “recipes” and best practices of peers to develop their services offerings, improve the sales process and marketing activities, and strengthen pricing models. Following the time-tested and proven advice of other providers reduces your risks and can improve operational efficiency. Consider tips like “avoid gold, silver, and bronze packages” to build a profitable and sustaining MSP business. That list of suggestions is long and covers a wide range of topics, including:
1. Research the Market
Before investing a single dollar in tools, buildings or other assets, every prospective MSP should have a good grasp of the local and vertical market opportunities. What types of businesses need better IT support? How many companies could benefit from innovative solutions and more proactive system oversight and management? If so, how much will the key decision-makers truly be willing to spend for that level of support? There is no opportunity without strong demand. Prospective MSPs must understand what their target clients desire and require, their core business functions and the actual budgets available to pay for that support. Market research is just the first step in building a viable MSP.
Prospective providers also need to explore the best practices for the delivery side of the business. Explore (and consider joining) industry associations like CompTIA, the ASCII Group, and MSP Alliance. These organizations will provide your team with access to valuable resources and allow you to network with thousands of successful IT services entrepreneurs. They may also offer vendor discounts, templates, business-enhancing tools and access to a host of other membership benefits. Take time to listen and learn from peers by attending industry events, including live and online conferences and webinars.
After conducting market and industry research, do you still feel confident in your ability to attract clients and deliver a valued combination of IT services? Can you control the cost of delivery, minimize the time to market, and provide a complex solutions stack? If so, the real work begins (starting with careful planning).
2. Outline Key Objectives/Build a Practical Business Plan
The foundations of some of the strongest organizations are not made of brick and mortar but paper (or computer files). Today, a business plan for service providers is essentially the basis for every organizational decision and action. A vital roadmap for MSPs, these documents should define your mission and objectives, establish the growth trajectory, outline concerns and opportunities, detail market strategies and business models and cover pricing and profitability goals. Business plans provide direction, and with the help of a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis, you can better prepare your MSP to take advantage of the best prospects and address the most likely threats.
3. Select Your MSP Toolset
To provide effective support, every managed services business needs its critical tools, including remote management and monitoring (RMM), access management and professional services automation (PSA) platforms. Your clients will likely require a plethora of business technology solutions and cloud applications. From email and collaboration tools to VoIP (Voice over Internet Protocol) and disaster recovery options, MSPs often partner with more than a dozen vendors to deliver a broad portfolio of services offerings. Creating all-encompassing packages that address a broad array of client needs, including compliance issues and rising demand for cloud-based infrastructure, will strengthen your toolset.
4. Build Strong Channel Networks
A managed services offering is only as strong as the firm’s key partnerships. Working with supportive vendors, distributors, master agents and peers allows MSPs to provide comprehensive support and deliver a broader portfolio of business-enhancing solutions. Industry events spur a lot of these engagements, allowing providers to learn about the latest tools and best practices, and align with partners to build out a complete list of offerings, technical services and delivery options.
5. Develop a Sustainable Pricing Model
Once vendors and portfolios are in place, it’s time to build out the expense and profit equations. Many MSPs begin with a “cost-plus target margin” baseline pricing model for client proposals with a floor for discounts to ensure profitability. It’s not always that easy. If you have a number of direct competitors, the pricing formula or the types of value-added services your MSP offers may need to be adjusted to capture more business. Discounting is discouraged by virtually every industry expert as most consider that approach a “race to the bottom,” reducing cash flow and negatively impacting other financial metrics. Your pricing plan for a core package (or core technology stack) should be competitive but profitable and still decrease costs in all client environments.
6. Leverage MSP-specific Sales Training Courses
Quality education and coaching help new sales team members hone their skills and allow you to get your business off to a strong start. Whether targeting prospects or upselling existing clients, effective training increases your chances of maximizing revenue and profitability and scaling your company’s operations. Managed services-specific sales courses help your team improve closing rates while addressing the specific needs of each client—a good way to boost retention and increase wallet share. Bringing in a sales expert to train your team helps improve their understanding of the sales process, overcome closing issues, and drive incremental revenue.
7. Create and Execute Your Marketing Plan
Building a database of prospective clients and generating demand and name recognition is essential for any new business. Popular MSP marketing strategies often include sponsoring local events and working with community civic and business groups. Participating in networking functions and sharing technical advice with regional newspapers and television stations are good ways to increase awareness and build mutually beneficial long-term relationships. From an informative and interactive website to email campaigns, client referrals and newsletters, matching your message with the needs of prospective clients will help generate leads for your MSP.
8. Build a Deep Sales Funnel
New MSP owners should invest a majority of their time in marketing and sales activities. Most IT services companies begin with one or two clients and funnel a fair portion of the revenue from those accounts to scale the operations. MSPs need a healthy sales funnel to help meet future revenue and profitability goals and grow the business. Innovative providers leverage every potential tool and available resource to drive those leads and strengthen the sales process. Leveraging targeted promotions and optimizing SEO and content on websites maximizes awareness of your firm and provides a solid return on your marketing investments. Utilizing crazy automation, cool sales tools and a creative marketing strategy can speed up lead generation and closing.
9. Develop a Team of Managed Services Professionals
Many MSPs start out as one-person shops or with a single business partner. A common past practice (though it still occasionally occurs) was for companies to essentially fire and outsource their IT staff. One or more of those professionals would form an LLC or another legal entity, hang out their shingle, and become their former employer’s IT services firm. Others went a more traditional route, starting a business and signing new clients.
No matter how they get their start, in the beginning, many MSPs wear many hats, and act as technicians, sales and marketing professionals, and the collections team. The bench needs to get deeper and wider as workloads grow. Full-time technicians and dedicated IT services sales professionals will help the organization scale quicker—if MSP owners recruit the right people. Finding the right mix of skills and personalities is never easy, especially in tough labor markets, but it is essential to the success of an IT services business. Successful MSPs regularly assess their current and future skills requirements and create hiring and training programs to support their companies’ long-term objectives.
Launch! Pursue Paths Less Traveled
While adopting best practices is key for building a successful (i.e., profitable, sustaining) managed services practice, MSPs must also be creative and pay close attention to their client’s unique needs. Building a “cookie-cutter” IT services business to mimic the competition won’t win new sales. Without clear differentiation, MSPs tend to get into pricing wars with peers to win bids and contracts, which, according to most industry experts, leads to a race to the bottom as revenue and profitability substantially drop.
A strong focus on value-selling is an effective way to blunt those issues. Building a strong portfolio of IT services, one that addresses the critical business needs of your target audience, allows your MSP to command more premium pricing. The greater the fit, the greater the demand. Taking the path less traveled—developing unique solutions and services—can be profitable for MSPs when they properly manage and sell those offerings. Better yet, more personalized portfolios create “stickiness,” strengthening each client relationship and elevating customer satisfaction and retention.
Building an MSP is not rocket science. As the paraphrased saying goes, “luck and fortune favor the prepared.” Along with adequate planning, that process is much easier for skilled IT professionals with attention to detail, some business acumen, the ability to connect with other business leaders, and hire the right people. Of course, the path to creating a successful MSP is never easy, but with the right guidance and support, the obstacles will seem smaller and more opportunities will come your way.
Set-up Your Business for Success
Cash flow is critical to every start-up, so your business has the financial resources on hand to grow. ConnectBooster is a scalable solution that automates getting paid, so your business can achieve consistent, predictable cashflow. We’re trusted by thousands of service providers to get paid on time, every time, all while saving time. All you need is an accounting package to use ConnectBooster. Connect with us to learn how ConnectBooster can set your business up for success, and save you time and money.