A lot has changed in the last few months and it's essential to stay afloat and relevant in a world that's constantly evolving. How do you define success during turbulent times like these?
What a year 2020 has been so far! The world as we know it has witnessed a paradigm shift, thanks to catastrophic events and new technologies redefining the way we do business today. Despite the pandemic, the managed service provider (MSP) market is going strong. However, the same cannot be said for those undergoing market consolidation. In this resource, we will discuss the MSP market — a quick overview of what has changed in the MSP market, the opportunities this new market presents, and what you can do to seize them.
MSPs — a quick overview
When computers were a novelty in the '90s, people didn’t have much to work with. When a machine completely broke, an IT team was dispatched to fix it. Things were pretty simple. There were flaws in this plan. Think about the volume of data loss, downtime, and productivity, not to mention the hefty bills that businesses had to deal with.
Though businesses built their own internal IT teams, it wasn’t affordable or scalable. Companies simply outsourced parts of the IT functions, they couldn't handle internally, to managed service providers (MSPs).
Though we might consider MSPs as simple businesses that provide IT support or manage the IT infrastructure of a company, their role in the recent past has become significant.
What's an MSP?
'MSP' is an umbrella term. Though managed service providers help businesses in developing complex applications or offer telecom services, they primarily act as the external IT department for SMBs. The demand for managed services is driven largely by five factors:
- Uncertain macroeconomic environment
- Increasing need to innovate
- Keeping up with technological advancements
- The necessity to meet the demands of regulatory compliance
- A lack of internal and deep technical expertise
Products and services offered by MSPs
MSPs provide support and address end-users' problems with PCs, laptops, printers, servers, LAN, software installations, etc.
Short for remote monitoring and management, RMM is the next key service that managed service providers provide. As the name suggests, MSPs remotely monitor and manage the company's PCs and servers for performance, software updates, and fix any issues as and when they occur.
Security is a huge revenue growth opportunity for MSPs. The portfolio of security solutions offered under managed services might vary from one MSP to another. Some of the common services include endpoint protection and firewalls.
Back-up and disaster recovery
MSPs help with the automatic backup of data and its restoration, from all devices. Usually, most managed service providers offer a narrow set of applications such as MS Office. Some MSPs on the other hand specialize in software where they play resellers. However, if there is a problem they tend to refer the customer back to the software vendor.
Apart from these, MSPs offer other products and services such as
Nearly less than half of all MSPs offer telecom services such as connectivity and voice-related services such as broadband connections, hosted voice communications, etc.
Professional services that MSPs offer are need-based application development projects and digital transformation projects.
Cloud and cloud migration
Managed service providers resell access to cloud services such as Azure and AWS. This also includes the management and migration from legacy systems.
A few larger MSPs have their own data centers while the majority resell access to third-party data centers.
Related reading: Software for MSPs
The three C's of today's MSP market reality
Though resilient, we need to understand that the MSP market is constantly evolving. The combination of catastrophic events, cloud-computing proliferation, and the criticality of IT security is contributing to the unparalleled complexity in the MSP market.
To top it, geographical constraints that limit the MSPs' scope of building to scale and fragmentation in the market that makes differentiation a challenge, have accelerated consolidation.
Currently, the three key market drivers are:
One cannot deny the growing need for business agility (which has further accelerated due to the pandemic), scalability, quicker deployment at reduced costs that are driving companies globally to switch to the cloud. Hence offering cloud migration services has become more important than ever. Managed service providers must offer these services at an expert level or get left behind.
The shift to remote working environments and the vulnerability of global economies has created a playfield for cybercriminals and opened up a can of cyberattacks. Ransomware attacks have significantly increased by 800%. This demands stringent cybersecurity measures. MSPs have a greater responsibility to strengthen their client's security.
Business, large and small, are preoccupied with changing systems and processes to ensure compliance with regulatory changes. Adhering to compliance is of utmost importance particularly to those industries that deal with sensitive data. However, there are only so many resources that smaller institutions have that can be stretched.
By focusing on supporting compliance, helping clients meet compliance regulations such as HIPAA, FINRA, and PCI DSS, and preparing for an audit, MSPs can differentiate themselves from their competition.
The new normal and the opportunities it presents for MSPs
No one works from a centralized location anymore. Today, you and I have been pushed to rethink the way we work. Businesses have to replan their IT infrastructure and service delivery. They can no longer depend only on their internal IT.
Speaking of internal IT, all these years, businesses outsourced those parts of their IT that they couldn't handle internally. MSPs remained on the outside, providing services on a need basis, fixing things that internal IT teams didn’t have the resource, skill, or time to fix.
While the pandemic has changed everything, I believe change brings opportunities. You have the unique opportunity to demonstrate your value to your customers due to this sudden shift in working conditions.
The improved reputation of MSPs as a brand
Nothing strengthens a business relationship more than coming through for your clients in a pinch. Managed service providers went over and beyond to ensure business continuity and get people working remotely. This has positively impacted the MSPs' brand reputation for being supportive and having their clients back during uncertain times. By continuing to provide relentless support, MSPs can prove themselves to be reliable service providers.
Related reading: Improving brand reputation for MSPs
Build and establish strategic partnerships
MSPs need to become strategic partners. Instead of blindly delivering on services, MSPs can focus on understanding the client's strategic objectives and the role of IT in seeing those objectives through. This opens up the opportunity for MSPs to play the role of advisors who are fully invested in the growth of their client's business.
Co-managing client's IT department
Today, MSPs have the opportunity to bridge the gap between themselves and internal IT. By transforming the client's internal IT, MSPs can co-manage the internal IT department. You can map your services to their business processes to identify gaps. You can provide them with the necessary help that they need to succeed. When you do that, you turn them into your cheerleaders.
Pro tip: When they seek you out for a solution, give them a solution (not a quote), one that has considered the strategic objectives of their business.
A good time to team up with MSSPs
When it comes to managed services, MSPs have a responsibility to keep their clients secure. The cyber threat landscape has been constantly expanding but increased acceleration to cloud and remote work has only dramatically increased cyber risks. This presents an opportunity to expand IT security services.
With a scarcity of cybersecurity talent, MSPs can team up with MSSPs. This way they can provide a comprehensive set of managed security services that otherwise can be difficult to assemble.
Related reading: Should MSPs become MSSPs
How to become a successful MSP in today's changing times
By now it is clear that organizations must re-evaluate what worked during the unexpected transitions that were forced on them by the pandemic. Managed service providers must use these lessons to further inform their efforts towards digital transformation. Pandemic or not, what follows are recommendations for MSPs that set them up for success.
Remote work is the new normal
We've already talked about how remote work has become the new normal. It's one of the driving reasons for us to create a unified solution for MSPs. This new normal makes it is critical for businesses to implement IT infrastructure that can securely and efficiently support remote work.
You need to identify which systems are crucial for running the business. You'll also need to ensure that your client has the necessary tools and data to work remotely. You need to prioritize remote access. This will be important even in the future when you are required to work from client sites or enable easier digital interaction.
It's easy to think that this might pass but truth is, the pandemic has shown companies that their employees can be just as productive or even more so when they stay at home. Nearly 67% of companies expect 'work from home' to be permanent or long-lasting. Unlike the pandemic, remote work is here to stay. The sooner you embrace it, the better for your business and clients.
It's a good time to create a flexible work culture, one that enables your team to quickly adjust to the new normal. You might want to consider re-evaluating existing policies about work hours, employee time off, operating from a safe office (should some of your employees choose to return to office), etc. Remember, the changes that you enforce to support this new normal will ensure your future success as an agile MSP.
Infuse repeatability into business processes
Technical competency is all good for the success of your MSP business. But I am sure you'd agree that technical competency isn't sufficient if you can't deliver these services at scale in a profitable manner. You need to make service delivery consistently repeatable.
To deliver top-notch service consistently, you need to document processes that have proved fruitful for your MSP business. Not just that. You need to implement metrics that will help you monitor the performance and consistency of your processes.
Now some of you might consider the measuring process problematic. Why spend time on how something is done when you get it done anyway? It's a fair question. However, it is essential to invest time in measuring your processes if you want to scale your MSP business operations. You need to understand that process discipline isn't only about doing things fast and efficiently. It's also about aligning them with your MSP's overall business strategy.
Don't be a jack of all trades, be the master of one
Ever heard the figure of speech 'Jack of all trades, master of none'? While it might seem beneficial to dabble in many skills, it can prove to be a recipe for disaster. As an MSP, you must focus on offering the best of services because truly understanding the technology is key to selling and growing your business. Most often this also depends on where you are geographically placed.
Successful MSPs pick one or more quite specific technical niches which then help them become the go-to MSPs in their region. Despite which niche or geographical location you are based out of, the upsides of going after a specific technical niche are plenty. Other than helping you create a competitive brand identity, it helps you improve your brand credibility as you can deliver reliable service consistently.
Since you will be implementing replicable solutions, focusing on technical niches increases your operating margins. Additionally, your learning experience from each customer engagement helps you enhance the value you provide to customers such as designing accurate pricing and SLAs.Consolidation is key, be it infrastructure or management tools
Consolidation is long due, don't you think?
The pandemic is a wake-up call for those managed service providers who haven't invested or focused on their digital transformation efforts. Most MSPs have been operating with dual systems — a lot of systems based on-premise workforce and a little of the cloud to support their remote workforce. This is only a stop-gap solution and will not hold well moving forward.
You need to think about merging existing technologies and processes that you have implemented so that your MSP is firmly planted on a strong and scalable digital platform. You also need to consider the fact that your clients are also working in a mixed model that most likely includes cloud-based, IaaS, and SaaS solutions. This means they will need your help managing and consolidating these solutions.
Another aspect that you need to consider is the mix of management tools that you use. There is a good chance that you use different remote monitoring and management
Pure-play recurring revenue model — well, about that
Usually, 84% to 90% of an MSP's recurring revenue is spent on human capital, RMM/PSA solutions, and other overheads. That leaves you with anywhere between 10% to 16% for margins.
Until a few months ago, managed service providers have been making the recurring revenue model work. True, it has been a resilient revenue model and still presents scope for building revenue. However, it would be best not to preach only one business model because you are most likely to run out of operating capital. It can also be difficult to manage cash flows during an economic downturn.
You need to think about the three-quarters of customers. Today as they are moving to the cloud, the opportunity is really in these project-based services. Over time, these 75% margin projects, they never end. Some of them have never ended for over 20 years.
There are two sources of revenue — the on-premise business and the dramatically growing cloud business. To be successful you need to participate in both these revenue pools. This gives you an advantage over your single-market competitors. By blending both on-premise and cloud you get to enjoy both the recurring revenue and revenue from additional products and services.
To have enough margin to fund your operations you need a mix of recurring, non-recurring, product, or service-led contracts.
It's time to start thinking about AI
Artificial intelligence (AI) is all the buzz just like Professional Services Automation (PSA) was 15 years ago for MSPs. It was a hot topic of debate. There were split opinions about the benefits of PSA and the value it can add to the MSP market. Fast forward to today. We all know how crucial a PSA is to the MSP business. And we also know that the early adopters of PSA have been reaping its benefits for years now.
Forget discussions, a large majority of MSPs haven't started thinking about AI yet. AI isn't the big topic it should be within the MSP community, at least not for the small and medium MSPs.
As MSPs, you are already familiar with automation. You have automation implemented as much as you can in your business processes because you know it results in higher productivity and profit margins. While tools such as PSA and Remote Monitoring and Management (RMM) are important pieces in the automation puzzle, there's one thing missing — AI.
Think about it. You and all your competitors use the same kind of operational or management tools. How do you stand out from the crowd? The answer is AI.
AI is not just smart automation that improves operational efficiency and increases profit margins. We are talking about intelligent machines that can teach themselves with predictive capabilities. They enable you to provide proactive services to your clients. It is a huge marketing advantage you want over your competitors.
Trust me, a few years from now, we will be talking about AI the same way we did about PSA.