By Larry Walsh
When managed services were introduced to solution providers more than a decade ago, they came with the promise of recurring and predictable revenue, as well as scalable resources that lowered operating costs. And with all that came predictable and reliable profitability.
Eureka! Managed services were the antidote to declining hardware and software margins, and everyone—vendors, distributors and industry evangelists (myself included)—encouraged solution providers to get on the bandwagon.
Fast-forward to today, and managed services are no longer a panacea for sliding margins; they’re becoming a barrier to growth.
Ingram Micro and The 2112 Group are collaborating to evaluate how SMB-focused solution providers operate, identify routes to sustained growth and uncover new market opportunities. Our assessment of dozens of Ingram Micro resellers finds that 65% earn more than one-half of their revenue through some form of managed services.
In the general channel, four out of 10 solution providers earn more than 50% of their revenue from managed services. In both cases, the balance of revenue comes from product sales and short-term professional services. In fact, the share of revenue that’s declining is attached to product—hardware and software—sales.
Arguably, managed services are delivering on the promise of recurring revenue and predictable profitability. And, arguably, they might be doing their job too well.
The general growth rate of companies in the Ingram Micro-2112 Incubator program is roughly 15% annually. But that growth rate is misleading, as it’s not consistent. Solution providers report that revenue fluctuates from year to year, creating a yo-yo effect that pretty much zeros out real growth over time.
While solution providers have invested in delivering managed services, they—with a few notable exceptions—haven’t invested in the development of managed services businesses. Making managed services a sustained growth driver requires building a sales force that’s adding new accounts and expanding consumption with existing customers.
Of the solution providers participating in the incubator program, one-third don’t have a sales manager or salesperson. Another one-third have just one salesperson. And most of these companies say they have no formal process for cultivating and closing sales. To them, sales come through word-of-mouth referrals, inbound sales from existing customers and opportunities handed down from vendors.
Services have always been a large part of the solution provider value proposition. In the past, if a PC or server failed, a technician would show up at the customer’s office. If a customer wanted email, the solution provider would sell a server and application that would be installed at the customer site. If a customer wanted to expand its data center, the solution provider would help design, select products, and install new systems. In many cases, managed services shifted what were once manual professional services to long-term semiautomated managed services.
And therein lies the challenge. If managed services are currently about shifting share from legacy professional services and product sales offerings, solution providers actually gain little net growth even as they increase their operational efficiency and, subsequently, profitability.
Managed services really work only when consumption increases steadily. If the services are administered properly, revenue and profitability will almost always exceed operational costs (after the initial investment costs, of course), providing the means for expanding capacity and investing in new capabilities. Managed service providers (MSPs) that don’t invest in sales have little financial capacity for investing in new services.
While managed services lower costs and deliver predictable profitability, the value will erode over time without investment. Inflationary costs always have a way of building up, cutting into the cost savings that come with automation and scale. Moreover, failure to invest in new services and capabilities will diminish a solution provider’s relevancy to the market.
Managed services may have been the antidote to eroding product sale margins. The antidote to managed services stagnation is sales management. Sales aren’t easy, but they produce tremendous return on investment when executed effectively.
Larry Walsh is the CEO and chief analyst of The 2112 Group. The 2112 Group is partnered with Ingram Micro on the development and maturation of its SMB and MTV partners through a unique Incubator program designed to provide strategic growth, sales and operational guidance for performance improvement. To learn more, contact us or your Ingram Micro representative.