3 Things MSPs Do Poorly Despite Skyrocketing Demand

IT GLUE GLUECON — Maybe you haven’t heard this yet, but managed service providers are making a lot of money right now.

A recent study conducted by IT Glue found that 70 percent of small and medium-size businesses are looking for a managed service. And it’s this demand, in addition to the fact that SMBs themselves are growing, that has MSPs growing at a rate five times faster than the U.S. GDP, according to the study.

Gazelles’ Verne Harnish

But those positive growth statistics might be causing MSPs to overlook potentially serious flaws.

“The reality is, you guys have a hot market. You have the winds to your back. It is absolutely up to you to screw this up,” said Verne Harnish, founder of strategic-planning insights company Gazelles.

Harnish and several other experts offered their commentary on the MSP industry at the IT Glue GlueCon event this week, as Channel Futures reported. And while these comments were geared toward MSPs, everyone in the channel should take notice.

Pricing

Harnish expressed concern at partners’ pricing habits. He said that many MSPs offer a flat, seat-based fee that is the same for all types of employees and all types of companies. He said the model is too uniform and acknowledges neither the needs of the client nor the value of the partner’s services. Managing IT for a law firm might be drastically different than servicing call-center employees, who spend such a high percentage of time on the phone working each day.

The airline industry has adopted demand-based pricing to the point where hardly any two airfares are the same. CNN describes why and how airlines have undertaken this method.

Uber drivers earn more money per ride in areas where more riders are demanding the services — one of the many reasons why the company brought the rigidly priced taxi industry closer to obsolescence.

IT Glue’s Chris Day

IT Glue CEO Chris Day told Channel Partners that he expects the advanced MSPs in his industry are adjusting, or will adjust, their cost strategies. But in the meantime, many of them are just following the crowd.

“People say, ‘Well, that guy charges $100 per hour. I’m going to charge $100 per hour,'” Day said.

TruMethod‘s Gary Pica has also spoken out on having a more customized seating price. He offered pricing advice in a recent Q&A.

Targeting

Harnish and other speakers also exhorted partners to tighten their customer demographic. Varnish said successful MSPs will pick a specific vertical or two, such as financial services, health care or law firms, and become experts at serving that type of client.

But not everyone shares that sentiment, according to Harnish.

“They think the opposite. They’re vehemently the opposite,” he told Channel Partners. “They [say], ‘We think that’s putting all of our eggs in one basket, and if something happens to that industry, we’re all going to be in trouble.'”

Former All Covered CEO Steve Lewis told Channel Partners that it’s understandable for a young MSP not to be picky with …

… its customers.

Service Leadership’s Steve Lewis

“You initially build an immature business, and when you run a relatively immature business, all customers are good customers,” he said.

Lewis said his company progressed from serving customers of 10 or more seats, to customers of 15 or more, and so on until the size requirement for customers was vastly larger than when All Covered began.

Lewis, who is now a senior client adviser for Service Leadership, described a pyramid of potential MSP customers. The top third, which contains the smallest pool of companies, includes verticals like financial services and architects. These customers work in an office and are looking to gain a competitive advantage by improving their IT processes.

“Their revenue is really driven off the white-collar workforce, as opposed to selling a tangible thing like a phone.”

As the pyramid descends, more and more companies view IT as a “necessary evil” and often use price as their main criteria.

Marketing

Most experts agree that channel partners – MSPs in particular – do not market their services well. Lewis noted that many channel sales forces are providing their own leads. Day agreed that marketing should be providing sales forces with more leads than they currently have.

He noted that many industries share this problem, while other industries, especially consumer goods, are top-heavy on marketing and light on sales.

But without good marketing, how will this industry’s growth change when SMBs cease to be so organically interested in managed IT?

“This is an industry that does not market very well. This is an industry that is focused on sales, and there are folks who sell well, but relatively few people view marketing as the front end of sales,” Lewis said.

Private Equity

Datto’s Rob Rae

This one isn’t a concern, but rather a subject of great interest in the industry. We seen frenzied M&A, such as Vista Equity buying Datto and merging it with Autotask. Rob Rae, Datto’s vice president of business development, spoke at the conference about the future of MSPs.

Rae, a winner of our Channel Influencer award, said he has at trade shows encountered various types of unexpected companies who want to find new MSPs.

And he said the increased private-equity investment is a validation of the industry.

“These guys are not dumb,” Rae said. “They spend money because they want to make money.”