Firm Sees Promise in Helping VARs Become MSPs ‘On the Cheap’

As the managed service provider model has grown in popularity, value added resellers are increasingly heading down the path toward evolving into MSPs.

But that path is littered with VARs that failed on the way, with some reports placing the percentage that ultimately become successful MSPs as low 10 percent.

Still, rapidly shrinking margins are leaving no shortage of VARs opting to try their luck, creating opportunities for MSPs that market services aimed at facilitating that transition.

“The VAR community has definitely come around to the concept of providing managed services with IT products,” said Eduardo Don, CEO of Lumen21, which markets a variety of products aimed at helping VARs sell managed services.

The challenges to the VAR business model have been well documented in recent years, as the proliferation of cloud services and easier commerce between IT vendors and end users combine to squeeze top and bottom lines.

“The Traditional VAR is dead,” VAR owner Hayes Drumwright told Forbes magazine in an August 2014 article about changes in the industry.

Drumwright is founder and CEO of Trace3, which at its peak earned about $400 million in revenue as a value-added reseller, but more recently increased the ratio of engineers to salespeople to focus on big data, and mobile and cloud applications, according to Forbes.

The insatiable demand for managed services – despite intensifying competition – offers tremendous incentive for VARs and other resellers with relationships, experience and expertise in the IT channel.

“The market is rewarding those companies that are making this transition,” Ken Bisnoff, an executive with TelePacific Communications, wrote in a blog post for Intelisys. “While many traditional telcos are valued at five times their operating profit, managed services providers are valued at 10-12 times.”

But such transitions rarely come easily – or cheap.

Successfully competing in the crowded MSP space often means being able to offer a variety of sophisticated services, around the clock. A full-service MSP needs a data center, world-class security, 24×7 remote monitoring, scalability and redundancy, not to mention trained staff.

The requirements make it difficult for many VARs to adhere to a cardinal rule of successful entry into the managed services space: Spend wisely.

“Successful MSPs find a way to provide infrastructure with minimal upfront investment (so you can transition without needing to raise significant capital) and with minimal ongoing spend,” Dr. Prasad Akella, a senior vice president at Intermedia, wrote in a blog post for ChannelPro Network.

That’s where Lumen21 saw an opportunity.

The firm offers VARs three options for making money in managed services without up-front capital investment, which Don estimates at about $1.5 million.

VARs can refer the business to Lumen21, turning over the entire managed service account in exchange for a referral fee. They can resell, using the VARs own sales staff to sell products from Lumen21’s managed service portfolio at a markup.

Finally, there’s a white label option, allowing VARs to present their own branding to customers, while contracting for one or all of Lumen21’s full array of back end services, which include 24/7 technical support and remote monitoring via the MSPs separate NOC and SOC.

Lumen21 also has required certifications to provide managed services to regulated industries, like the lucrative healthcare vertical.

“We’re trying to establish a channel for our services,” said Don, the Lumen21 CEO. “It’s an opportunity to move services through that channel.”

Don said the arrangement allows VARs to immediately generate revenue selling managed services, whether or not they intend to exit the reselling business.

VARs, he said, innately understand how to solve their customers’ IT problems and have the skills to upsell additional managed services. Resellers can even realize a boost to their traditional core business.

“If they’re able to do that model correctly, they’ll also pull product through,” Don said.

In his blog post, Intermedia’s Akella suggested VARs should ensure that their service provider partners have certain attributes:

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