MSP Whisperers: Service Leadership’s Paul Dippell Talks Margins

When you’re ready to get truly serious about the IT services business, you often pay a visit to Paul Dippell.

During the better part of two decades as an operator of VARs and managed services providers (MSPs), Dippell was instrumental in growing three companies from a combined $313 million in revenue to about $2.18 billion.

These days, Service Leadership Inc., the IT channel consulting firm he launched in 2001, is the advisory favored by some of the industry’s largest MSPs – many with annual revenues of $30 million or more.

Dippell doesn’t mince words about what, in his experience, differentiates more successful companies from their lesser counterparts: management skill.

“They choose management efforts that are most often implemented by guys at the top,” he said.

Service Leadership’s model is built around helping IT services and solutions firms to measure their performance, compare that performance against the broader industry, and adjust practices to improve their businesses.

Dippell said the companies that join his programs generally fall into 10 business models, including VARs, MSPs and cloud-centric service providers, among others.

Of those firms, the top 25 percent take in about three times the margin of that of the median: 12.5 percent versus 4.5 percent.

“That’s the difference between $400,000 and $1.25 million to the bottom line,” Dippell said.

For MSPs with whom he works, average profit margin is about 7.4 percent, while those in the top quartile see profits of about 17 percent.

“That is a massive delta in cash flow,” Dippell said. “That is a very different picture in terms of lifestyle, in terms of safety or in terms of your ability to invest in things.”

Dippell’s career as business mentor and IT services guru launched from a stint as a junior high school English teacher in the Seattle area.

A year as a student teacher convinced him he wasn’t cut out for the low salary and requisite babysitting.

“The only other thing I knew anything about was 35 mm photography,” Dippell said.

He landed a job at what was then the largest photography store in the Northwest U.S., and was essentially discovered by the manager of a new branch of the Byte Shop computer store, an electronics retailer made famous for buying the first 50 Apple computer kits.

“She said ‘I’ve been watching you sell and I think you’re really good at what you do,’” he recalled her saying. “She gave me her card.”

“Nobody knew anything about computers,” Dippell said. “I didn’t know anything about computers.

“I started as a sales guy.”

IT services background

Turns out that sales skill was accompanied by a fair amount of business acumen and, by 1983, Dippell was building and fixing VARs.

That year, he joined a $10 million a year solution provider with locations in California, Oregon and Washington.

Dippell helped grow that company to $30 million in revenue and orchestrate a sale to a telecom that later became part of AT&T.

He stayed on as that business grew to $130 million in yearly revenue, before leaving the company in 1989.

Later that year, Dippell took a role at CompuCom, an IT firm doing about $300 million in revenue across 12 locations.

“It was about $295 million in product and about $5 million in services,” he said. “We grew that over the next seven years to $2 billion in 40 locations.”

Dippell sounded most proud of the way the business model evolved during that period.

“Of that, about $400 million was service,” he said. “Of that, about $250 million was project and the balance was managed services.”

Dippell’s next venture was as part of a group that bought a solution provider doing $400 million a year – but which wasn’t making any money.

“We turned it around and got it profitable, and about 20 months after I joined, we sold it to Xerox,” he said. “I spent about a couple years with Xerox integrating that.”

During his last run as an operator, Dippell was part of the executive team at IT services firm All Covered, one of the top MSPs serving the SMB space.

“When I joined that company, it was about $3 million in annual recurring revenue,” he said. “We got that to about a $50 million run rate in under two years.”

“Half was organic growth and half was acquisitions,” Dippell explained. “My job was to handle the acquisitions and integration.”

He recalled trying to purchase the IT services firm then owned by Gary Pica. Pica is another MSP-turned-consultant who now runs the consultancy TruMethods.

“I liked Gary and his company a lot but he didn’t want to sell at the time so we didn’t do it,” Dippell said.

In 2001, he was ready for a new challenge.

“Having had that kind of fun, I thought ‘what do I do next,’” he said.  

Management consulting

Dippell started Service Leadership in 2001 as a mergers and acquisitions firm.

But the model of facilitating sales of IT services firms wasn’t a perfect market fit at the time.

“We were in the middle of the recession,” he recalled. “The question was ‘Paul, I don’t want to sell now because we’re not worth anything but will you consult and help us do better? Help us get better.”

“‘Do better’ means I want to stay in my business model and make more money, or I want to change my business model, (for instance) from product-centric to service-centric,” Dippell said. “It immediately led to management consulting and benchmarking.”

Fast forward to 2017 and Service Leadership has grown to 12 employees and is viewed as a tried and true approach that draws many of the most successful and fastest-growing IT services firms.

“We are the essence of a boutique,” Dippell said. “We don’t do any other industry because we don’t know any other industry.”

The consultancy’s business model divides fairly evenly into thirds, its founder said.

About one third is management consulting, geared towards larger firms with annual revenues in the eight digits and above.

Another third of the business is comprised of the Service Leadership Index (SLI), a proprietary tool that measures subscribing MSPs on 85 financial data points to help them gauge their Operational Maturity Level (OML), another proprietary concept.

For $675 a quarter, MSPs can submit their verified financials for benchmarking against peers and gain access to all of the insights.

“It answers the question ‘how am I doing compared against the top performers in my business model,’” Dippell explained. 

In an upgraded package, the benchmarking is accompanied by access to an SLI software application that provides users with step-by-step best practices for increasing their operational maturity.

The $5,400 annual subscription for that program includes five seats.

The final third of the business involves working with firms like Microsoft, Cisco, HPE, Citrix, and other major vendors.

“What we do with them is we help them help their partners do better,” Dippell said.

Despite predictions of doom and gloom for the IT services space in the age of cloud, Dippell insisted there’s every reason for optimism.

“Total cost of ownership on a per CPU basis continues to go down, but the acceleration of the consumption of computing power and the complexity of the environments far exceeds that, and so drives up the need for IT support,” he said. “We have these wildly better computing environments but there’s still great business in finding out what the customers need.”

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