What makes a high-quality, operationally mature MSP?
The answers to this question are the same the world over, and are also sometimes counter-intuitive, according to Paul Dippell, CEO of Service Leadership, which claims to be the world's largest benchmarker of managed service providers.
Dippell (pictured) revealed to Channel Partner Insight that the highest-performing MSPs that Service Leadership tracks have 90 per cent of their customers running the same technology stack. The same proportion of customers will also take their "full-meal" managed services offering.
This is all learned behaviour. If they want to get better and they want to acquire best practices, they absolutely can do that, and the best practices are the same all the world around
Service Leadership has been benchmarking MSPs and solution providers for 10 years and scrutinises 80 metrics of financial and operational performance.
Operationally mature MSPs grow faster and make more money than their peers, with the top quartile achieving a bottom line of 18 per cent or more after the owner has taken a fair wage, Dippell said.
The bottom quartile of MSPs have a negative bottom line of 3.4 per cent, with those in the middle making around eight per cent margin.
"The best practices for running a top-performing MSP are the same in Manchester as they are in Pittsburgh or Melbourne," Dippell said.
"The blue screen of death occurs everywhere, and there are only a certain number of ways to fix that. Either you get on the phone to the user and show them how to reboot it, or the PC has an Intel VPro chip and from your NOC you can hard boot it out of band, or you can send someone in on-site. It doesn't matter where you are: the physics of doing these three things are identical."
Poorly performing MSPs have the choice of folding or selling up, but can also boost their bottom line by complying with simple best practices, some of which Dippell admitted often appear paradoxical.
Why identical is good
Dippell offered a flavour of the benchmarks elite MSPs should be striving for.
"I'll give you some of the tougher ones out of the 80," he said.
"The best in class have somewhere in the neighbourhood of 90 per cent of their customers running the same technology stack, meaning the equipment the customer has on site and the cloud choices the customer makes are identical from customer to customer to customer.
"That is one way you get to top profitability, top growth and top service quality, and it's fairly counter-intuitive because a less operationally mature MSP will say ‘if I have to get all my customers onto all the same hardware and software, that will cost them money. They will object to that because they have equipment they've just bought that doesn't fit my standard, so I think I'll grow slower if I require customers to do that'.
"And paradoxically, you actually grow faster. The reason for that is you can deliver high-quality services less expensively. If you take that approach you get a better reputation, attract more customers, keep more customers and make more profit that you can share back into the business to grow. Low operational maturity MSPs just won't get that until they hit their heads up against the scalability problems and start losing customers about five times."
Full meal, not a la carte
Best-in-class performers will also have 90 per cent of their customers buying their "full-meal", fully managed services offering, according to Dippell.
"The low performers will either have a million a la carte offerings - ‘I can monitor this, I can manage this, I can patch that' - and the customer selects which of those options they want. Only 20 per cent of the low performers' customers buy their fully managed offerings, where the MSP does everything. If you look at the mid-performing MSPs, about 35 per cent of their customers buy their fully managed offering, and the way they do that is by going from a la carte to a precious metals plan, and 35 per cent of customers are on Gold. Eliminating a la carte forces each sales transaction to at least buy the Bronze package and broaches the subject of the Gold package more frequently, and they can get 35 per cent of customers on the fullest, richest package, which is the biggest win for the customer and the MSP."
Dippell continued: "If you look at the top quartile guys, they only offer the Gold package, and they don't call it Gold, they call it standard, and they get around 95 per cent of their customers on that. That's 95 per cent of the sales cycle resulting in the biggest possible sales with the most possible value to the customer. The customer is happier, revenue growth is better, and more and more customers look identical, which is cheaper to run, so there are multiple benefits."
Why being an MSP is like learning to ride a bike
Service Leadership's operational maturity level is a one-to-five scale, where those in the bottom quartile of profitability typically score around 2.7 and mid-performers around 3.1.
"The bottom quartile guys really struggle to ride the bicycle. They're wobbly on the bicycle; they have a hard time steering; not much of their pedal motion results in forward motion. And when you're learning to ride a bike, all of a sudden the handlebars go sideways and you fall off, and that's their level of control of their business.
"They improve either the hard way, through trial and error and muscle, or they join something like HTG or make use of our assets so they learn how to ride the bike faster without falling off.
"The guys in that medium profitability - that eight per cent range - are less wobbly on the bike. They can stay on more consistently and they don't fall down as often, but are still kind of wobbly. They more or less go in the direction they want, and more of the pedal motion results in forward motion, but if there's any change in the terrain they normally have a pretty rough time and fall off.
"The guys in the top quartile, 95 per cent of their pedal motion results in forward motion. They're smooth, they're stable; it doesn't matter what the ground is like under them - they go where they want to go, and pretty fast and efficiently.
"This is all learned behaviour. If they want to get better and they want to acquire best practices they absolutely can do that, and the best practices are the same all the world around."
Walk away from MSP sceptics
Dippell said there are around 15,000 MSPs in North America, a figure that excludes those that may use the MSP tag but in reality draw 80 per cent of sales from hardware resell. Dippell estimated the number in Europe to be 10,000 or 12,000, pointing out that a portion of what is done by MSPs in the US is carried out by major telecoms companies on this side of the Atlantic.
Asked about how MSPs should pitch to end users that are averse to working with third parties because they want to keep IT functions in-house, Dippell had some sobering advice.
"Walk away," he said.
"Spend your time on the 25 per cent of customers that understand the value and can afford it. For the top-performing MSPs, the value proposition is never ‘I'm a cheaper way to do this'. A high-performing MSP wont' be cheaper than Johnny ponytail, and if you did try to be cheaper you'd go broke. It's not that pitch. Here's the pitch of the top MSPs, whether SMB, mid-market or enterprise: ‘Dear decision maker, get out of the IT business, shift that risk to us and focus on your core business'."
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