Business Model: Managed Service Provider

Managed Service Provider

In a Managed Service Provider (MSP) model a strategic partner takes on, transforms, and runs business digital operations and processes to improve business outcomes on a long-term basis

Business Models in Use

Valuable to Customer

Benefits

Challenges

Key Performance Indicators

Benefits

Challenges

Key Performance Indicators

When it Works Well

Focus on Customer Results, not IT Jobs

Traditional outsourcing companies sell on an FTE or full-time-equivalent basis. MSP providers focus on the core customer need and delivers a continuous service often with an uptime guarantee or other type of service level agreement.

High Risk, Urgent Need

A Managed service provider (MSP) business works best when customers see the process being outsourced as having high enterprise risk, with an urgent need for expertise.

 

For example, the rise of ransomware and security breaches have had a dramatic impact on the adoption of companies hiring MSPs. The real costs to the customer, and their reputations, put them at risk. Those MSPs who invested in well-planned, multi-layered cybersecurity offerings, therefore, saw their businesses grow.

Specialized Expertise, Rapidly Changing Field

MSPs that specialize in specific industries or aspects of technology tend to perform better than generalized outsourced IT. Because MSPs tend to price based on business value, those that deeply understand the industry or customer economics are able to translate technical capabilities into business value add.

Value Selling

Related to the above, those that are able to price their services to the value that they provide outperform those that sell based on general service levels or guarantees. However, value selling does require stronger relationships with top decision-makers, the ability to deeply understand the pain points, and the financial logic to sell on an ROI basis.

Recurring Relationship

Not all MSPs sell their services as a subscription model, though the pricing on an all-you-can-eat or tiered basis has become more of the norm for all sizes of MSPs. When MSPs make the transition to a subscription they tend to see higher retention rates, growth, and margins.

Challenges to the MSP Model

Low Differentiation

The biggest challenge to the MSP model is to define a competitive differentiation. Because MSPs are typically services wrapped around third-party technology, there is no strong competitive moat. MSPs can increase differentiation through specialization or investment in software or hardware to enable core workflows valued by the customer.

Lack of Continuous Improvement

MSPs need to invest in understanding and adopting new technology to keep pace with advancements. If pricing is commoditized and margins are low, MSPs can be caught unable to invest in continuous learning and adoption of new technology and can become outdated and quickly replaced by a new MSP who is able to deliver new capabilities.

Choosing Which Technology to Support

MSPs can be dragged into the wrong end or wrong timing of the technology hype cycle, for example investing heavily in blockchain capabilities before a target industry was ready to adopt. On there another hand, a number of MSPs were caught off guard during COVID19 response by not investing in remote, automation, and IoT or Internet-of-Things offerings.

Trends in MSP

Automation

Even before the demands of COVID19, automation has been a key driver of scale for MSPs and their customers. Automation does not replace employees but rather moves them to the higher-value task so that MSP providers can spend more time on strategy and operational improvement.

Telcos Entering

Telecom Service Providers are now keen on the idea of MSPs in order to branch out beyond data services and make use of their scale. Telco’s dominant logic is the subscription model, so their entire

They already work on the subscription model so there is no need to migrate customers to new world order. As telcos enter the managed services space, the existing MSPs will feel the pressure to try new things to increase revenue in the year ahead and beyond.

 

Telecom Service Providers or better known as telcos are making use of their existing scale and IT savviness to shift beyond data services and voice to selling managed offerings

Cloud Systems

MSPs have ridden the wave of adoption in the shift from on-premises servers to cloud-based systems, the growing use of connected sensors and hardware, and the consumerization of IT – end-users chasing their own technology solutions. All of these trends in addition to COVID19 have accelerated the shift to the cloud, enabled by MSPs.

Emerging Technologies like IoT and Blockchain

Managed Service Providers have not followed the hype cycle to promote the adoption of internet-of-things or blockchain but instead have adopted practical models like hardware-as-a-service or device-as-a-service. As connected sensors and devices combine with 5G networks to manifest more use cases and interactions, MSPs are potentially positioned to benefit.

 

However, they will need to not just implement technology solutions but search and validate new business models made recently possible by these technologies.

Outcomes-Based Business Models

Business customers seek out more result-based outcomes with pre-defined ROI and standards based on benchmarks. Those that are able to sell on an outcomes basis are more likely to maintain C-suite relationships and higher retention.

Key MSP Mechanisms to Test

Not all customers want to purchase recurring revenue MSP services, so test your value proposition first and determine the ideal segments. MSP companies focus on the ability to maintain margin advantage through key phases of growth.

Before You Consider MSP

  • There’s no coasting in MSP models, expect to continuously innovate. Meanwhile, your role is to adopt the most practical technology that drives business outcomes, so less bleeding edge and the more early majority.

    Not all customers want to buy their solutions as an MSP; they may prefer to buy devices and hardware, capitalize the cost on their balance sheet, and buy a software and service agreement separately.

Testing the Model

If you are starting a brand new MSP, develop a uniquely differentiated value proposition that lasts beyond your initial set of contacts. Run a sales or marketing test to ensure that you could develop leads based on that value proposition.

If you are transitioning a traditional device or services business to MSP, segment your customer base to determine which types of customers are more likely to migrate. Test before you migrate, and control the shift as there will be a hit to your revenue and cash flow as well.

 

  • Is it the high-end customer that wants access to the latest technology?
  • Is it the risk-averse customer that wants the highest level in your Service Level Agreement?
  • Is it your cash strapped customer that wants to shift their spending from Capex to Opex?

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