The 17 Characteristics of Successful MSPs
Many partners that have been around for some time are classified as value-added resellers (VARs). The VAR business model entails working to get the most, biggest and most profitable transactions as possible. Some VARs have a small services arm, where they install, repair and maintain customers' equipment; if they play it right, they can make the bulk of their profits this way. However, a VAR's business is often based on reselling hardware and software, plus the margin that customers will accept. VARs try to add value to their transactions in multiple ways, but ultimately, it is mostly a reselling game.
Personally, I have always seen being a VAR as a risky way to run a business because you're always fighting to find a new deal. Margins have been shrinking for decades; nowadays, they're razor-thin. I have always believed that recurring revenue streams are a better foundation for a successful company. You'll sleep better if you don't have to worry about what next month's revenue will be.
Today, there is good analyst evidence that becoming an MSP is the better choice. Company valuations of MSPs compared to VARs are night and day. MSPs are growing much faster than the tech sector in general, and most are not just growing revenue, but also their bottom-line profits. But what are the characteristics of a successful MSP? How do they operate? Here are some ways to tell if you're looking at a thriving MSP:
- They don't resell hardware, but they might create packages where a piece of hardware is included in a service that is being billed monthly (like a managed firewall).
- They might resell software licenses, but that's not where they earn their money; they don't compensate people internally for licensing deals that have extremely slim margins. Selling software licenses is just one service for their customers that might improve their status with vendors and give them a few incentives.
- They are heavy on marketing and have fully and successfully integrated it with sales.
- They talk about value and business outcomes, not about products.
- They love helping their prospects along their buying journeys without necessarily interacting one-on-one with them. They invest a lot in being where their customers are. This means that they invest in their Web site, in podcasts, in being at relevant marketplaces and everywhere else their customers seek information and guidance. They know that their customers are highly intelligent and able to search for information themselves.
- Their culture is about "forever customers" and being relevant to them over the long-haul. They seek to constantly improve their services by being driven by SLAs and constant innovation. This way, their customers have more reasons to stay and give them warm referrals. Shifting from selling pieces of hardware to selling a service that is measured by an SLA is a paradigm shift. It starts with the senior leadership but everyone needs to be on board, and that often takes time.
- They might have different people in sales and marketing than when they were a VAR. It was not a change they intended, but some salespeople might not have liked going from selling big transactions to being an SLA-driven, recurring revenue business model.
- They identify what is core to them and what they should produce internally, and then they add services from external partners that they embed and resell (sometimes white-labeled and sometimes not). I've seen a lot of success with this method in cybersecurity.
- They take an industrialized, large-scale approach to how they produce their services so that both cost and quality are under control. Their services portfolio is heavily standardized; they do not customize for specific customers, as that will divert from their standard, jeopardizing both quality and cost.
- They always strive to innovate and improve their services, but never ad hoc and always with a structured approach.
- They love partnering! They work with others and make sure that the partnership is successful for all parties involved. Giving and getting warm referrals is in their DNA and they have taken a strategic approach to this. Partnering is something they're proud of and it's endorsed by the senior leadership.
- Cashflow was really tough at the beginning of their transition from VAR to MSP, but nowadays, the CFO can easily predict cashflow from quarter to quarter. In fact, the cashflow is so good that they can make smaller acquisitions without additional loans or external investments.
- They have identified their own unique path to success. They often serve certain verticals or other segments, and have taken the bold decision to be specialized, highlighting their expertise in their marketing.
- As much as they love their vendors, they don't let those vendors distract them from their plotted course. Incentives are nice but shouldn't pull focus. They participate in partner programs, but they're still recognizably their own organization, and not just a partner of a certain vendor.
- They are strategic to their customers and they can easily justify the value that they provide.
- They are fanatic about customer satisfaction. They make sure to know exactly how happy their customers are and they are constantly trying to improve customer satisfaction.
- Their company valuation was not much to be proud of before, which made it hard to issue shares when making acquisitions. Today, the multiples based on revenue or profits are much higher, and the company can use their own share as currency when growing through acquisitions.
Bonus: If I were writing this two or three years from now, I would add that successful MSPs make great use of AI to improve their services, and to become more efficient and profitable with a smaller staff. AI is a great way to reduce the cost base for a MSP. This is something that we'll see a lot of evidence about in the future.
These are my own observations based on what I have seen in the ecosystem and meeting with partners. I'm also drawing from my own experience when I successfully led the change of my own organization several years ago.
Hopefully you can find your own successful path from VAR to MSP. It's rewarding and a whole lot of fun.
Posted by Per Werngren on September 30, 2024