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The Utility View – October ’06 Vision

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MSP Franchising – Could this be the Answer?

Something happened on the way to the managed services “gold rush”. Although many information technology (IT) service providers have embraced the model, by in large, very few of these firms are successful in terms of the basic barometers for business - revenue, profit and most importantly cashflow.

Over the past six years the IT channel has been impacted by the evolution of managed services in all of its different shapes and forms. In 2000, managed services was introduced to the small and medium business (SMB) service provider community and has since seen increasing adoption as a means to increase profitability, revenue and ultimately business value. As easy as this statement is to make, achieving on the promises of managed services has been much more elusive.

The principle challenge for today’s would-be managed service providers (MSP) is the fact that it represents a very different business then the traditional technology model employed by the channel over the past three decades. Exacerbating this challenge is the fact that it also represents a very different way for SMBs to consume technology – beyond technology operations, they need to be educated on how the MSP will improve their business productivity.

Today we have what we see as the perfect storm in the SMB managed services industry:

the continued commoditization (“aka” utilization) of hardware, software and services;
the erosion of the monitor/break/fix service model, which many providers today call managed services;
the business transformation challenge, particularly with people and process.

Commoditization vs. Utilization

Over the years, technology has evolved considerably to become more standardized with basically 90% of today’s small and medium businesses using 90% of the same devices and applications to operate their business. This now positions the market to evolve technology into a utility-like service by changing from an element, to a user, to a usage-based service, as follows:

Element-based – this is the traditional technology model where a business consumes technology by individual element: hardware, software, service and support, generally in a reactive break/fix service model -> this is where you don’t want to be;
User-based – this is where a business consumes technology on a fixed fee basis by user, including ongoing proactive monitoring and maintenance -> this is where you should be today;
Usage-based – this model is where the business consumes technology based on usage; similar to other utilities in the business such as electricity -> this is where you will be going in the future.

As the industry makes its titanic shift towards a more service-centric model, the commoditization and standardization of technology (end users refer to this as utilization) will continue. With large, national retailers soon entering the SMB managed services market, an already competitive space will become even more challenging. For the foreseeable future, Technology-as-a-Service™ models will dominate all aspects of hardware, software and service delivery.

Monitor/Break/Fix

If you asked five people to define managed services you would likely get five different answers. One common theme to most service providers’ definition is the idea of leveraging remote monitoring and management (RMM) technology to deliver the services. In fact, many people equate RMM as managed services, with many simply adding monitoring to current break/fix service arrangements – hence the name monitor/break/fix.

Although this results in IT service automation, this typically benefits the provider rather then the end customer by making a time-based engagement more profitable. As a result, we have seen the erosion of the monitor/break/fix model over the past few years. MSP’s eager to roll-out their managed services offering should beware – SMB’s won’t and don’t buy monitoring technology any more then a home user cares about what security monitoring technology guards their house. RMM tools should always be bundled into the SMB managed services program as a feature not as the service itself.

The paradox of monitor/break/fix as your managed service program is that the MSP gets paid more for customer downtime rather then uptime. This lack of alignment between customer/service provider objectives will ultimately undermine the relationship.

While software vendors have increasingly evolved their products to become more service-like, managed IT services still needs to become more productized. The challenge for many is the strategic marketing exercise and industry expertise required to package, price, market and deliver technology as a bundled, fixed fee service.

Business Transformation

A big term and bigger problem for most service providers looking to add the word “managed” to their title and services. Business transformation requires service providers to change the way they do business. In fact, this is changing the way all members of the IT value chain do business. This requires a large investment of both time and money, which most service providers are unprepared for – think six figures.

Any business process re-engineering consultant will tell you that most engagements fail due to a lack of resources – time and money commitment. Interestingly, while new market entrants to managed services, like distributors, focus on making MSP technology easier and more affordable to consume, this actually doesn’t address the principle problem in the industry. That being the creation of a repeatable business model - administration, marketing, sales and service - where process drives peoples’ activities toward clear business objectives. While this sounds easy enough, unfortunately the IT industry and the traditional channel model, coupled with the lack of resources, time and expertise, makes this very difficult to achieve.

Why a Franchise System?

Many industries, such as food services and retail, have reached the stage of maturity and complexity where the franchise model prevails. In these two industries there is no “easy money” and if you are not operating an efficient, systematized business you are out of business. The IT industry has also reached this stage, whereby it has become increasingly difficult for small service providers to maintain current business levels, let alone grow, with the traditional technology model.

Our view is that for something as complex and elusive as managed services for the SMB market, a franchise approach is actually the best model. Most service providers are busy enough operating their current businesses to take on the investment of resources and time required to offer managed services. An MSP franchise system removes most of the risk and time requirement from the model creating a proven, process-driven, annuity-based service business, building brand, expertise and franchise value through the sum of the parts. It provides a complete business system, including the front and back office support – people, process and technology – to deliver profitable, cash-generating managed services.

This new type of franchise model addresses the complexities and challenges facing today’s MSPs by providing them the tactical and strategic support to stay ahead of the curve from an administration, sales, marketing and service delivery perspective. The result is that the franchisee is freed up from the day-to-day tasks of running a managed services business, which takes them away from their two most important activities:

servicing customers
getting more customers

The ultimate benefit of an MSP franchise system is that it allows service providers to do what they are best at – onsite service and customer relations. For 99% of SMB service providers, which are owner-managed, an MSP franchise system balances the benefits of being independent with the economies of scale and marketability of being part of a large, national managed services organization.

The predictions of MSP market consolidation will remain unfulfilled for small providers (under $2M in revenue) until there is a vehicle that allows them to join forces, standardize business practices, build a brand name and become the dominant MSP in the SMB market. If the purpose of creating a business is to sell it, then no business model makes this more achievable then an MSP franchise system.

About The Utility View™

The Utility View (TUV) is a monthly thought paper series on current trends in the managed services industry and the emerging utility services market. TUV Vision articles specifically address the service provider community to keep them “in the know” on the channel’s titanic shift toward a more service-centric model. TUV Insight provides small and medium businesses in-depth information on how to better understand and utilize technology and actually make it work for their business. Questions on any of our thoughts and opinions should be directed to tuv@theutilitycompany.com. To receive The Utility View alert please register on our Website.

About The Utility Company™

The Utility Company™ the leader in Technology-as-a-Service™, delivers information technology as a utility to small and medium-sized businesses, providing the required hardware, software and service for a monthly fee per user. Our Connected Office™ service suite empowers people to properly leverage technology to operate, communicate and manage their business more effectively to increase productivity, performance and ultimately profit. Our customers are supported by the Utility Service Network delivering on-site service across North America – technology sales and service professionals can review the Beyond Managed Services™ franchise opportunity on our website. Learn how to make technology work for your business today at www.theutilitycompany.com

Copyright

All rights reserved. This document contains information intended for the exclusive use of Utility personnel, strategic partners and potential investors. The information herein is restricted in use and is strictly confidential and subject to change without notice. No part of this document may be altered, reproduced, or transmitted in any form or by any means, electronic or mechanical, for any purpose, without the express written permission of The Utility Company.

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