It’s important to note that rarely is a provider defined as being only one of the above—it is more about what percentage of your revenue or customer base fits into each bucket. Depending on your business goals, your ideal bucket should contain the highest percentage of your business. In order to determine where you are now and where you aspire to be, let us take a look at the characteristics of each.
The best example here is: a customer calls with a problem and you react to fix it. You have no recurring relationship with the customer beyond hoping they will call you the next time they have an issue.
For the most part your service delivery is still reactive, here, as you are waiting for a call or email to generate revenue. The difference is you have started to add products or services that you invoice customers for on a recurring basis. This recurring resale of services makes the customer more loyal and keeps you top-of-mind. The problem is that you are just reselling something they could probably purchase themselves. There is no value-add proposition to the recurring services in this model.
This is the biggest jump in the range. Moving from a-la-carte to proactive requires a mind shift. You are going from a wait-and-see, reaction-driven revenue model where no real relationship exists to one where you have a deeper relationship with the customer. Sometimes we refer to this relationship as being a trusted advisor or virtual CIO. The profit model changes from markup to value-add.
In the two previous models we simply sold time, products, and recurring services at a percentage markup. With proactive we begin adding value to the equation. My favorite example of this is how, in the old days, proactive maintenance was done by moving from computer to computer, physically, to make sure patches were installed, disks were defragged, and AV software was updated and working.
With the advent of remote tools and automation this can all be done from our own office, run by a scheduled task, and we get notified if something did not work. The value of what we were doing did not change. If it was worth one hour of labor then, it is worth one hour of labor now. Competition changes that formula slightly, but the premise is still true. Therefore, your revenue is no longer calculated with cost + markup but instead, cost + value. You are no longer reselling AV and web filtering; they are part of your proactive security package that has more value than the components alone because of the added expertise, labor, and automation that you add to those components.
Your expertise, labor, and automation skills are a differentiator that allows you to charge more and reduce your costs, generating higher margins.
The difference between proactive and managed is that managed includes the labor to fix things when they break. In proactive, you are adding labor to monitor and run maintenance work, but it does not include remediation when an issue comes up. Managed service delivery benefits the client because it further moderates their IT expenses so they are more predictable while also reducing expensive downtime. It benefits the MSP by increasing profits when service delivery becomes so optimized that efficiencies reduce labor cost and issues are reduced so you can handle more clients with the same number of technicians. This creates the optimal win-win solution for both client and MSP.
I believe a more proactive business model, such as proactive or managed, is the best thing for both client and IT provider. It aligns their goals and financially works best for both. The barriers to transitioning from reactive to proactive, however, can be difficult to overcome. Here are two key areas people struggle:
Doing what is best for the customer at a reasonable price is a noble gesture. However, the problem is that many would consider the best thing to be to only have to pay when they need you. This is a false assumption that is easily debunked. Take your average business customer that you have a reactive or a-la-carte relationship with, add up all of their invoices for the past year, and divide by 12. Could you deliver a proactive or managed services plan that would reduce their downtime and even cut their expenses for 15% to 20% over that? In most cases you probably can. Your additional margin comes from reducing the number and severity of issues through proactive tasks that keeps your labor cost related to that client down compared to last year.
I hear it all the time that if you can automate something and it costs half of what it did before you should not charge the customer the same. This is another false assumption. The value did not change; in fact, in many cases it goes up. In my former example, we did monthly maintenance by going from machine to machine. This was boring and monotonous, and errors were made. With the introduction of automation, I can now perform these tasks much more often, eliminate human error, and be notified within minutes of something abnormal occurring. This has much more value than the old way, but costs significantly less.
Changing your mindset
As you can imagine, much of the barrier revolves around mindset and price. Mindset is something you must convince yourself of. Price, however, can be calculated. I suggest you define your proactive and managed packages according to how you want to serve your clients and then work back to the price. Use cost factors like labor and the expense of your tool sets but also consider value, the cost of customer downtime, and things like service level agreements to make sure your price matches the VALUE that a service is delivering and is not merely a reflection of cost. There are detailed training materials available for you in the MSP Institute that can help you develop your packages and pricing.
Moving from a reactive to proactive service model can be intimidating. It can be difficult. The rewards, however, are well worth it. Higher profits mean a healthier company for you, more money in your pocket, and better opportunities for growth. At the same time you will be generating higher customer satisfaction amongst your clients by making their IT environment more efficient with less downtime. That, in turn, will generate referrals that also help you to grow.
Eric Anthony is principal of customer experience at SolarWinds MSP. Before joining SolarWinds, Eric ran his own managed services provider business for over six years.
You can follow Eric on Twitter at @EricAnthonyMSP