Allan Thorvaldsen of Panorama9 explains the problem with traditional break-fix models and MSPs can power through the transition to recurring revenue.
From working with MSPs for several years, I have learned that most businesses start with an inner desire to change the world of IT. Sometimes it’s a couple of tech-savvy friends teaming up and offering their services. In other cases, an MSP is born out of internal layoffs: The CIO tells the IT admin that they can no longer afford to keep him on in a full-time role. The MSP starts out with the owner’s old company as its first client.
Over time the business grows, but the overall business mind-set is still framed around thinking that revenue comes from getting paid by the hour – a type of company often referred to as a break-fix company. A full calendar leads to a full bank account. This approach has some clear risks, and in reality it’s not about the full bank account (does it ever get full?). Rather, it’s a question of keeping the pawnbroker away from the doorstep. And going on vacation can be a pain if you’re a one-man band with no partner or colleagues to step in during emergencies.
I have yet to see an MSP that grew rich from just selling hours. You can make a decent income, but you can’t make a fortune with that business model, as it’s often about the consultant and not necessarily about the company that provides the service. When an employee moves to a competitor, the customer often follows.
Some MSPs move one step ahead and start implementing other pricing models. Monthly contracts (retainers) are probably the most often-used model. These give the MSP some financial security – at least for a couple of months ahead. However, this pricing model doesn’t contribute to growing the business, and isn’t scalable.
The problem with break-fix
It’s simple: Because clients on a retainer only see the value when something is broken and they need to call you. In many cases, you will only get paid for plastering duct tape on a wreck, and they want you to react immediately. Basically, it is not the MSP’s fault – it’s the client who doesn’t see IT services as a priority. But low priorities foster low budgets.
Making a solid business with such clients is possible, but at the end of the day they don’t understand the value of your business. And you will get stuck in the break-fix treadmill with little chance to grow your business – or maintain your income with less effort.
To understand what break-fix MSPs can do better, it’s useful to look at the car industry.
It’s break-fix when you call your auto mechanic from the side of the road with an overheated engine.
But it’s a managed service when your auto mechanic schedules a maintenance check a few weeks before you need to get your oil changed.
For decades, break-fix was a common model in the car industry. Today, you can’t pick up a new car without becoming aware of scheduled maintenance. As a result, auto mechanics can plan their resources better, they get fewer urgent requests and car owners are happier when their engines purr like kittens.
So what keeps MSPs in their break-fix mind-set?
First of all, there is an element of perceived risk. Switching to a managed services model will involve saying goodbye to some part of your existing client base and with that, losing some income. Some will trust you well enough to continue working with you, but habits are tough to change. If your clients know how to call you when their network is infected with malware, then you won’t be able to make them unlearn that habit. So you have to let some of them go – and actively breaking up with a client is a risky move.
On the other hand, break-fix companies spend more time with fewer clients. So continuing down that path can be a riskier strategy if one or more clients should go out of business or switch providers, since you will grow to be very dependent on a few select clients rather than averaging out the risk over more clients.
Another element that holds MSPs back from scaling their business is control. Or rather, the lack of control. The possibilities with RMM software and automation are vast, and smart MSPs can monitor and manage a large number of computer parks without the need to spend time at their clients’ sites. This is good for scaling the business, but to some MSPs it results in less control. If you are not showing up and fixing problems, it feels like you are redundant. Which is odd, because clients get the most value when you secure the maximum productive time for them.
At the same time, there’s a megatrend in transitions to cloud-based software. All of a sudden, you are competing with guys like Microsoft, who offer hosted services via Office 365 or Azure. Why not help your clients migrate to such platforms and invoice them for your involvement? The move seems inevitable.
The market has spoken—are you listening?
Sooner or later they will make the switch anyway, and if it’s not you helping them out, it’s probably your worst competitor! Sure, you will lose some revenue in the short run, but over a longer time span you will still have that client, and they will get one consolidated invoice from you for all their services: MS Azure, Office 365, QuickBooks, antivirus software and so forth.
Your net revenue per user will probably decrease—but is that really so bad if you spend less time per client in line with more services being automated? You should now have time to find more clients, and you’ll have fewer interruptions during your vacation.
Building a successful MSP business takes more than simply signing up more clients and getting a full calendar. It’s all about finding profitable ways to service clients and do business with those who understand that MSPs provide the most value when they don’t have to call them or have them show up in the office.