An Open Letter to Managed Services Buyers and Sellers

Open LetterThe names may change but the fundamentals stay the same. When I first started in IT they called it outsourcing. It was something big companies did and the service was delivered by other big companies. SaaS and cloud services have changed the economics of the model and now we call them Managed Services Providers (MSP) or Cloud Services Providers (CSP), but the fundamental value proposition remains the same.  It’s important for businesses to focus on the areas where they have a competitive advantage to be successful in their market. For areas where it’s more commoditized — IT service management, HR, accounting, for example — it makes sense to find the most effective way to do it. Not cost effective. Effective. It sounds simple, but many people on both sides of the transaction lose sight of it. Too often the MSP/CSP outsourcing transaction is looked at as a cost savings. However, cost is just one factor in the decision to outsource and not the most important one. It is likely when you outsource you will spend more then you are spending now. There I said it. It’s like a dirty little secret.

Back in my days as an infrastructure MSP I would walk into a prospect to discuss their environment. I would do my site survey and audit, and then come up with a proposal to manage their environment. What I found early on was the prevalence of “sticker shock,” that first eye opening reaction when they saw how much it would cost to support their environment. “That’s more than I’m paying now” was the constant refrain. Unfortunately, that would often be the end of the conversation.

What it took me some time to realize is the gap between reality and expectations. The expectation of the buyers was always that it would be cheaper than what they were currently paying. The expectation of the sellers was the buyer would understand the value proposition of outsourcing. Therein lay the problem.

Reality vs. Expectations

Is what you’re doing now working for you? The first question to consider was whether you were happy with your current service management. If the answer is no (which is probably why we were having the conversation in the first place), then how can you compare the cost of what you’re currently paying for poor service with the cost of good or great service?

Do you know how much you’re paying now? To make money as an MSP you need to be very detailed about what goes into managing a technology environment and what it will cost you to deliver the service. You apply your best practices methodology and then allocate the costs (on a per unit, per environment or whatever works for you basis) to come up with your pricing model. Essentially you’re saying here’s what it costs to deliver high quality service. What I found speaking with prospects was many of them didn’t fully load their costs. Those high priced engineers you hired to write software are also spending time fixing PC’s and rebooting servers? That’s a cost that needs to go into your total support costs. Time spent fixing infrastructure is time NOT spent doing what you hired them to do. And what about hiring and training? What about knowledge loss through attrition ie when the key employee leaves and he is the only one who knows how things work? Or hiring a person for a very specific bit of expertise but not having enough work to keep her busy?

I found most small and mid-sized organizations (and even some larger ones) did not know what they were really spending on service management. When I handed them a proposal, what I was showing them was the real cost of managing their environment. The gap between that price and what they assumed or expected was the biggest challenge to closing the deal.

Is this where you want to spend your valuable time? My good friend and mentor Mike Ross will always open an initial conversation with this question: “How you do want to spend your valuable time?” The outsourcing discussion is not a matter of cost as much as a matter of focus. Do you want to spend your valuable time doing things that are a commodity or doing things that will give you a competitive advantage? If you’re spending time in your business on functions that are commodities and don’t give you a competitive advantage it makes sense to make sure that function is handled in the most efficient and effective manner. That’s the value proposition for outsourcing.

Advice For Both Sides

I’m not in the MSP business anymore so I feel pretty comfortable giving advice to both sides of the transaction.

Buyers: The reason you’re looking to outsource aspects of your business is not about cost savings. It’s about focus. If you are in the manufacturing business your focus should be on making better products and delivering better service to your customers. Do you also want to be in the business of building technology infrastructure and hiring and training staff to manage it? Does that give you a competitive advantage? If the answer to those questions is “no” (as it should be) then the outsourcing consideration should be first and foremost on finding the right partner (and yes, it will be a partner) to do this work for you. Spend your valuable time doing activities that give you a competitive advantage.

MSPsStop trying to sell on price. The service you deliver will most likely not be cheaper than what they are paying (or think they are paying) now doing it themselves — and that’s OK.  They are hiring you to do what needs to be done, not necessarily what they are asking to be done. You’re the expert. That’s what they are hiring. Your focus should be on making partnering with you as easy and effective as possible and delivering the high quality services your customers expect.

There, I said it. Discuss.


This post was brought to you by IBM for MSPs and opinions are my own. To read more on this topic, visit IBM’s PivotPoint. Dedicated to providing valuable insight from industry thought leaders, PivotPoint offers expertise to help you develop, differentiate and scale your business.