XChange: Top MSPs See Three Times The Profit Vs. The Median

Managed service providers have a good reason to become one of the best in their business: The top 25 percent of all MSPs make three times the profits of the median MSP, according to benchmark research by Paul Dippell, CEO of Service Leadership Inc.

"That means three times more stock value, three times more safety from the same business model. That's enormous leverage compared to the median," Dippell said during a general session at UBM Channel's XChange Solution Provider conference in Los Angeles Monday.

Meanwhile, solution providers that engage in services, especially managed services, also generate more profitability than those that are more product-centric, Dippell said. Best-in-class product-centric VARs, categorized as the top quartile, generate 13.4 percent margins, while the top MSPs find margins surpassing 20 percent, he said.

"This is a tough business model to get right; with flat fees you need a lot of control and discipline to stay between the lines. But it's a predictable business model. Predictability is a key thing you want. [Prospective buyers] want to know that results will continue to happen," Dippell said.

Service Leadership organizes VARs into five tiers of maturity based on all business models: beginning, emerging, scaling, optimizing and innovating. Most companies start at a lower level and develop to a higher level over time, Dippell said.

"If you're [beginning], you can't imagine justifying a huge monthly price to a customer so you don't charge much and hope maybe they'll see the value. At [level two], you can't believe you're getting eaten alive, you way overcommitted and you need to raise your price but you don't know how. At [level three], you raise your price and start to sell more," Dippell said.

Most MSPs can't survive at level two so they have to raise prices to stay in business, he said.

Another key to becoming a best-in-class MSP is to avoid charging customers by the number of devices managed, Dippell said. A better strategy is to charge by number of users, vendors or applications managed so if a customer moves some functionality to the cloud, and the number of devices declines, MSPs maintain their revenue stream.

"It's the same value you provide today, which is making that stuff easy for the customer. The reason cloud looks like a threat to managed services is when a server evaporates to cloud, you can't charge by server. So don't," Dippell said.