Solution Providers Seeing Record Outsourced IT Sales

Those gathered for the recent ConnectWise Summit said these increases signal a cultural shift, with small and midsize customers embracing the fixed-fee monthly bill outsourcing model at a faster-than-expected rate.

Michael Moran, president of Affiliated, Dublin, Ohio, said he expects his managed services business to triple this year and quadruple in 2006. “It&'s 180 degrees different from three years ago when 90 percent of our sales was from AS/400 application support,” said Moran. He said that business now accounts for about 40 percent to 50 percent of 13-year-old Affiliated&'s revenue.

Affiliated is not alone. Many of the 350 service providers at the summit, which was aimed at driving best practices in services, say they expect similar increases in their top line and robust increases in earnings as a result of moving to this business model.

Summit host ConnectWise makes the ConnectWise PSA professional services software for running solution provider organizations. The company is also a solution provider, and partners say its software is more suited to their business. As part of its push to assist partners in driving more outsourced IT revenue, ConnectWise recently launched a managed services platform along with a national services network. Arnie Bellini, president of ConnectWise, said that VARs must use the same model that Ross Perot popularized with EDS, only in the SMB space. “Perot was brilliant,” said Bellini. “He figured out a way to save corporations 30 [percent] to 40 percent on their IT budgets.”

Marie Barletta, a service manager at Netteks Technology, a Boston-based IT service provider, said businesses are finding it more economically compelling to have outside staff with a wealth of expertise provide IT services rather than in-house staff.

Netteks&' services business will be up 20 percent this year, according to Barletta. “We are seeing more managed services, and that is raising the bar on our top-line number,” she said. Netteks&' billable utilization rate for this year is up 15 percent, she added.

Linda Lynch, president of KI Technology Group, a 23-year-old East Lansing, Mich., solution provider, said her company is taking the MSP plunge because customers are demanding a single monthly bill for IT services. “Customers want a flat monthly fee for us to take care of everything,” she said. “There is a lot of demand for it. A year ago, no one was asking for this. Now we are getting a couple of calls a month from existing clients or prospective customers.”

Service providers said they are not concerned about the corporate behemoths from the solution provider side—like CDW— or the vendor side—like Dell—entering the business. Evan Leonard, president of Chips Computer Consulting, a Lake Success, N.Y., solution provider, said he is not troubled by CDW or Dell because of customers&' demand for local services. “There is always going to be a need for a local presence,” he said. “Our customers trust us. They come to us for solutions, and they are not going to get that from CDW or Dell. I am not selling on price.”

Leonard said he expects monthly recurring revenue from Chips&' outsourced IT services business to be up 300 percent this year over last. He said Chips has converted many of its existing clients to the outsourced monthly model and is selling that services level as the “only option” to new clients. Chips charges per server and per desktop seat, Leonard added.

Steve Bowser, director of True Profit Groups, a Phoenix-based consultant that counsels select VARs on best practices aimed at driving profits, said he expects the company&'s 50 members to double their managed services business this year. By True Profit Groups&' definition, managed services should come in at as much as 75 percent gross margin after the initial investment once the model is ramped up, said Bowser.

Bowser said he sees more VARs than ever before profiting from managed services. “This is a pivotal year for managed services,” said Bowser, who has been advising groups of VARs on profitability for the past 15 years. “If you are not talking to your clients about managed services, someone else probably is. Right now it&'s all about market share. From a profitability standpoint, I haven&'t seen anything like this for 15 years.”

Bowser said the managed services boom is helping VARs push up gross margins and earnings as a percentage of revenue. He recommends that VARs get 20 percent pure profit—20 percent of revenue as net before taxes—from the business.

Bowser is pushing VARs to get 50 percent or more of sales from managed services. “When you&'ve got 50 percent or more of your revenue from managed services at 70 percent gross margin, it is going to be a lot easier to bring 20 percent to the bottom line.”