Creating a Managed Services Practice: Build, Buy, Cobble or Partner? Previous item The Buzz in Cyber... Next item Embracing Diversity in the...

Predictions have the Managed Services market reaching $258 billion by 2022. Value-added resellers (VARs) that offer Managed Services create recurring revenue models with higher gross profit margins. Multiyear contracts stabilize revenue and increase the valuation of a Managed Services business. It’s a no-brainer, right? Not so fast.

There are a few things you need to consider before you go down that road. To be an effective provider, you need everything from a network operations center (NOC) to cyber offerings and much more. So, the big question is: Creating a Managed Services Practice: Build, Buy, Cobble or Partner?

Regardless of the approach you take, you need to consider everything from whether you will build or “borrow” technology and how much you can afford to fork out to buy technology, tools, licensing and certifications.

What about marketing and legal support? Do you have a solid business operations plan? Are you even aware of all that you need to know about what you are getting into?

In this post, I will focus on what it takes to build or buy a practice that includes everything you would need to be competitive in the space. Here’s a quick overview:

Build Your Own

Financial
  • Investment $3M -$6M
  • Negative Cash Flow for XX (capital)
  • Cash Flow – Ongoing Salaries vs Receivables
  • Tools, Licenses, Updates, Resources (Up-front and ongoing)
  • Qualifications / Certifications
Staff, Train & Manage
  • Multiple Service Delivery Disciplines
  • Ongoing Training
  • Multiple Shifts (24/7)
  • Sales Support Staff
  • Sales Staff
Create
  • Service Delivery Processes
  • Statement of Work
  • Marketing
  • Collateral
  • Sales Job Descriptions
  • Compensation Plans
  • Contracts
  • Service “Credit” Approach
  • Costs Models
  • Pricing
  • Billing Process
  • Accounting Approach
  • Renewal Management
  • Cancellation Reserves
  • Account Management Process
  • Risk Reserves
  • Security Policies

Buy an Existing Practice

Financial
  • Investment $6M- $10M
  • ROI
  • Cash Flow – Ongoing Salaries vs Receivables
  • Tools, Licenses, Updates, Resources (Up-front and ongoing)
  • Qualifications / Certifications
  • Contract Financial Risk Analysis
Staff, Train & Manage
  • Multiple Service Delivery Disciplines
  • Ongoing Training
  • Turnover
  • Multiple Shifts (24/7)
  • Sales Support Staff
  • Sales Staff
Create/Refine
  • Service Delivery Processes
  • Statement of Work
  • Marketing
  • Collateral
  • Sales Job Descriptions
  • Compensation Plans
  • Operational Support

Today, up-front costs to build a successful Managed Services Practice have been lowered because many former buy “tools” are now offered as-a-service. However, it still can cost millions to establish a NOC (And, yes, I realize that it has been done a lot “cheaper” with just a single workstation and a couple of engineers. These usually fail.).

Everyone underestimates the resources (skills and effort) to build a Managed Services Practice from the ground up. The focus needed from management and technical resources is constant. This is just the way it is as there is constantly new technology being created that need management.

Oh, and if you buy a successful practice – with a NOC – it will cost even more.

If you set up for practice with an as-a-service solution, you usually must pay up front for a full year, in advance. Unless you have a large enough initial contract, you will underutilize your resources. Then you have to allocate those resources to maximize their effectiveness and keep them happy.

Whether you build or buy, until your Managed Services business is large enough, you also may not have the “right” level of resource available. Therefore, you may find yourself overpaying a resource for a specific task (e.g.: a level 3 performing a level 2 task) or a lower-level resource trying to do a higher-level task (which will either result in longer repair times and/or delivery issues). Then there is the obvious need to staff 24 x 7 x 365, for which you will need a minimum of 12 professionals to keep “eyes on the glass.”

Project or hardware sales contracts are straightforward, and warranties and indemnification are passed from OEM to customer. On the other hand, Managed Services agreements require you to address warranties, indemnification, insurance, confidentially, data protection, service credits, usage, etc. These agreements require knowledgeable business operations and legal counsel and will likely need to be customized for larger customers.

Think you are ready to build or buy? Don’t make up your mind until you have read my next post, in which I will focus on what it would take to “cobble” together or leverage a managed services practice.

Reach out to David McGillivray and his team at info@intergridms.com to learn more about InterGrid’s JetStream line of Managed Services currently offered to Comstor VARs.