Managed Services Are Paying Off for VARs

New revenue model seen as way to offset shrinking profits.

VARs and small integrators are always on the lookout for steady sources of revenue as product margins shrink and competition from online retailers and direct-selling vendors intensifies.

For many, the opportunity for a recurring revenue stream comes in the form of managed services. That is why many VARs and small integrators are shifting at least a small portion of their business focus to the MSP (management service provider) model. For some, it is more than just a new opportunity; it is a potential business lifesaver.

In moving to the MSP model, these companies are using the latest remote monitoring and network management technology to take over IT functions at client sites, ranging from one or two applications to mission-critical systems. Some experts say companies that have seized this trend may have to rethink their position.

Essential IT services such as storage, ERP (enterprise resource planning), Web applications and firewall protection are being administered remotely for companies that would rather pay a fixed monthly fee than incur IT staffing and maintenance costs.

In some cases, VARs and integrators are remotely taking over entire IT departments of small and midsize companies.

Revenue comes in the form of monthly payments, akin to cable or phone bills for the client, which range from hundreds to thousands of dollars.

"If traditional VARs are not going to make this type of evolution, theyre going to have some problems," said Tony Williams, vice president and chief technology officer of Riata Technologies, in Austin, Texas.

Too much reliance on product margins and bidding for projects cuts into VAR profits and may ultimately lead to failure, Williams said. Four years ago, his company decided to start offering managed services because project-based revenue was too unsteady.

Like most traditional VARs and small integrators, Riata had to fight for every penny as it bid for projects against competitors that were under as much pressure for profit. At times, revenue would dry up when Riata caught up with all its projects and found itself with no projects on which to bid, Williams said.

"Its a highly volatile environment to do business in," Williams said.

Feeling similar market pressures, Heartland Technology Solutions, of Joplin, Mo., has started evaluating several software platforms that will let the company provide managed services to customers, said Heartland partner Jane Cage.

"We hope to have a decision within the next 60 days on software to use for monitoring and for help desk," Cage said. Heartland is testing technology from Kaseya Inc. and LPI Level Platforms Inc.

Distributor Ingram Micro Inc., of Santa Ana, Calif., is building a services portfolio for VARs, such as Heartland, that are trying to determine how to best gain entrance into the managed-services space.

The distributor is partnering with providers of services and technology that VARs can resell to end-user customers, said Justin Crotty, vice president of channel market at Ingram Micro North America. Already signed on are N-able Technologies Inc., Etilize Inc., Lapp Technology Works LLC, Dealtree Inc. and Intechra LLC.

VARs source the technology from the distributor, just as they do with product. But instead of making one-time profits, as they would with product sales, they open up sources of revenue that can last for years.

"A lot of our VARs are very interested in recurring revenue streams and providing services that can be billed in that manner," Crotty said.

The switch to a recurring-fee model, however, is often difficult for VARs because they are so focused on project work. It is important to understand the models profitability, true costs and the number of client seats for which a VAR is providing managed services, Crotty said.

Ingram Micro is helping to educate VARs through seminars and presentations at customer events, including the VentureTech Network Invitational, which was held last week in Atlanta, Crotty said.

Aside from adapting to the switch within their own organizations, VARs also have to sell the concept of managed services to customers. Cage views that as a challenge she hopes her company will surmount as customers learn more about the underlying technology that facilitates managed services.

"Im not certain that customers realize the kind of technology that is available today," she said. "I think, though, in our rural settings, it will be well-received because we can provide more rapid response. Too often we drive an hour both ways to solve a one-half-hour problem."

Managed services were a tough sell at first, Williams said. But customers who make the transition quickly find they enjoy the predictability of the monthly fees, the reduction in IT staff costs and the availability of 24-by-7 support service that Riata provides. In four years, Riata has signed managed-services contracts, each generating anywhere from $400 to $10,000 in revenue monthly, with approximately 100 customers, Williams said.

Though Riata is de-emphasizing project work, it is not abandoning it altogether. The difference is that, now, managed-services clients contract Riata for the one-time projects without having to go through the bidding process. "We dont compete for projects anymore; we just get them," Williams said.

The company developed a menu of managed services for clients after making a heavy investment in N-able monitoring technology. "We really dont try to shoehorn a solution for those companies. We realize one solution may be right for one company but not for another," Williams said.

As technology becomes better and more reliable, customers become more comfortable with the idea of managed services, said Tyler Roye, CEO of services provider Inc., based in Commack, N.Y.

"A few years ago, the notion of a data-center-hosted accounting or ERP system was a much harder sell than it is today," Roye said. But as network infrastructures grow more robust and applications become more reliable and network-friendly, the total-cost-of-ownership argument for managed services gets more compelling, he said.

"Essential IT service revenue is up for grabs, and its going to be redistributed over these new revenue models," Roye said. "The more we can do as a service, the more value we can provide to the customer."

Pedro Pereira is a contributing editor for The Channel Insider.