Selecting the Right Service Delivery Model for MSP Services

IT Services Agent or Provider

Managed Service Providers (MSP) often become MSPs by evolving from a traditional IT reseller to the more services oriented approach. Other organizations specifically choose to start as MSPs after watching the challenges that traditional IT resellers face. The products that an MSP chooses to be the foundation of their services are critical to the organization in maintaining its value as more than just a reseller. The problem is that many vendors that aim to sell to MSPs essentially force the MSP to become an agent instead of maintaining its provider status.

Don’t Let History Repeat Itself

The reason that many IT reseller organizations became MSPs was because traditional product vendors diluted the market by signing too many IT resellers in a given geographic area. The high number of IT resellers lead to a reduction of margins on products and services being delivered, which subsequently made it hard for those IT resellers to continue to invest in professional services skill sets necessary to implement, support and operate the solutions delivered.

The IT resellers’ inability to deliver quality services then lead to IT vendors deciding it was in their best interests to take projects with end-users direct because the IT reseller channel “added no real value.” However, some IT vendors have changed their approach to the channel over the last few years and have put steps in place to make sure certain types of business is “channel-only.” Typically, the business that the vendors feel the channel is qualified for is small to medium sized organizations. Many vendors do business directly with the larger enterprises.

The combination of decreasing margins and vendor attitudes toward IT resellers is what drove many traditional resellers to focus solely on services. As these organizations mature they provide products to bundle with their services in monthly/quarterly subscription models. The result is the service provider is renting their infrastructure and expertise in order to help end-customers lower their capital expenditures and reduce operational costs.

The service provider model has proven to be very successful both for the organizations that become one, and for their customers. The problem is that many of the IT vendors that sell to the MSP community also provide infrastructure. If the MSP engages in these types of relationships their role with their customers is reduced to one of an agent instead of a providers of services. They become the IT equivalent to an insurance broker and place self-imposed limits on their value to the customer.

Agent or Provider

MSPs need to decide if they want to be known as an agent or a provider. In an agent business model the MSP is not building out a rentable infrastructure. Instead they are leveraging the infrastructure of the underlying cloud service vendor (i.e. the real service provider). The marketed advantage of the agent business model is that the MSP does not need to invest the resources required to deliver the service. “Just go sell our stuff!” is the mantra of the service provider.

The downsides for MSPs can be serious and deep.  They include low margins, no differentiation, no intellectual property, loss of customer control, and a much lower value of the overall MSP business[EF1] . An agent faces diluted differentiation, diluted margins and diluted shareholder value. In addition, the agent model requires the relinquishing of customer control and no motivation to create their own intellectual property.

An MSP on the other hand maintains the infrastructure for their clients and that infrastructure becomes a key differentiator for them enabling to maintain, if not increase margins and shareholder value. Owning the infrastructure also encourages creation of intellectual property as each step toward greater efficiency enables greater profitability and increased differentiation.

Agency for MSP Startups?

A provider may think that going the agent route is an ideal way to get started. They can focus on finding clients and not have to outlay a lot of capital on the infrastructure. Their theory might be that once the startup provider achieves critical mass then the provider can cut over to providing a more complete and turnkey offering that includes a rentable infrastructure. However, the problem is, how does the provider ever actually make the switch? They may have hundreds of customers set up with a vendor, so to suddenly change course is a difficult and risky strategy.

Leveraging a vendor relationship to help a provider get started also assumes that the cost of starting as a full-service provider is substantially higher. Some providers’ vendors offer low starting price points and affordable hardware configurations while using the existing employees to operate the service. If the organization can make the initial first step, they put themselves in a far better position to remain profitable and be sustainable for the client.

The next blog will dive deep on the comparison between agents and providers. It will answer the question is the inherent upfront risks of being an MSP be outweighed by increase differentiation, margins and shareholder value. It will also explore options to mitigate the upfront risks.

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Twelve years ago George Crump founded Storage Switzerland with one simple goal; to educate IT professionals about all aspects of data center storage. He is the primary contributor to Storage Switzerland and is a heavily sought after public speaker. With over 25 years of experience designing storage solutions for data centers across the US, he has seen the birth of such technologies as RAID, NAS and SAN, Virtualization, Cloud and Enterprise Flash. Prior to founding Storage Switzerland he was CTO at one of the nation's largest storage integrators where he was in charge of technology testing, integration and product selection.

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