Managed Service Providers (MSP) have a decision to make, should they be an agent or a provider? Both choices have ramifications on the business both short term and long-term. Understanding the pros and cons of each model is critical in making that choice and/or shift from one to the other.
An MSP Agent is an organization that re-sells another provider’s service. In many cases the “other provider” is a software or hardware vendor. The MSP Agent business model is, in many ways, similar to the traditional manufacturer & reseller model. The reseller buys product from the manufacturer, sells it, potentially installs and supports it, and is there when it is time to upgrade. In the case of a cloud services resell model the agent sells the solution, installs and configures any on-premises components and is there for basic level 1 support and monthly billing.
The seemingly obvious advantage for the MSP Agent is they can quickly start selling a new service without much investment in training and infrastructure. The disadvantages are less obvious but more dangerous to the long-term health of the partner.
A cloud service provider controls the infrastructure. They’ve invested in servers, storage, networking and software that they own/lease/rent, typically in their data center or a colo facility.
In this blog we will compare the cloud service agent business model to the cloud service provider model. There may be times where an organization wants to do both and there may be times where it makes sense to make the full investment to have control and be the service provider.
The first challenge that any business needs to overcome is how to differentiate themselves from the competition. The challenge with being an agent is that almost any organization in the IT channel space can pick up the service provider and start offering it to its clients and prospects, or to a competitor’s clients. Agency is a “me too” offering with low/no differentiation. An agency approach might be a good solution for IT channel companies looking to expand the core services they provide, but it is difficult to justify the agency model for an IT channel’s core business.
It is also more likely that a vendor who provides their solutions via an agency option will over-distribute the service. There is nothing limiting how many agents they have since customer satisfaction eventually falls solely at the feet of the vendor. A vendor offering a provider model must be careful how many providers it authorizes since those providers actually deliver a significant part of the solution (hardware, infrastructure, data center, L1 and L2 support), so they are directly involved in keeping customers satisfied.
At some point every business needs to make money. When an MSP is an agent it is hard to control margins since the entire solution comes from the vendor. They are also susceptible to continually raising revenue commitments in order to maintain discount levels. MSP Agents may have seen this before in their past lives. As a provider, because the organization controls the infrastructure they have much more control over margins. They also have more flexibility since they own half of the solution and can re-direct a customer to a new software solution if need be.
MSP Providers are encouraged to create various levels of automation and customization to make their solutions easier to manage and to interact with. The result is a definable set of intellectual property that adds further value to their service, and to their overall business. They essentially make the software they provide better. MSP Agents have no motivation to create these unique automation steps and as a result are seen by the vendor as low cost outsourced sales agents.
Maintaining customer relationships is critical for any organization to survive. The primary value of an MSP to a vendor, with which they have an agent relationship, is to be a list holder. The problem is those customers, once sold, also become the property of the cloud vendor. Once the vendor has the relationship there is nothing to prevent them from marketing to and engaging directly with the customer. MSP providers on the other hand, assuming they provide not only infrastructure but also support, can keep their customer list proprietary.
Also, in most cases the customer understands the relationship and it is relatively easy for them to shop between agents, further driving down costs. There is no gravity in the agent model. If the customer switches agents nothing has to move on the backside since it is all consolidated at the vendor’s location.
Enterprise Shareholder Value
At some point an MSP business owner wants to retire or sell the business, even if it is back to the company’s employees. The problem is how does an organization, which is built from agency relationships demonstrate value. They have little, to no infrastructure and they don’t even have an exclusive list of customers. An MSP Provider is just the opposite. They have an investment in infrastructure. If the MSP is successful, that investment is quite large. They also have a protected customer list that is proprietary to the organization. Finally, those customers are “sticky” as it is difficult for them to switch services, and the future recurring revenue is valuable.
There are times where selecting the agent business model may make sense. Typically, when the organization wants to provide a service that is outside of its core capabilities. Even using an agent model to start-up a new service is risky because at some inflection point the provider will want to bring the service in-house.
The provider route is a more viable long-term strategy. The upfront costs are higher, but the long-term value of retaining customers, developing unique intellectual property, maintaining margins, and longer term recurring revenue all outweigh that initial investment.
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