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Hopefully you’ve been following along this popular blog miniseries focusing on the Five Key Practices of a Successful Managed Services Provider (MSP), based on a TSIA research report of the same title. If you haven’t had a chance to check them out, or you need a quick refresh, follow this link to read all previous posts in this series.
And now, moving on to this week’s key practice of a successful MSP:
Building the financials for a managed services (MS) business typically requires a different skill set and a different set of key measurements and financial accounting than a typical technology business, including product attach services such as professional services and implementation and support services.
Managed services businesses often require significant up-front investment before they start to generate appreciable revenue, let alone a return on that investment. They are often very slow to grow in the first several years, yet the compounding annuity revenue growth effect can be staggering. Having a few shrewd financial management members on your MS team will help alleviate major headaches and heartache as you go.
As mentioned, when there is a desire for a healthy, growing, profitable managed services business, upfront investment is not optional. The list of investments includes (but is not limited to) experienced executive talent, specialized tools and technologies, up-skilling of engineering resources and specialized MS sales executives.
This is just to get the ball rolling. If you think about it, greater than 65% of today’s technology companies have either flat or declining product revenues―and that is a trend that has been going on for the past three years! You can imagine the “appetite to invest” for a shrinking company is near impossible. Securing investment will require a bulletproof financial business case with credible growth rates, predictable cost, an appreciable return on investment, careful balancing of cost and expense, comprehension of realistic attrition and revenue erosion rates, knowledge of cost of MS tools, etc.
The financial acumen for these complex annuitized, compounding growth businesses is often vacant or at least sparse in a traditional technology company. If you find a strong financial leader that understands the MS model, they’re worth their weight in gold. They’ll be one of your strongest assets when working with other company resources outside your managed services organization.
Once you’ve received the investment needed, and you’re off to the races with the acquisition of new clients, you need to religiously protect and grow your base revenue. Not only does this require excellence in service management, it also requires rigorous financial attention. I typically recommend that companies employ, at a minimum, a biweekly review of their revenue, client by client, if possible. This should be accompanied by a rolling five-quarter forecast of revenue (and ideally cost) by client.
The reason for five quarters is it forces the client management team to think beyond the fiscal year and sets you up for an understanding of how your accounts will perform in the next fiscal year. Never use a yearly snapshot. MS contracts change quickly, both up and down, in terms of revenue.
As I mention in the “Five Key Practices of a Successful MSP”, this is just a small sample of the financial management and governance required to build and sustain a successful managed services practice. A blog can only skim the surface, which is why I encourage reaching out to us here at TSIA to learn more about managed services and what it takes to be a successful MSP!
Thanks again for reading, and please feel free to keep the conversation going by leaving a comment or observations below. We’d love to hear from you!
Read more posts in the “5 Key Practices of a Successful Managed Services Provider” series:
Post Date: May 16, 2014
George Humphrey is the vice president and managing director of service and delivery research and advisory for TSIA. Given his extensive background, George also directly supports the managed services research practice. He is a networking and communications industry veteran with over 25+ years of experience. Throughout his career, he has held several leadership positions in managed services, including global strategy, product line management, marketing, operations, and client management.
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