Hardware and software companies are constantly facing pressure from customers to increase the value their products deliver, and to deliver a quicker return on investment. As more companies are being driven into the technology subscription marketplace by the changing needs of their customers, the ones that embrace this change are the ones that end up growing at exponential rates. And with this change, they must make some realistic decisions on the types of solutions they’re going to offer their customers going forward.
Offering managed services (MS) is one way technology companies can meet these challenges. A well-developed managed services offering can provide clear benefit to both the technology vendor and the customer.
The Key to Tech Revenue Growth is Technology Services
Customers are looking for help for many strategic reasons, such as cost reduction, risk aversion, transition from CapEx procurements to OpEx, or accelerated return on technology investment. In the world of IT, our customers are moving from being IT operators to being IT integrators. In other words, they’re looking to combine the best-of-breed providers of technology services to improve their operations.
However, many companies that either manufacture or supply technology to customers view their services portfolio as “attach” offers. You may have heard this question from your CEO or CFO before: “What is the attach rate for this service?” That question makes sense for product support (maintenance) offerings or professional services. But if all services were “attach” services, shouldn’t services revenues be shrinking, not growing?
As we have seen with the previous 6 years since we’ve been tracking managed services through benchmark analysis, the market has continued to show strong, double-digit growth in this past year. The fundamental reason for this is that customers are continuing to change the way they want to buy and consume technology. The TSIA Technology and Services 50 study is a perfect illustration of the major tectonic shift occurring in tech.
TSIA has been tracking 50 of the largest tech companies since 2008 and the revenue ratio between products and services for the T&S 50 has effectively flipped in just 10 years. Product revenues have diminished while services revenues have grown.
The bottom line is that services are now more important than technology for the tech industry. Customers have voted with their wallets. They want to subscribe to their technology, and they want you—the supplier—to operate it. TSIA calls this the “managed XaaS model” and it is disrupting traditional P&Ls of tech companies.
What is Managed XaaS?
Perhaps one of the biggest managed services trends is the rapid growth of the managed XaaS model. A managed XaaS solution bundles services and technology together into a turnkey solution offer through a per-unit, term-based subscription fee. It can include professional services elements (consulting, design, implementation, and integration), program management, support elements, and operations elements, as well has hardware and software.
These managed XaaS solutions may be hosted and offered as a cloud solution, they may reside in the customer’s data center, or they may be a blend of both, aka, a “hybrid cloud” model. The managed services provider (MSP) essentially has taken over full responsibility for the complete design, implementation, operation, optimization, and success of the technology.
What a Managed XaaS Offer Looks Like
- The technology under management is owned and operated by the managed services provider
- The technology under management may, or may not, reside on the customer’s premises
- The technology may be hosted from the MSP’s operation center
- The technology may be hosted from a collocation facility—typically a Tier 3 or Tier 4 co-location facility due to the following types of requirements:
- Network resiliency and redundancy
- Power conditioning and redundancy
- Fortified building infrastructure
- On-net access to ISPs and communications carriers
- High-security facilities and highly secure network environments
- The solution may leverage cloud infrastructure such as AWS or Microsoft Azure
- The solution may be a hybrid of customer premises and cloud/hosted infrastructure and applications
Since the managed services provider (MSP) is offering the technology through a service consumption model, it greatly benefits the MSP to keep the software releases up to date, keep capacity management of technology and operations in line, monitor the applications, infrastructure, and network, and to provide a highly secure, resilient, and optimized operations environment.
The managed XaaS offering, in many cases, is the most attractive solution to modern customers, as it removes major risk (both technical and financial) from the consumer and transfers the majority of the risk to the MSP. It allows the customer to pay for what they’re using while relying on MSP to ensure it is always in optimal condition. These models are traditionally full OpEx solutions, so the customer simply pays for the solution as they need it (per licensed user per month, per agent per month, etc.). Managed XaaS solutions are also commonly used in managed transformation scenarios. The existing technology may be in the customer’s data center and the new solution may be in the Cloud, or a hybrid of both. The MSP then typically manages the migration of the customer to the new solution over a period of time that makes the most sense for the customer’s needs.
Importantly, current and future generations of managed services don’t look anything like the low-margin outsourcing businesses of the past. Ideally, services are cloud-enabled, delivered from a remote network operations center. Delivery resources are typically shared across multiple clients. The product elements within the MS offer may be hosted and/or on premises; they may be single tenant or multi-tenant.
Forbes recently cited a study that more than half of IT managers expect to use multiple MSPs within the next two years; a whopping 85% are at least somewhat likely to use MSPs.
So, if you have a customer who is demanding one of the MS value propositions previously cited and you don’t have an offer, you may lose that customer. How many customers can you afford to lose until you bring a managed services offer to market that the market clearly wants?
Pivoting to Managed Solutions
For companies that have been selling technology as an asset, the pivot to selling technology-as-a-service can be overwhelming. Most tech companies that are not pure-breed MSPs have a love/hate relationship with their managed services business. They know managed services is a potential revenue growth engine for them, yet they worry about how MS revenues will affect their P&L.
We’ve written repeatedly on why this is the case, most recently summarized in our book, the Technology-as-a-Service Playbook. Here’s an excerpt from the book that illustrates this:
“(Executive leadership at OEMs) are extremely reticent to sign off on any offers that may increase company risk, reduce cash flow, or impact the margin profile of the company. The customer is asking for managed services, but the CFO and other executives at your company are quick to raise the following concerns:
- We don’t own customer assets
- Delayed revenue recognition
- Service revenue intensive
- Increased risk
- Channel conflict
- Complex sales cycle
We’ve written about methods to overcome this resistance in previous blog, "(Managed) Lip Service: How to Recognize It and What to Do About It". One of those methods was to use the friction from customer demand to help tell the MS story. But are your customers ready for you to be an MSP?
Are Your Customers Ready for You to Be a Managed Services Provider?
One recommended tactic when contemplating your current managed services opportunity is to identify the attributes required in a customer to make them a viable candidate for an MS offer. There are at least four attributes we believe you should test for before attempting a managed services relationship with your customers:
- Do senior customer executives view you as a strategic provider? If you spend your time with procurement or mid-level IT managers, it is not likely you will be able to influence the customer to execute the practices required to achieve a target outcome. Even worse, great progress and measurable results may not lead to increased customer spending.
- Does the customer have a history of listening to your recommendations? If not, an MS relationship is high risk. Why will they start listening now?
- Has the customer demonstrated reasonable project management and IT governance capabilities? If not, this customer will struggle to work with you to implement the technology and practices required to achieve targeted outcomes.
- Do you have the ability to benchmark the customer’s current performance on targeted KPIs? If the customer refuses to share data or does not have the ability to generate the data, this is a significant red flag. How can you improve performance KPIs if you do not know the current starting point?
This list is just a springboard for evaluating your managed services opportunity. Technology providers should build on it to create a comprehensive set of customer attributes that should exist before incubating MS capabilities. This approach will minimize the risk that a customer will not do what they need to do. It is worth mentioning that profiling your managed services customers is an ongoing effort.
Well-structured deals that look profitable when being assembled may take a turn for the worse during the life of the contract. Continually measuring managed services performance is crucial, and getting initial wins and curating success is another way to bring attention and focus to your MS business. What are some of the ways you can best incubate initial deals to grow your business?
Incubating Managed Services: Key Success Tactics
TSIA’s Managed Services research and advisory engages with product companies to help them establish or optimize their managed services businesses. Through that work, we have identified a set of success tactics to consider as you explore new opportunities with your customers:
Make Finance Your Friend
If your finance group is not on board with pursuing managed services offers, there is a high probability that the MS business will quickly atrophy from a lack of approved contracts. Finance needs to believe in this business, and they need to understand the financial models of MS.
Understand the Net-New Capabilities That Will Be Required to Successfully Deliver a Managed Services Offer
Managed services offers require you to be intimately involved in IT operational practices. Common customer handshakes that must be mastered include applications management, capacity management, information security management, and release management. Mastering these processes will most likely require new organizational capabilities for your company.
Understand the New Sales Skills That Will Be Required to Land Managed Services Offers
TSIA’s benchmark data is clear on this point; the existing product sales force will struggle with this offer. Yet, we know from our data that the most common approach is to attempt to sell new managed services offers through the existing sales force. Our recommendation is to incubate a dedicated sales capability that specializes in selling managed services offers.
In TSIA benchmark data, we see that companies relying on their existing sales force to sell managed services are seeing annual MS growth rates of 5%. Companies that invest in a dedicated MS sales force are seeing annual MS revenues grow an average of 39%. Also, dedicated sales reps secure deals that are almost 20% more profitable then the deals being sold by generalist sales reps.
Establish Key Performance Indicators (KPIs) and Measure Them Regularly
One of the surprising facts we discovered is how many product companies have established managed services offers with no clear definition of the KPIs that should be used to understand the health of that offer. If they did have KPIs, they often had no idea what “good” should look like. This is not untrodden ground. The technology industry understands what metrics to measure related to managed services. In addition, we have specific benchmarks on what pacesetting companies achieve on these metrics.
Pilot, Pilot, Pilot
As previously mentioned, it is very important to identify the right customers for your MS offers. Not all customers are good candidates for this type of relationship. Once you start identifying customers, the initial managed services engagements should be approached as pilots designed to help you mature the offer. It is unlikely your first MS offer will spring from the heads of your offer designers fully formed. Early customers should understand you are partnering with them to help define the best offer possible for both sides.
Invest in Automation Early
The most profitable managed services organizations we benchmark have implemented commercial, off-the-shelf tools and platforms to help automate aspects of their MS operations.
Don’t Ignore the Channel
There is no doubt that when a product company decides to work with customers directly as a managed services provider, channel partners get nervous. However, our point of view is that MS offers actually unlock an entirely new class of service opportunities for your partners as well.
Learn How to Grow Tech Profits with Managed Services
The bottom line is this: If you want a profitably growing business in tech, you need to seriously plan through your strategy for both the technology and the operation of the tech. You’re going to own it. The customer wants to subscribe to technology, and they want you to operate. You may sell the best tech in the world, but unless you can offer them an operations model that supports it, they’re going to go somewhere else.
Reach out to TSIA today so that together, we can develop a plan of action to take advantage of the amazing opportunities managed services and XaaS offers will open up for your organization.
Other resources you may be able to access to launch and grow your MS practice are identified below:
Learn More About Managed Services and Managed XaaS at TSW
Join TSIA researchers and technology and services industry experts at our upcoming Technology & Services World conference in Las Vegas, October 21-23. In our Managed Services track, we have a great list of relevant sessions for you, including:
- “The Five Pillars of a Successful Managed Services Organization,” presented by TSIA
- “Best Practices for Implementing Customer Success for Managed Services Business,” presented by Dimension Data
- “Evolving Managed Services Through Automation,” presented by Cisco Systems
- “How to Resource the Managed XaaS Sales Process to Improve Win Rates,” presented by TSIA
Be sure to register early to receive a discount on admission. I look forward to seeing you in Vegas!