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At TSIA, we are constantly using data to analyze and document the challenges our members face. One challenge that we see most of our Managed Services members struggling with is selling managed services. Over the past several years, TSIA has conducted multiple surveys, benchmark reviews, and capabilities accelerators that help us identify what these challenges are, how companies are tackling these challenges, and what the key capabilities are that lead to success.
Through the analysis of data gathered from benchmarking more than 115 Managed Services organizations, we see some very clear patterns in driving profitable growth directly related to the sales motions of the organization.
First, let’s talk about what success looks like. A successful managed service provider (MSP) has better than average revenue growth, revenue retention, and profitability. By the way, when we say profitability, we’re looking at the bottom-line operating income (OI) or EBITDA of the business. Managed services is an operating-intensive service, which means that a substantial portion of the costs are below the gross margin line.
We are often asked why gross margin isn’t a good predictor of profitability for an operating expense driven business. Born-in-the-Cloud companies are great example of this. When we look at the TSIA Cloud 40 index, we see health gross margins continually hovering around 70%. However, as of the most recent quarter in 2019, the Cloud 40 overall OI is sitting at -6%!
To get back to the challenges managed service providers across the industry are facing, our members also continually tell us that selling managed services is a major challenge for their general Sales teams. In fact, for the past seven years, selling managed services has remained one of the top 10 business challenges TSIA has researched.
There is a very good reason for this. Managed services are outcome-driven, contractual solutions. Selling technology is a transactional engagement, and the buyer for outcome-driven services is often very different than the buyer for technology. The buyer for technology is typically the IT department, which is usually governed by the Procurement organization. The buyer wants the best solution at the lowest cost, and managed services are typically sold to a line of business owner or even a member of the C-Suite such as the CFO, COO, or even the CEO. The buyer wants the best solution to help them achieve the desired business outcome. Simply put, that means the Sales team has to have a very unique skill-set and speak a different language.
Here are the four key skills that every salesperson selling managed services must master.
There are three attributes to C-Suite credibility, the first of which is Trust. The line of business owner, usually a Vice President or the C-Suite buyer, needs to believe the Sales rep knows what they are talking about and that they have the ability to translate the business requirements into a solution that will help them achieve their desired outcome.
The second is Experience. It’s difficult to trust someone and their recommendations without knowing that they have experience in their domain.
The third is Relatability. This isn’t the kind of relatability like chit-chatting over 18 holes of golf. This is more like bed-side manner that you would expect to see from your primary care physician that understands your challenges and that you know is there to help.
There are three critical pieces of knowledge that the person selling managed services needs to understand:
Sales individuals selling managed services need to have a certain degree of acumen in the ability to orchestrate complex solution design, which all starts with a consultative-led sales approach. They need to be able to sit down with the primary decision maker and the primary influencer(s) and talk through their business challenges, the direction of the company, and the outcomes they’re hoping to achieve.
Once they know the desired outcomes, they need to drive both the technical and operational design of the solution. Because of the fact that managed services are subscription-based solutions that bundle together service capabilities and technologies, there is also a requirement for a financial architecture of the deal. This includes the business case for the customer as well as an internal, deal-level business case for your company.
Finally, the average deal time for managed services is substantially longer than a transactional, product-led engagement. It is not uncommon for large managed services deals to take a year or longer to design, negotiate and close, therefore, salespeople need to have patience!
The last of the four major skills required to successfully sell managed services is Leadership. I’m not talking about the kind of leadership that is given to them with direct reports. This is an indirect leadership skill that comes with time and experience.
The managed services salesperson needs to lead several resources for the benefit of the deal, the customer and ultimately for the company. They need to enroll the finance team and help them understand the value of the deal. They need to lead the delivery organization in providing the ideal architecture and operations model. The earlier they do this in the sales cycle, the better the results. They also need to lead the offer/product teams to help them understand capabilities required in the offer and to drive the proper scope of these solutions.
When you think about these four major skills or attributes required to successfully sell managed services, you can see why many technology-based organizations are a loss. The cold, hard truth is that less than 10% of technology sales individuals have all four of these skills, as they take time to master. This is why we see more and more Managed Services organizations develop a specialized Sales role for managed services called the Business Development Manager. That’s exactly what they’re doing, they’re developing new business opportunities and business relationships.
At a recent Technology & Services World conference, I presented a session called the “Five Pillars of a Managed Services Organization”. During this presentation, I outlined the five most critical organization functions that should exist in every managed services business.
Yes, I say business, because that is what Managed Services is: it is a business, not an offer. There may be offers within that business, but there is much more to managed services than simply pulling together service capabilities and products from other organizations and offers.
In the presentation, I mentioned there are Five Pillars to a Managed Services organization. One of those core pillars is the Business Development pillar. Organizations that implement a Business Development set of capabilities within the Managed Services organization are experiencing the highest performing results in the three key areas I mentioned: revenue growth, revenue retention, and profitability.
In fact, we often see tech companies with a dedicated Services Sales team. A company with a dedicated Managed Services Business Development team has more than double the revenue growth rate, 15% improvement on revenue retention and 5% improvement on bottom-line OI.
Would you like to learn more about the skills and capabilities required to successfully sell managed services? Reach out to us so we can discuss your business challenges and your desired outcomes. Managed Services organizations used to achieve success through trial and error, but TSIA has collected over 20,000 datapoints that inform us on the keys to success. If you have questions, we have data-driven answers.
Post Date: November 26, 2019
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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The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.