Discussing New Year planning with partners over the past couple of weeks has been really interesting.
Despite the challenges of 2020, many are very positive about 2021. The pandemic has resulted in channel partners reviewing their strategy and becoming far more focussed on their value proposition to their customers. This only comes about by understanding how customers are changing their strategies are what they expect from suppliers.
One partner with a retail focus explained they recognised the need to continue to develop as a systems integrator than as a product supplier. They were beginning to discuss outcomes with their customers, not just the solution. This required “working with other partners within their ecosystem, as no one can do it all”.
This partner recognised that planning timescales within retail were changing; 5-year plans were now 2 year plans. These businesses had seen IT become a business enabler over the past 12 months and those who had adapted quicker, benefited most. These findings around changing priorities were supported in a subsequent conversation with UK Fashion and Retail this week, as part of the project we are working on with IBM and Leeds University. More info at: Creating New Opportunities Via The Tech Data Retail Ecosystem
The challenge for the partner sales team is recognising and adapting to these changes, trying to position themselves as a trusted adviser rather than just a product supplier. This may take some out of their comfort zone and potentially slow sales in the first few months as trust is gained. But the longer-term benefit is achieved through being part of future discussions, helping to architect solutions because you understand the outcomes required.
This new customer approach can be seen in another partner we held a workshop with last week. They have a successful and growing business across four European countries. The management team recognised that to continue to grow they needed to make their offerings and their position within their customers more strategic. Adding value that makes it more difficult for the customer to select or switch to another supplier.
In today’s market, becoming strategic is often about providing a managed services offering. The attached chart shows how interest in managed services has grown during the pandemic.
Both the partner and the customer want a contracted value added service, which delivers a return over the life of the contract. But this isn’t an easy transformation for a historically transaction-based business to make. Firstly, sales cycles are much longer. This can be for many reasons: more of the customers’ people are impacted, often legal teams that hadn’t been involved before are now looking at your contract and costs now move into future budget years for the customer and typically require another level of sign-off.
Moving a customer from a transaction to a managed service is much more of a team game. The customer wants to know about the people delivering the service, the details and capacity of your data centre, your security services that surround it, the call centre team and details on systems availability and disaster recovery plans. Now ISO9001, 27001 and 14001 certifications become important, as do both your customer and credit references.
And this is just the start. Contracts may seem really profitable over the 3 or 5 years of their planned life. But there are a number of things to account for before profit starts to hit the bottom line. Firstly, is the commission scheme. To encourage the sales team to change to this model it needs to be at least as attractive as a normal transaction. But they need a lot more help from the rest of the business and there is often additional commission for overlay sales.
So how do you accommodate these new costs? The ratio of commission to margin costs can be higher than in a transaction only business and it certainly takes a lot longer until the costs are recovered. There will also be some up-front investment to show the customer you are in a position to provide the service, both in capital and recurring costs. It can be 24 months into a contract before the recurring revenue covers the cost of the commission payments and the investment. And this assumes the customer sees out the contract – they don’t go bust, go into dispute, change ownership or a host of other unforeseen circumstances that reduce the total contract value. These are difficult to budget for.
By the way, there is upside; if they like the service and decide to increase their reliance on it, revenues could be greater than planned. Don’t budget for this yet, but ensure your commission scheme covers it when it happens. And, you may need to invest in new resources to deliver this increase. Managing the capital and resource steps is a key part of making a managed service business successful. Setting sales targets for a mixed revenue stream and recognising all the costs before calculating gross profit over the contract’s life, provides a challenge that needs to be carefully thought through at the start. With profit recognition moved out 2 years, growing your “as a service” revenues whilst maintaining transaction gross profit, becomes an important balance.
Accompanying the financial and process changes, there is typically a culture change that needs to be made too. If someone’s business becomes reliant on your service 24x7 then they expect your business to respond 24x7. To succeed in this new environment the business needs to become a customer obsessed business.
This can impact all staff, but often there is a big change on behalf of key consultants, whose work patterns in a transaction business may look a lot different to those in a managed services business. Technical employees see their client facing time reduced, as the regular travel to customers’ sites to discuss new installations and the following implementation, can be replaced by spending time in a large serviced data centre somewhere remote, continuously upgrading the same piece of company owned equipment.
Meanwhile the managed services opportunity continues to grow. Global growth, in excess of 8% and higher in the SME market, is being driven by cyber threats, the risk of data loss and the lack of skills. (Hear more about this during our February 4th Webinar):
These are just a few of the challenges and opportunities we look at within the MSP Innovation Workshops run by the Tech Data Ecosystem team. If your business is planning strategic change, or you are simply looking to increase the managed services percentage of your business, and you think you would benefit from such a workshop please get in touch. We look forward to working with you in 2021.