How MSPs Can Generate Value (And Profit) Without Reselling Vendor Products

You Are More Than A Reseller

When discussing the financial state of MSPs, Jay McBain, Chief Analyst of Channels, Partnerships & Ecosystems at Canalys recently said, “The one statistic that has stubbornly persisted in the industry (through good times and bad) is that 30% of the 335,000 global companies offering managed services do not (consistently) make money.” He went on to say that “While some point to the ridiculously low barrier to entry to become an MSP, others point to execution issues around strategy, operations, automation, sales and marketing, financial controls, and governance.” 

While Jay mentioned a wide range of issues, there is one trend for certain that I’ve witnessed contributing to the 30%. The best way to describe it is an over-reliance on “vendor arbitrage” and the lack of value creation by the MSP. Let this be a reminder that Value-Added Resellers (VARs) and Managed Service Providers (MSPs) are intended to be distinctly different. While VARs offer short-term, less intimate engagements, MSPs are supposed to be deeply integrated, long-term partners. During the tenure of these relationships, it’s critical that the MSP stop relying on low-margin, passthrough revenue from vendor products and distribute value that they themselves create from their own internal resources. This is the key to profitability for many, as it finally puts the MSP in the driver seat. 

The Vendor Resale Squeeze 

If you’re wondering, “what’s wrong with reselling vendor products?” There’s nothing wrong with it and it’s actually an important part of the job description, however not all revenue is created equal and this type of revenue in particular holds little value on its own. This is not me taking a cheap shot at the IT vendor community (which I believe serves a very useful purpose), but rather an attempt to reframe our thinking on what actually creates enterprise value for an MSP business.

As Hannah Paige, Director of Worklyn Partners puts it,  “MSPs should prioritize creating value through services their internal employees provide rather than relying heavily on reselling 3rd party services or vendor products. Service revenue generated by MSPs’ internal employees is more valuable than vendor resale revenue, as it offers better control over profit margins, which are otherwise subject to being squeezed by vendors. Additionally as people-driven businesses, MSPs must ensure they have the in-house talent necessary to deliver on their service promises, guaranteeing quality and reliability for their customers.” 

Hannah offers a great point, which is that even if that hot new vendor product has a healthy margin and is selling like hotcakes, that profit can easily be taken away from you. This happens from both ends as vendors slowly raise prices and competitors compete away whatever is leftover. This cycle often occurs faster than you think, and those MSPs that get caught in the middle are often left chasing the next high-margin resale opportunity to make up for it. The real problem is that more of these services get added to the stack than are taken away and this happens at a rate more frequent than customer price increases. The result? Welcome to the 30 Percent Club which many have also described as a “race to the bottom.”

Creating Your Own Value 

On a more positive note, there is no shortage of opportunities for MSPs to create their own value outside of vendor arbitrage. In addition to healthier, more sustainable profit margins, these opportunities also act as the key differentiating factors when comparing Provider A to Provider B. Here are just a few of the ways that you can create more value for your customers: 

Deep Industry Expertise

While vertical specialization was once looked at as an SEO and marketing gimmick for MSPs, it’s evolved into a full fledged go-to-market strategy. There is now a clear difference between those who simply throw up an “industry page” on their website, and those who have developed a deep expertise across their entire organization. 

The expertise I am referring to includes strong connections with industry leaders, understanding of the partnership ecosystem within that channel and the technology products therein, as well as knowledge of industry trends and compliance requirements. To truly create value through this level of expertise, your MSP must become “part of” the industry. This is opposed to simply being on the outside looking in, through the lens of your customer. There are very few MSPs that can say this and that’s where the value comes from. 

Custom Workflow Automations

Being fully integrated into your client’s industry ecosystem often opens up opportunities in the form of custom workflow development. As you start to understand the processes that these businesses undertake on a daily basis and the tools that they use to do so, you can start to develop your own proprietary workflow automations that can be applied across multiple customers. 

While there is some tooling required (such as low or no-code development software) the value comes from the architecture and design of the workflow, as well as the capital efficiency for the end customer. Once these workflows are developed, you are able to essentially “license” them to your client at a rate far below their cost to build them from scratch. With each implementation, you are also able to improve and expand the workflows to suit the client’s needs, increasing the value of your offering. 

Technical Talent Development

When I was an MSP, some of our most lucrative contracts were for staff augmentation. This was entirely made possible by our ability to hire, develop, and manage technical talent on behalf of our clients. As you can imagine, a sizable company without IT leadership can have a lot of difficulty with hiring and managing technical people. There is a ton of value in solving these challenges and doing so in a completely scalable way.  

I recently caught up with Kyle Christensen, Co-Founder of Empath, who claimed to have a similar experience. “Your clients either grow out of you or into your next product. That’s why we built a staff augmentation component of our MSP agreement, when they hit 100+ employees, they wanted someone dedicated. But you have a lot more to lose, as your client will see your employees’ talent and flaws a bit closer. So we had to invest in a way for our team members, no matter their roots, to always be at the same or higher level than their peers. And that level? Being able to service the client while they’re staring over their shoulder, for the whole day.” 

Quality & Documentation Standards 

I’ve always been a firm believer that you should leave a place better than you found it. One of the ways that we applied this mantra to our managed service clients was through documentation standards. No matter how chaotic a client’s environment was when we first made contact with it, we always tried to thoroughly document the landscape as well as the processes that we observed therein, all while making every attempt to improve them. 

While this extra time and attention-to-detail can be looked at as a cost initially, it allows for more accurate project scoping, faster support resolution, and more seamless delegation of work. When you can explain, and show documented proof of processes that your client didn’t even know existed, you can create real value that acts as a foundation for more high-margin opportunities.

Framework Implementation

The implementation of IT and Security frameworks acts as a great point of value delivery for MSPs. This includes examples such as; ITIL (Information Technology Infrastructure Library), NIST Cybersecurity Framework (CSF), ISO/IEC 27001, CIS Controls (Center for Internet Security Controls), GDPR (General Data Protection Regulation, and PCI DSS (Payment Card Industry Data Security Standard). While companies often struggle to understand the requirements of such frameworks due to technical knowledge gaps, MSPs often have the knowledge and resources required for successful implementations. 

It’s important to note that the value being delivered on behalf of the MSP is often in the execution and not necessarily in the framework itself. I talked to Jesse Miller, Founder of PowerPSA Consulting to get his take on where the value lies in these scenarios. He states; “As a consultant, I would say: ‘It depends,’ but if you’re going to force me to pick just one, I will say the implementation matters more. Most organizations, regardless of size, are still getting the basics wrong. So instead of hand wringing over scholastics, I favor action. I took a crisis management course many years ago, and the instructor said ‘Speed beats perfection. Every time.’ – that’s always stuck with me.”

Exceptional Service Delivery 

The most obvious, and I believe least scalable way to create value is through exceptional service delivery. While some of this relies on the technical knowledge and talent development that we covered earlier, it also extends to soft skills and the ability to work and collaborate with people to achieve a positive outcome. At the end of the day, people want to do business with people that they like to work with and if your customers cringe at the idea of calling your help desk or submitting a ticket then your days are likely numbered as a partner. 

While “white glove IT service” has become an overused and under-executed concept in our industry that is impossible to measure, I tend to look at it as a balance between speed and care. You want to resolve your customers’ problems as quickly as possible to get them back on track with their workday, but you need to do it with enough attention to detail whereas the problem doesn’t immediately re-occur. The execution of this is what produces a positive ROI for your customer which then leads to value creation on behalf of your business. 

Conclusion

While these are just a few of the ways that MSPs can create value, this is in no way an all-inclusive list. The point is that we should constantly be looking to create new ways to leverage our resources to the benefit of the customer, on top of the passthrough revenue earned on vendor products and services. If all we are doing is reselling an SMB technology stack at a markup, then the MSPs with the largest purchasing power will almost always win and frankly, there is no point for most to even play that game.