White Paper

Are You Ready For The Hybrid Business Model?

Starting A Business

For many Unified Communications providers and IT VARs, having a mix of recurring revenue services and traditional hardware and software sales is the key to sustainability and increased profitability.

There’s an important shift taking place that will affect your business forever. If you’re a Unified Communications provider or IT VAR and you built your business on selling product-based solutions, you probably already feel this shift. Cloud and subscription service models have fundamentally changed the way technology is being delivered today. With those delivery model changes comes a change in compensation for those services. The days of receiving a single large payment for your work are going away. Customers have evolved and so have their expectations. As a result, you must adapt your business model or run the risk of putting your business in a dangerous position concerning its sustainability. Thankfully, there is a clear path that can lead you to unimagined levels of prosperity and profitability.

In this paper, we’ll discuss the changes taking place in the IT industry and how you can adjust your business to deliver a hybrid of products and services — without crippling your cash flow. We’ll detail the services and solutions you can deliver to customers, highlight common mistakes to avoid, discuss the changes you’ll have to make to your business, and more. In the end, you’ll have a concise playbook to help you transition to a powerful new hybrid business model.

Defining the hybrid business model

The hybrid business model is a mix of traditional product sales with the addition of hardware, software, cloud offerings, and other services via a subscription. Under this model, customers are contracted to pay you a monthly fee for the delivery of these ongoing services. This results in a steady, recurring revenue stream for your business on top of any project-based work you perform under the old model.

Why adopt the hybrid business model?

Thanks to commoditization, increased competition, and the industry pricing itself to the bottom, product margins have evaporated. In many places, powerful new cloud solutions have replaced the need for on-premises infrastructure. What will things look like five years from now? We won’t see a shift back to product sales. Rather, the cloud will grow in power and popularity, and remain a relevant option.

In addition, many VARs have tied their fates to one or two vendors, essentially acting as sales agents for that vendor. What happens when that vendor goes out of business and your line card disappears? It’s time to build or strengthen your book of business with monthly recurring revenue (MRR).

However, while there are plenty of MSPs (managed services providers) and born-in-the-cloud solutions providers who relentlessly pursue nothing but monthly recurring service revenue, it’s not realistic to expect traditional Solution Providers to make such a drastic change to their organization.

As we’ll discuss, the changes are complex and require quite a bit of work. Additionally, unless you are flush with cash reserves, making such a dramatic change would create significant cash flow challenges for you. The most prudent approach for established VARs is to adopt a hybrid model to ease into offering recurring revenue-based solutions alongside traditional sales.

4 Benefits of a hybrid approach

Once you begin adding solutions that provide MRR, you’ll begin to experience some or all of the following benefits:

1. Customers see the value in monthly services

The buying patterns of your customers have changed; in particular, as younger generations get more involved in running businesses they want to consume technology differently. Today, we live in a subscription economy where many decision makers are used to paying monthly fees for services. Additionally, as all industries look to control their costs, shifting traditional costly IT expenses to monthly payments is more manageable and appealing.

Additionally, as we’ll detail in a later section, many of the services you can provide under this model give your customers a higher-quality level of service and solution reliability than they currently experience. There is a peace of mind provided to customers under this model.

2. Level revenue peaks and valleys

Many business owners feel the recurring stress of making enough sales to cover payroll for that month. As you build MRR under a hybrid model, you’ll notice the peaks and valleys of your traditional sales model levelling off and you’ll see a more stable, predictable cash flow. Not only does MRR allow you to rest asy knowing that expenses are covered, long contracts ensure you don’t have to worry for months or even years.

3. An improved lifestyle for yourself

Many business owners wear many hats, including that of lead salesperson. Working 70+ hours a week to keep the lights on is tiring. With steady MRR, business owners can free themselves up to gain valuable family time or re-dedicate themselves to other aspects of the business.

4. Increased business value

Many traditional VARs are shocked and disappointed to learn their businesses aren’t worth what they think they should be after dedicating years, even decades, of blood, sweat, and tears into them. If, or when, you attempt to sell your business or merge with another organization, there are a number of factors that will dictate the value of your company. 

Perhaps the most heavily weighted factor is the MRR you’ve earned by providing subscription services. Mergers and acquisitions specialists will talk about multipliers. The multiplier used to value your company will differ depending on the types of revenue you have. Product sales have a much lower multiplier than recurring services. This makes sense when you consider that a product sale-based technology company really doesn’t have much to offer a prospective buyer. Sales come and go, and there is no predictable way for a buyer to estimate what they can get from the company. Traditional Solution Providers with mostly product sales will find their business isn’t very valuable at all.

However, having a book of recurring revenue contracts is predictable and, therefore, more valuable. The multiplier for these companies is much higher. That said, the details of MRR contracts can greatly affect the multiplier. For example, having a book of business made of three-year contracts is more valuable than month-to-month contracts. If those three-year contracts have easy outs for customers to cancel for any reason, they might as well not exist.

Overall, buyers want predictability. Adding service revenue is the best way to get a better return for your business.

Adding services to your offerings

Assuming you’re ready to add MRR to your business, you have some decisions to make concerning which services to offer. Here are just a few of the services:

Remote monitoring and management (RMM) — A staple of every MSP, RMM allows you to take your current reactive support offering and make it proactive. Rather than waiting for problems to occur, you use an RMM tool to keep 24/7/365 vigil over your customers’ IT. Monitoring can include servers, desktops, mobile devices, printers, and more. The system can alert you to things such as hard drive failures, low disk space, failing memory, and even low toner. The idea is that problems are found and fixed (using remote tools) often before the customer is aware. Customers pay for the monthly service because it gives them peace of mind that things will work as they should. A benefit to you is that RMM tools can do the work of many people, allowing you to be more efficient and profitable with fewer people. RMM providers have different cost structures, but, generally speaking, expect to pay per device being monitored or per user.

Business continuity (backup and disaster recovery [BDR]) — Typically the first service offered outside of RMM, BDR or business continuity solutions ensure that any sensitive or important customer data is backed up. However, BDR isn’t simply about storage of data. A key component of BDR solutions is the ability to restore data as quickly as possible to minimize downtime. Additionally, today’s modern tools include validations to ensure the data is backed up. Today, it’s common to see data backed up to local storage and mirrored to cloud storage as an additional precaution. Some BDR providers also offer appliances that slip into the server rack and provide additional levels of redundancy. Costs will vary by BDR vendor.

Cybersecurity — One of the most significant IT trends today is centered on the security of customer data. If you operate in heavily regulated verticals such as healthcare, banking, or even retail, you understand the importance of data security. Regardless of the industries in which your customers operate, the proliferation of ransomware means no company is safe. Criminals have learned that every business has valuable data, and many are willing to pay the ransom to decrypt. Today, you can provide security services that include constant monitoring of customer endpoints to protect against such threats.

Hosted email — As businesses look to save money, shifting email from local servers to the cloud is appealing. Offering Hosted Exchange is a great way to get started with recurring revenue.

X-as-a-Service — Today, everything can be offered as a service — infrastructure, solutions, security, hardware, software, communications, and more. Take a solution and sell it for a monthly fee. There are many ways to do this without breaking the bank.

In all of the above cases, it’s important that you ease into this model and figure out how to get involved strategically. For example, rather than attempting to establish your own private cloud service, you might be better off reselling someone else’s established white label service. There are a variety of cloud providers that allow you to own the customer relationship and bill the customer under your name. Additionally, rather than build your own NOC (network operations center), you can use the NOC of a master MSP or take advantage of an RMM tool that includes NOC services.

For telecom-focused VARs, it’s possible to sell a cloud solution with an up-front equipment sale (endpoints), plus monthly recurring for the associated network and dial tone. With the right finance arrangement, you can offer your customers a monthly payment plan for endpoints while you get paid up front.

As you pursue adding services, a bit of advice is to try to marry your core competency to a recurring revenue approach. It most likely that everything you offer could be offered as a service today. What makes sense for you and your customers will depend on your capabilities and desires, as well as your customers’ needs.

Finally, with services, remember that the whole is greater than the sum of the separate services you’re offering. Rather than thinking of each product and service that you sell as they are in their own silo, think holistically — you are selling a solution that was designed to solve the needs of your customers. If you give customers the ability to pick and choose from products and services, your solutions will quickly lose their effectiveness.

Tools Needed

Adding services to your line card will require you to use some additional tools. Consider these tools as must-haves and as critical to your business as email or Microsoft Excel.

Professional services automation (PSA) — PSA tools typically include functionality such as ticketing, reporting, timekeeping, billing, project management, CRM, and more. Many traditional Solution Providers interested in the hybrid model or transition fully to Managed Services will try to convince themselves the various disparate tools they currently use are the same as a PSA tool. The reality is that by having a unified PSA tool, you will achieve greater efficiencies and accountability. One of the most powerful uses of a PSA tool is business intelligence analytics. You’ll best understand the drivers of your profitability, not only overall, but by customer. Such a tool can help ensure you’re charging enough and allow you to identify problem accounts that might need to be charged more or dropped due to the negative impact on your bottom line. Most MSPs will tell you PSA tools pay for themselves, so don’t try to shortcut this expense.

Pricing and quoting — If you have your own Excel or Word templates for pricing and proposals and think you’re set, you’re wrong. Such systems are inefficient and difficult to scale. Today’s pricing and quoting tools provide a single platform to ensure every quote and contract that goes out of your company meets the standards you set. Additionally, with integration with most distributors today, you have the ability to pull in real-time pricing and create your own custom configurations. Once customers accept the quote, work orders can be automatically generated. These tools have value to the most successful MSPs, but they can be particularly useful to someone new to selling services. Used as a crutch, you can ensure you and your team are asking the right questions and including the right pieces in any services quote.

Other tools — When it comes to the services business, there are a variety of ancillary tools available to help you run your business more effectively. Some of the most prevalent tools include add-ons for your PSA that can help analyze customer data, generate reports, and more. Additionally, you might consider adding a network assessment tool. Many of these tools produce binders full of information on the customer, essentially creating a blueprint for what you can offer them. Some MSPs charge for the assessment or discovery, while others offer it for free as a way to start a conversation about issues within the customer’s organization. For Solution Providers new to services, a network assessment tool can be another great crutch.

Evaluating partners

There are a few special considerations when evaluating potential partners of services.

  1. Identify how well the manufacturer’s model fits your ideal service model. For example, do they offer a consumption model for monthly subscriptions? Do they ask partners to take a cash flow hit, or do they have programs that ease your burden?
  2. Since many of the services you’ll offer might be new to you, or at least new in the type of delivery model, you might seek partners that provide extensive training, education, and assistance. Some manufacturers require certifications. In this case, be sure to understand the costs and expectations. For instance, check if certifications are required for just one of your technicians or all of them.
  3. Note how the service is provided — either directly by the manufacturer, through a distributor, or both. You might have a preference depending on the service and your needs. For example, many distributors now have cloud marketplaces that provide one-stop shopping for offerings for your customers.
  4. Does the vendor allow you to build your own brand or theirs? While leading with a strong vendor card used to be the preferred way to win sales, today it’s all about building your own brand by combining services into a bundle. Some vendors allow you to white label their solutions and put your name on them. By doing so, it’s much more difficult for customers to shop you on the Internet and all your marketing will build your brand.
  5. With any product/service you’re considering, take note of integrations with other products and tools you currently use or might use in the future. Your RMM and BDR must . If you make the wrong choice by selecting some new-to-market cheaper solutions, you might find the key integrations you require aren’t yet available.

Sales compensation

Entire books have been dedicated to this topic, and many opinions on which compensation models are the most and least effective. What is important here to know is the way you compensate salespeople under the traditional model won’t work when it comes to services.

With services, there’s a balancing act. You want the sales rep to be satisfied with their compensation, but not content to the point they won’t sell the new thing (your services) because they’ve already made money selling the old thing (traditional hardware). Everything must be done to ensure you hit your profitability goals.

Most successful MSPs will pay their salespeople one time at the close of a deal (some percent of the total value of the contract). This can generate nice earnings for the salesperson, while still keeping them hungry to produce on a monthly basis.

Finally, you should consider separating your sales team into traditional sales reps and those who are selling the new solution. This is especially true if the products and services are not related. For example you traditionally sell business phones, and you are implementing a Managed IT Service you should keep them separate. People tend to fall back to what they are most comfortable with. In cases where you have a salesperson offering both traditional product resale and MRR services, you’ll find your salespeople not pushing services as much as you’d like.


Common mistakes

As you can imagine, adding services to your business and using a host of new tools can be daunting and mistakes are likely to be made. Following are some of the common mistakes Solution Providers make as they adopt a product/services hybrid model.

Your vendor partners aren’t on board — Solution Providers can get locked out of charging a monthly recurring fee if the manufacturer requires maintenance as part of its agreement. As you alter your business, make sure your vendor partner has a model that allows for your desired change to provide MRR services.

You make too many changes, too fast — The transition to the hybrid model should be made slowly and with purpose. If you move too quickly or change too much, it could be overwhelming to you and/or your employees.

You’re not committed to the model — If leadership within your organization isn’t fully invested in adopting services, the rest of the organization will not support the endeavor. Additionally, since the change will be challenging, leadership must have the stomach to ride out the hard times.

You don’t have the right people — Selling services is different from selling products. It’s possible your team doesn’t have the right skills necessary to sell services today. If you are selling products and services that work together as one solution, make sure the sales person has the training and tools to sell the total solution. If your services and products aren’t related, you need resources that are 100 percent dedicated to each and compensate them differently.

You’re targeting the wrong customers — Not all of your current customers will be ideal for services. You’ll have to perform some analysis to see which services your customers need and potentially find some new customers.

You lack a strategy — This model will only work if someone works at it. You can’t just try various things and hope something works. You must have a thoughtful plan and strategy. Get methodical about the services you’ll offer, know who in your organization is selling them, and know your potential market.

You create internal strife — Having some employees focused on the old part of the business and some focused on the new can create some issues. Sales compensation can become one bone of contention. More importantly, you don’t want those working on the old part of the business wondering how they fit into your plans for the future. We have seen successful partners who have transitioned to a hybrid model build compensation programs that address this issue and make sales more cooperative and not contentious. 

You ignore what made you successful to begin with — Don’t forget the cash cow that got you to this point. There’s no sense in tossing out a great solution you offer to move to this new model. The hybrid approach means keeping what works in your old model so you can ease in.

Conclusion: Take your first steps today

How quickly you act on this opportunity - and to what degree - are up to you and based entirely on your capabilities, customer base, and desire to move forward. There’s no right or wrong way to adopt Managed Services and move towards a hybrid model. However, the single biggest mistake you could make is not beginning your transition today. The longer you wait, the further behind you fall. Start now and move with purpose before it’s too late.

If you’re scratching your head trying to figure out how to turn some of your offerings into subscription offerings without destroying your cash flow, know there are potential partners who can help. Great America can help you provide a subscription model to your customers…