Why Managed Services?
Ahhh… The good ol’ days. I sit back and dream of the halcyon days of yesteryear. Days when we didn’t have to worry about the price of fuel or electricity. Days when we didn’t have to remove most of our clothing and go through five security checks just to board an aeroplane. And days when we made profits on selling computer hardware.
Research shows that humans distort old memories to make themselves happier so we tend to look back on past events with fondness. In fact, up to 20 percent of people have happy memories from their childhood that their siblings and parents confirm never actually occurred!
When it comes to the glory days of being a computer reseller though, I remember selling an average PC for $3000 and averaging 30 percent GP on the transaction. Fantastic! $900 gross profit on a single PC sale.I didn’t want to rely just on my memories though. I enlisted the help of IDC and their research confirmed my past memories. Their research revealed that over the last ten years, the combined effects of lower ticket prices and lower margins resulted in a reduction in net profit on PC sales of 85 percent. Sure the sales volume has increased but so has the number of outlets that you can purchase a PC from as there is no barrier to entry in the PC market.
No wonder I remember the past fondly!
IT resellers the world over are faced with this problem. In the glory days, we could all offer exceptional service – without charging for it – because we made enough profit on sales that we could give service away. It was written off as ‘customer service’. Again this was back in the days when an attendant filled up your car and washed your windscreen and it didn’t cost you any extra.
It is true that what is profitable in your business today can be the path to ruin tomorrow so resellers are faced with several choices. First – close the doors. Not a great option. Second - continue to charge high prices with high margins. Sounds good in theory, but more than likely this will reduce sales in an increasingly competitive environment.Third - charge competitive prices for hardware but charge for every service component. This is a tough sell given the fact that consumers have been accustomed to their service being ‘free’. What was called customer service is now chargeable and clients are irritated at the penny-pinching. The slow loss of clients would result in a gradual decline of the business. The last option – and the option that I would recommend – is to create a Managed Services offering.
Note that a true Managed Services offering is NOT a maintenance contract. A maintenance contract offers minimal benefits to the client and can often create more frustration with your business. My definition of Managed Services is: “The proactive day-to-day management of IT infrastructure to maintain the optimal performance of the network for a fixed fee.”
The benefits to the reseller and the client are enormous. The client feels that the risk is shared with the IT reseller. The reality is that an IT reseller that structures his maintenance schedule and pricing correctly suffers minimal risk in the same way that an insurance company is sharing risks across all of their clients. The proactive nature of the arrangement delivers a more reliable network to the client and allows staff resources to be utilised more effectively with less stress. Regular communication with your clients – at both technical and sales levels – increases client loyalty and allows you to better service a business that you understand better. From a financial perspective, the client can budget and plan for their IT expenditure with certainty and from the reseller perspective, you can have consistent recurring revenue that increases your profits and your business valuation. Staff attraction and retention is a crucial issue in the IT world. IT turnover stats are higher than other industry averages but Managed Services businesses have turnover rates 30 percent lower than break/fix IT businesses.
Managed Services as a concept is not a passing fad.If you are in IT services in five years, you will be in Managed Services – or you won’t be in business. With close to 20 percent of US IT businesses having already made the move to Managed Services, there is still a chance to differentiate your business and be a leader. Similar moves are occurring in other industries such as accounting and medical practices and client expectations are changing.
The Dow Jones was launched on 26 May 1896 and of all the companies on the original index, only one company survives today (GE). They have survived by continually modifying their business model and they look dramatically different today to what they looked like in 1896. In business, evolution is not an option.
Tell me your favourite childhood memory – and if it was real – at [email protected]
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