It seems like every year, there’s a trendy new business model that managed services providers (MSPs) are told to adopt if you want to, well, survive.
The most obvious example in 2018 is security. Cybercrime is a hot topic at channel conferences, and vendors are offering content in droves to help MSPs package and sell managed security services with the promise it’ll help you better protect your customers—and your business.But Jay McBain, an IT channel analyst at Forrester, warns against being overdramatic. He says the MSP industry won’t die any time soon—though the opportunity to generate revenue is certainly shrinking.
“We’re predicting that managed services are going to be about a quarter of the market and stable in the future. So that’s why it’s being compressed and being consolidated—the average managed services margin is now 17%.”
A high margin opportunity
The cloud, as we all know, is changing how businesses in every industry operate, and is creating new categories of businesses. One example is born in the cloud businesses, which “find their opportunity in project-based, downstream revenue that cloud opportunities create.”
Born in the cloud businesses enable cloud services rather than selling them—they take care of the implementation, integration, security, and optimization. And “they’re figuring out a way to find 40 to 75% margin business within these (cloud) projects.”
The difference between this business model and a current-day MSP is the absence of recurring revenue. “You don’t implement Salesforce and charge somebody per device per month,” says McBain. “It’s a project that’s charged one time. It’s sticky business but it’s not managed.”
The reason born in the cloud businesses are gaining popularity and generating significant revenue is because of a new type of IT buyer. “There’s been a big shift in buying from IT to the line of business executive. It used to be called shadow IT, when 10% of purchases were made outside of IT. Now 65% are made outside of IT—soon to be 80%.”
If the vast majority of tech buying decisions are being made outside the IT department, you’ll need to change how you prospect and deliver services. The way a VP of marketing selects software is likely very different from an IT decision maker. And 80% of purchases? That’s not an opportunity to squander.
Reach the new IT buyer through hyperspecialization
One way to access non-IT buyers is through a business model called hyperspecialization, which means pursuing and servicing customers in a hyper-specific niche.
Since non-IT buyers expect you to make tech recommendations based on their unique business goals, processes, segment, location, and line of business, you need deep niche expertise to resonate.
McBain says you need deep knowledge about five things to effectively hyperspecialize:
- The client’s sub-industry
“There are 297 sub-industries. So not only are you healthcare specialized, but I need your experience to be in mid-sized ambulatory care clinics with 50 doctors.”
- The client’s line of business
“I might be a VP of marketing, sales, operations, or finance, and I need you to speak my language. My pain point might be that I need more leads, so I need you to talk about top of funnel, lead progression, predictive analytics.”
- The client’s geographic location
“Selling to mid-sized clinics is very different in New York than it is in Canada, the U.K., and California. Every region has different compliance regulations and legislation. I need you to understand those nuances.”
- The client’s sector, segment, and size
“What might work in a small hospital or a large dentist’s office may not work for a 50-person clinic. So I’d like your resume to be very specific to my size, resources, and challenges.”
- The line of business tech stack
“The average solution today has seven layers to the tech stack. I need you to be very connected and detailed in terms of what those layers are. To drive leads in a mid-sized clinic, here’s what the seven layers look like—here are the vendors that participate.”
The only catch is, even if you meet the expertise criteria, non-IT buyers want to see “three examples of you being able to do this successfully across all those five hyper-specialties on your resume.”
If you look at your current client base and see some similar clients—say mid-market health clinics on the West Coast—you have a head start in hyperspecializing. But why would you want to focus solely on them? And what if your clients are literally all over the map?
McBain has an answer. “To use a Canadian analogy, you want to skate to where the puck is going to be. Managed services is plateauing. You’ve got to look at where the future opportunity is, especially high-margin business—and it’s centered around cloud and digital transformation projects.”
Stay tuned for the second piece in this series on MSP hyperspecialization, which will offer hyperspecialization tips and examples for MSPs who have a hyperspecialty in mind—and for those who don’t.