Valuations and Worth for MSP's

I recently had a conversation with someone and the subject of M&A came up, specifically what the current valuation trends were. Having been in M&A for so long I have seen this particular area of business philosophy mature in many respects. Many MSP's, during the negotiation process, would complain to me about why their businesses were being devalued by potential buyers. Obviously, that's what a buyer is supposed to do; every buyer is looking for the best deal possible. However, in the last few years I've started to see a trend in valuation schemes that is showing signs of maturity and common sense.

Because M&A is the most likely liquidation (or cash out) event a business owner/investor is to experience these days (IPO's, venture capital, and other deal transactions are less common) the valuation of a company is one of the best external indicators of how the managed services profession is faring. Here is a great example of how our profession has advanced in the last decade.

It used to be common practice to discount or assign a zero value to a MSP's non-recurring revenue...zero! This means, any product, project, or any revenue of any kind that was not specifically tied to a contract would have been essentially tossed out of the negotiations. What ended up happening was recurring revenue (tied to a contract for all of you "we do business on a handshake" folks) was valued at a premium, with its own multiple, while the non-recurring revenue was assigned a zero or minimal valuation multiple. I actually got very upset and decided to quit the M&A industry because it was unfair to the MSP's who worked hard on growing their business only to see important components of the business thrown away at the bargaining table.

Today, things are beginning to change. By going to a flat multiple scheme, MSP's can achieve a more realistic and accurate model of their business valuation than under the previous model. For example, instead of taking all the different revenue sources and assigning each its own multiple, you would take the overall (top line) revenue and assigning it one multiple. Assuming that the revenue streams are all related to a managed services practice (i.e., you wouldn't want to pay for a tanning salon along with the MSP business assets) this valuation model will yield a number more accurately reflecting all the various components that make up a successful and efficient managed services practice.

Our profession is maturing and for that I am thankful! What are your thoughts? 

What MSP's Want from their Vendors: Better Margins

This is the first of many articles to come based on a session held at MSPWorld Orlando. This session, moderated by Dan Wilson (co-chair of the vendor relations committee), produced a lot of great ideas for vendors. These ideas are useful, both for MSP's and vendors because the following issues are all high priority items MSP's want to see from their vendors. So, let's begin.

Better margins. No surprise here. This is the age old debate in the channel and it hasn't gone away. Honestly, it probably will never go away entirely but it is important that we talk about it. Vendors typically respond to the "more margin please" question by saying that they have hard costs that cannot go away and that if the channel partners would produce more (i.e., become more effective) they would reward those partners with wider profit margins.

In response, solution providers typically claim that they are not "agents" of any one vendor and must represent and serve the interests of the client who, more often than not, do not care about brand as much as they care about the solution actually working. No matter which side you are on, it is important the channel come to some resolution quickly.

If you are a MSP looking for good vendors, margin is definitely one of the questions you want to ask up front. No matter how good the product/solution is, if you can't make money at it it probably isn't worth your time. Of course, if your vendor happens to provide you with a solution/product that enables you to sell it at a price you determine (i.e., you incorporate the solution into your own service) then you have a business relationship with a vendor that truly recognizes you as a partner.

Managed Services Goldmine; Do you have the right tools?

With the MSPWorld Orlando conference just around the corner there are a lot of companies looking for new tools to help them make the most of their managed services practice. I have personally been fielding a lot of emails and phone calls lately from MSPs who are looking for new tools to either replace or augment their existing tool sets. It is not, however, just tools that are being sought by MSPs today but other MSPs.

Now, some of you may be wondering why on earth a MSP would want to seek out other MSPs. There is a growing number of MSPs who are trying to grow their services revenues while driving down costs by sharing them across a distributed community. I wrote a blog about this phenomenon a few months ago but it continues to grow in popularity amongst mature MSPs. As mature MSPs grow their practices, the pinch of trying to expand while keeping costs in line can be a challenge. Mature MSPs, who tend to be more secure in their own capabilities and therefore likely to not be threatened by other MSPs are creating small yet powerful communities that yield impressive service capabilities.

Datacenter capacities are being increased, help desks hours are being extended, and Network Operation Centers are being fully utilized. The important thing to note is that many of these communities are springing up among accredited MSPs. Obviously, these communities are seeking out secure, stable, and vetted MSPs who are likely to not be a risk to the larger group.

Whether you are just starting out or you have been in the industry for some time, I would really recommend looking into joining one of these communities. Don't like what you see out there…start your own. The benefits to your managed services practice might surprise you.

What's in your SLA?

In a recent conversation with a MSP executive the topic of contracts came up. This person said that MSP's who do not hold their clients to the letter of their contracts are doing the client's a disservice. I could not agree more.

particularly among smaller organizations there is a habit (no doubt born of many years of practice) where solution providers do business "on a handshake". When MSP's do business like this they are risking more than just a lawsuit. MSP's who cannot say no to a client asking them to do more than what is in the contract can open their managed services practice to a great deal of risk and potential harm.

1) Habit Forming - MSP's who do things not enumerated in their SLA get their clients thinking that they can ask for something anytime and they will get it...regardless if the contract says they should get it.

2) Liability - when a MSP performs a task outside a service agreement there may be far reaching consequences involving legal liability and/or insurance disclaimers.

3) Bad for staff - when an owner or account manager authorizes out of contract work to be done they are circumventing the internal service delivery process every MSP should have. Each service delivered should be directly tied to a SLA, if only to help bill accurately and ensure accountability on the part of the service delivery team.

4) Bad for business - during a M&A business transaction anything delivered outside of a service contract will likely become zeroed out or reduced significantly in value. All those times you thought you were doing your client a favor might actually end up costing you in the end.

Whether it is increased liability, bad for your internal service delivery procedures,  or simply bad business protocol, deviating from a standardized service level agreement is something that should be avoided at all costs. By sticking to the letter of your agreement (and inserting into an agreement any new services requested by the client), you will be doing yourself and your clients a huge favor.

IT outsourcing prices to fall, but not managed services

A recent Gartner analyst predicted IT outsourcing prices would fall between 5-20% in the next 2 years. While I certainly respect the opinion of others I would like to clarify those opinions which might potentially impact the managed services market. We in the managed services profession went through a similar situation many years ago when the generic "outsourcing" industry came under fire by US politicians for sending jobs to overseas firms. The problem was this generic debate around "outsourcing" caused quite a bit of confusion by dragging the managed services profession into the conversation.

The managed services profession successfully avoided being associated with the "outsourcing" debate years ago and I would hope that today is no different. The problem with proclaiming that IT outsourcing prices are likely to fall in the next two years is that some people may assume that managed IT services prices will also fall. It is important to understand that there is nothing to support such a conclusion or inference!

Managed services pricing has remained stable, if not increased slightly, for the last 5 years. The reason for this is the increasing popularity of the profession as it continues to recruit new members around the world. Now, you may be asking why would a major research firm issue such a prediction. That is a very good question and I have an answer. The reason is the same reason why these same research firms misunderstood the "outsourcing" debate 8 years ago. Outsourcing is not the same as managed services. Any attempt to equate the two as similar would be to cheapen managed services by simplifying what is a very complex and quick moving industry. The reason so many IT firms have been moving rapidly towards managed services is precisely because it has maintained its margins better than any other IT services offering in the last 2 decades.

Some of you may be wondering if managed services prices will begin to fall as a result of the large number of new MSP's. Simply economics can answer this question. The sheer demand for managed IT services, combined with a very low end-user adoption rate (as of today it is roughly 10%), and the low number of firms doing managed services correctly should indicate that prices and margins will remain strong for the next 5-10 years. What is falling rapidly are product margins and commodtized services that are increasingly being delivered through Software as a Service (aka, cloud computing, aka Application Service Providers).

Since the birth of managed services there have always been services that become common and naturally decrease in price. This happens with every profession. What makes professions last is the fact that they always replace those commodtized services with high value and high margin services. This is the cycle of IT services that will always exist. 

What is your Managed Services Firm Worth?

What is my managed services practice worth? I'm sure a lot of you have been asking yourselves this question recently. Most of you who have been involved in building a managed services business have at least contemplated the day when you can divest yourself of a precious and valuable company. However, in order to get to that happy day, you have to be willing to invest in your company. No, I'm not talking only about money; i'm talking about time and other resources that can have a very big impact on how your company operates and on how people view your company.

There are some very simple things you can do to help increase the value of your company and prepare for the day when you want to sell. On a side note, if you are buyer looking for MSP's these items also apply to you.

Keep Good Records
IT providers are very adept at solving technology problems but not all IT providers are good at keeping financial records. No, I"I'm not talking about just having a copy of QuickBooks on your PC. Companies, even MSP's, have to have good financial records for a number of reasons. First, keeping good financials will help you make better decisions about your company. Any well run MSP has access to solid financial data so they can understand exactly how their organization is operating. Equally as important is the ability to sell or merge your company. If you are planning on going through a merger or acquisition (or even a funding round) you will need to have your financial records in good order. That means having an accountant review your financials and keep them organized on a regular basis. 

Service Level Agreements
It is funny how some MSP's will invest a lot of money in their technology and then pay little attention to their service level documentation. SLA's aren't just for binding clients to multi year contracts; they are useful and necessary tools for setting client expectations and defining obligations. Perhaps most importantly though, having revenue that is tied to a contract will significantly enhance your company's value. Even your product and non-recurring revenue will be enhanced if it flows from a service agreement. Having a properly drafted and reviewed service contract can not only help protect your company but it will make your company more appealing to buyers.

Service Delivery Consolidation
Many young MSP's start off by partnering with other MSP's. This is an excellent and highly advantageous model, especially if you intend to broaden your service capabilities without wanting to take risks. There is a time, however, when a MSP needs to evaluate the services it delivers to clients and whether those services should properly be delivered internally or through an external partnership. For MSP's who are considering a sale or merger, the more services you deliver through external partnerships the less valuable your company is. Now, if you have the customer relationship that is a good thing. Owning the customer relationship is the most important thing. But, if you can deliver a majority of the services internally a MSP will likely maximize its customer satisfaction as well as its corporate valuation.

Doing these simple things can have a dramatic impact on how your company delivers managed services and on how others value your organization. In the end, having happy clients is probably the best indicator of a valuable company. If your clients are happy, chances are you have many, if not all, of these best practices in place.

Click here to attend a free webinar on Merger & Acquisition Essentials for MSP's

Pretend Managed Service Providers

We live in a time where truth and fiction can sometimes become so blurred that we do not know which is which. This is no less true than in the managed services profession. As many young companies enter the managed services industry, the standards and guidelines which have served our profession for many years are being tested. So, it becomes important for all professionals in the managed services industry to be aware of the ways in which your profession is being attacked and how you can protect against such attacks. One such attack comes in the form of risk avoidance.

Risk avoidance can mean a lot of things but in this case I mean tech companies avoiding risk by pushing it back onto the client. Young IT solution providers tend to view the world as a very threatening place. Clients, in particular, pose great threats to such companies and are typically treated with caution. It is because of this view that many such IT solution providers have service contracts that shift all or a majority of the risk onto the client.  Through agreements that limit liability and force clients to turn over control of their IT assets and have little to no recourse other than the cancellation of a contract these IT providers are putting the managed IT services industry in a very bad light.

Consider the following issues:

1) Clients are giving you (the MSP) an incredible amount of trust and control over their IT infrastructure.

2) That trust is given primarily because they perceive you as being a professional with certain experience and judgment.

3) Clients, when dealing with other professionals, usually do not have to absorb a majority of the risk arising out of the relationship. Doctors, lawyers, and accountants all carry professional liability insurance (i.e., malpractice insurance) to protect clients.

4) MSPs, if they want to be considered true professionals, should start to discourage behavior that punishes the client for trusting in a MSP.

At some point, the MSPAlliance cannot do this all by itself. MSPs need to start educating clients on the proper way to engage in a managed services relationship. Preferably, that relationship will not punish the client for taking a chance on a MSP!