Making the Leap from Consultancy to MSP
In the world of IT service providers, there are two business models to choose from: the break-fix, charge-by-the-hour IT consultancy, and the per-seat managed service provider (MSP).
Many consultancies see the MSP model as a natural next step as they move from a small team to a more mature company. It’s true that the MSP model is more profitable in many cases, but for consultancies looking to take the leap, where do they get started? And how do they know if it’s even the right move?
The reality is that the MSP model is completely different from that of a consultancy, and there are a number of considerations you’ll have to mull over before you can be sure your business is ready.
Don’t believe me? Try this: go to a Reddit forum for MSPs and look for the simple, Day One questions people are asking about running an MSP. You’ll see a lot of posts from people trying to start their own MSP who are completely stumbling through the transition. They had the enthusiasm to succeed, but they didn’t do enough planning and preparation to actually hit the ground running.
The good news is, you can learn from their mistakes.
The main things you’ll need to transition to an MSP are a tolerance for uncertainty and a structured plan for how you’ll grow. That said, there are also a number of concrete steps you can take to get your business to where it needs to be to flourish as an MSP.
Step one: Do the numbers
For many consultancies, moving to an MSP model feels inevitable. It’s just what you do when you reach a certain size, with a certain number of clients. But just because you could do something doesn’t mean you necessarily should. There’s no reason to move to an MSP model if it’s not going to be profitable for your business.
You owe it to yourself to do a deep dive into financial analysis well before you make the call to change your entire offering. There are a number of drastic differences between consultancies and MSPs: consultancies tend to run on a break-fix, hourly rate model, while MSPs typically charge a fixed monthly rate per seat.
It’s your job to figure out ahead of time how that monthly price will break down: what’s included, and what’s your margin on top of that? You can’t just pull a number out of thin air.
I recommend creating a matrix of all your current clients, with a breakdown of what they buy, how often they need support, and whether they’re a profitable client for you or not. You don’t have to do this from scratch, either. There are services like MSP CFO that will help you determine profitability per client by showing you the margin on each of them.
Keep in mind that best-in-class margins (or EBITDA) in the MSP world are around 18%. Operationally mature companies usually have an EBITDA of between 20 and 25%. MSPs that are failing have an EBITDA of less than 10%.
Take the time to project your EBITDA for each client under your proposed business model. If it makes sense to move to an MSP, do it. If it doesn’t, stay where you are.
Step two: Outline your offering
Next, you’ll need to solidify your offering as an MSP. As we know, most MSPs charge their clients a monthly rate for their services. Now you need to figure out what will be included in that price.
Here’s where you work out the basics. For example, are you bundling security into your product offering? If so, is your business competent enough to do that well? Which vendors are you going to work with? Do you have the resources to offer top-tier services, like IT roadmapping?
Many consultancies are used to selling boxes and hours. Pivoting to the more nebulous offering of high-level business concepts can be difficult, and it can be tricky to know how to communicate that value. It’s like selling insurance; it’s something ephemeral that you can’t look at or touch. With MSPs, what you’re really selling is the value of not needing to go through 18 steps in order to get tech support.
Most MSPs take a tiered approach to their service offering, which is something you might want to consider. A three-tiered offering will look something like this:
Tier one: Bare bones
This tier contains the “basics” for price-conscious clients who don’t need much. In other words, all the IT essentials that every business needs (basic hardware, and software like email).
Tier two: Best practices
This tier typically includes all the necessary licensing that a business needs, but doesn’t include the full suite of support that makes it a fully managed service.
Tier three: Expert support
This tier contains everything: licensing, security, and roadmapping for the years ahead. It’s the tier for businesses who don’t want to have to worry about their IT, and who see it as an investment that will enable their growth as a company.
Step three: Step up your staffing
Part of the challenge of offering managed services is being able to balance your workload with your overhead. If you have too many technicians, your profit margins drop. Not enough technicians, and your service quality dips. There’s a constant seesaw of new business to new staff that you have to be mindful of all the time.
At the end of the day, it comes down to being realistic about your planning. If you bring on a 50-seat client, you’d better have the resources to support the amount of work that will bring.
I talk to so many MSPs who hire their first sales representative in June with the intent of tripling their business by next year. Let’s think about what that means. Most MSP sales cycles mean that very few contracts will be signed until the end of the year. These businesses hired someone and gave them a target, but that target was completely unreasonable. Now they’re going to have a sales rep who’s disgruntled and burnt out before the business has brought on even one new client.
It’s natural to be aggressive with your growth goals, but you have to be realistic about what you can actually support.
Step four: Understand your roadblocks
Once you’ve set up and staffed your business to scale, your next hurdle will be doing the actual work of growing your company.
Of the roughly 50,000 MSPs operating today, only 6,000 of them make over $2 million a year in revenue. This figure seems to be the tipping point; if you can make it happen, you can do pretty much anything.
Of the MSPs I’ve worked with, growing a business from $1 million to $2 million in annual revenue seems to be the most difficult leap to make. Most will peter out at the $500,000 mark. Those that do make their way to $1 million in revenue will find that this is where the rubber meets the road. Businesses have to be focused, organized, structured, and process-driven to grow past this point.
One of the major hurdles that impedes this growth is the staffing issue I just mentioned. If you fail to balance client attrition and onboarding with staffing, much of your business will be stuck managing churn. It’s important to continue to monitor where your business is at, whether you’re staffed to grow sustainably, and whether the clients you’re onboarding are ones that you can support with quality service well into the future.
Remember, you have a network to rely on
There are a number of things you’ll need to plan for before you make the transition to building an MSP, but don’t fall into the trap of thinking you need to figure this out alone. There are tens of thousands of MSPs operating today, and many of them are doing best-in-class work that you can learn a lot from.
Look at the companies you respect in your market, and reach out to them for advice. Most of your peers in the IT space will be happy to share knowledge with you and pass along their best practices. To help you get started, read and subscribe to “Rockstars of MSP”! It spotlights stories from MSP leaders who talk about how they built their businesses.
With proper planning, packaging, and staffing, as well as a realistic set of expectations, you can make the leap from consultancy to MSP.
Editor's note: if you ever run into trouble, let us know. We offer a lot of great external resources to direct you to, like Carrie (the author of this blog post and CEO of Managed Sales Pros). She has built an entire business around helping MSP founders who have bitten off more than they can chew!
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