- MSP versus break-fix, what’s the difference
- Step one is to identify your target market and get to know them.
- Where does MSSP fit in…?
- Define your product bundle
- Implement the software you need and automate
- Estimate costs and profit.
- Demonstrate your value
- Sell the value
- Sign contracts and agreements
- Deliver business results
The easiest way to start a tech business is to fix problems. Something is broken, and the client can’t work, so they call in desperation, needing a solution. They break it, you fix it, everyone’s happy.
The allure of the break-fix model is its simplicity. The challenge is its unpredictability. Something always breaks Friday afternoon or right before your holiday with the family. Since you don’t know when things will go wrong, you can’t predict your revenue, which complicates hiring and planning. Scaling break-fix in this market today is excruciating.
The MSP market, however, is exploding: Business Wire forecasts a 12.7% annual growth rate for the MSP market, predicting it will get to over $525 billion by 2028. The opportunity for growth is tremendous, but capturing this opportunity requires a different approach. It isn’t enough anymore to sit back and wait for things to break and fix them. In fact, it isn’t enough to only know technology. You must transition away from break-fix to MSP.
In this post, we’ll talk about how you do that.
MSP versus break-fix, what’s the difference
Break-fix is generally a pay-by-the-hour service in which a service provider fixes whatever doesn’t work for a client.
The perceived advantage of break-fix is the ease of sales and delivery. Everybody knows when something is broken, and you, as the technical person, can focus specifically on the technology without worrying about its impact on the business.
If the network isn’t working, you fix the network, and that’s it.
There was a time when IT was so complex that this alone was enough to build a business; things broke all the time, and nobody knew how to fix them.
Today, though, the technology is more reliable, and concerns are more business-focused than in the past. Prospects and clients assume their tech will work (rightly or wrongly). Their concern is the business.
So selling and delivering break-fix services is painful, there is no way to stand out, there is no earnings leverage (you only charge by the hour), and it doesn’t address their primary concern: business performance.
A Managed Service Provider (MSP) charges a monthly fee to maintain and support IT infrastructure so that the business is more efficient, profitable, and able to achieve its strategic objectives.
MSP services are more valuable to clients because they get better results and have a partner focused on ensuring their business works more efficiently. Things don’t break as often.
The challenge for the MSP is that it is a move out of pure technology: you have to think about how the technology impacts the business and focus your efforts on business results rather than technical results.
When technicians start MSPs, they keep it generic and serve everybody. They want to be “agnostic.” This is better than a break-fix in that you earn MRR but are hard to deliver and sell because if you support multiple industries, you must understand each one.
To scale profitably, MSPs specialize, focusing on one specific client avatar and fully addressing their business technology needs.
How it works
| You monitor and stay on top of their IT: you make sure nothing goes wrong.
| Make sure everything works so that the client can achieve their goals.
| You monitor and stay on top of their IT and business strategy. You make sure nothing goes wrong technically but also look for opportunities to improve business performance.
How you charge
Time and materials
Do the minimum, fix things as they break.
Ensure everything works so the client doesn’t feel the pain of tech not working.
Make sure everything works so that the client can achieve their goals.
A specific target market you know deeply.
Trusted tech partner.
Trusted business partner
Step one is to identify your target market and get to know them.
Step one of transitioning from break-fix (or commodity MSP) is understanding your target market: whom will you support?
When Joe started his first MSP, it was a disaster. He tells the story of sitting at the kitchen table buried in bills while his wife looked at him very disapprovingly…
His breakthrough moment was realizing that he should specialize. He narrowed his focus to personal injury attorneys and used that focus to build his business.
What was key for Joe, and will be essential for you, is to learn their line of business software and workflows inside and out. Personal injury attorneys used Saga, so Joe learned Saga and learned how to integrate it with other software the lawyers used.
Since he knew technology, this was easy for him and hugely valuable to his clients. He increased his price because he now had a more valuable service and became the go-to MSP for personal injury attorneys.
- Identify your target market.
- Identify the problems they have.
- Develop specific solutions.
Where does MSSP fit in…?
We’ve noticed a push to offer security services as a variant of the MSP. This is because security is so complex and mysterious that you can, in theory, stay industry-agnostic and still sell a monthly recurring revenue product.
The problem with this is that security services will also become commoditized, and you’ll end up in the same break-fix predicament. Business-focused MSP services are resilient and more valuable because you focus on improving the business.
Define your product bundle
Once you know the problem you solve and for whom, you must define your product. Your product is the bundle of software and services you will use to support your client.
It is important to standardize your product bundle so that you sell the same bundle every time.
First, a standardized product makes your offer easier to present and buy.
Having a defined bundle means that when you have a pitch meeting, you can put together a proposal in minutes instead of days, which immediately puts you ahead of the competition.
Second, though, it means that you get outrageously good at supporting and delivering your services; this is the intellectual property you build up in your business that helps you differentiate.
Implement the software you need and automate
Once you know what your product bundle is and what you are going to offer, then you must ensure that you have the tools you need to deliver and support your product.
First, you’ll need the software that your services require.
- Office tools.
- Cyber security.
Second, you will need the tools of the MSP trade:
- Remote Management and Monitoring and
- Professional Services Automation.
Third, you will need the business infrastructure that helps you serve your clients efficiently:
- CRM (ActiveCampaign, Hubspot)
- Billing software (Quickbooks)
- Quoting and Proposal Software (Qwilr, Quoter, QuoteWerks)
And finally, you’ll need to keep track of your money and business processes, so you’ll need:
- Bookkeeping software (Quickbooks, Xero) (and a bookkeeper to run it… don’t do your bookkeeping, that’ll drive you crazy, and it is a terrible use of your time).
- Software to document processes (IT Glue)
It can seem like a lot to put in place to start, but you can’t effectively support your clients without these tools. Start charging monthly recurring revenue but don’t have a way to deliver reliable support. You won’t be an MSP for long…
Estimate costs and profit.
Once you have your product bundle and stack in place, estimate your cost. To do this, consider both your variable and your fixed costs.
Variable costs are those that change with the number of customers you have. So, if you include a virus scanning software costing $5 a device, that’s a $5 variable cost.
Fixed costs don’t change with customer volume (or at least not as quickly); some support software is fixed, rent is fixed, and your w2 labor you’ll want to treat as a fixed cost.
Then, figure out your product profit by subtracting the total cost per unit from the total price per unit.
If you charge by user, you subtract the total variable cost per user from the total price per user. If you charge by device, you remove the total cost per device from the total price per device, and so on. You may have a pricing model that includes per user, per device, and per location costs, and you will want to know how much money you make on each.
Once you add this up, you want your total variable cost to be 33% or less of the price, ideally. The remaining 67% goes to pay for your fixed costs (including you).
One of the biggest mistakes we see is charging too low a price and not having enough money left over for expenses, salaries, the owner’s salary, and profit. Remember: your business should make a profit, or your price is too low.
I won’t get deep into pricing theory here, but it is essential to understand that price does not depend on cost. The price is what someone in the market will pay for your services. The comparison that your customer will make is not your cost (as in, is this price fair compared to your cost), but rather to their next best alternative (can I get this for less elsewhere or do without).
We talk to many MSPs, and it’s amazing how some will swear that accountants will never pay more than $75 a seat while another is pushing their price to accountants up to $275.
Customers will pay any price as long as you offer more value than the price you charge, and they can’t get the same value elsewhere. This is why defining your niche and unassailable competitive advantage is important.
Demonstrate your value
Since you sell value, not cost, you must demonstrate value. Demonstrating value is the crux of converting to MSP. This is because everybody understands the value of “Hey, this is broken; I need it fixed,” but business value is more complex. It is especially difficult for MSP work because you are preventing a negative (preventing downtime) or are enabling something in the future (you can sell more faster).
The way to demonstrate value is to calculate your client’s (or prospect’s):
- True cash cost: what they spend on support, problem-solving, or lost time that you prevent.
- Opportunity cost: the opportunity they lose because they don’t have your support.
Joe pitched a client for services; his proposal was $300,000 a year to manage the IT systems; they were currently paying $90,000 for break-fix services.
To show value, Joe calculated:
In addition to the $90,000 for services, they had these additional costs:
- There servers were down 100 hours a year.
- They had 200 employees who earned, on average $60 an hour.
- So the 100 hours of downtime cost them: 200 employees x 100 hours x $60 = 1.2 million a year.
This was plenty for Joe, but he could have added:
Cash cost of Googlesearchery (looking for solutions to problems on their own).
He did add in some opportunity costs:
- They couldn’t grow the business because they were bogged down with tech issues.
- People were demotivated.
After the analysis, the true cost was $1,290,000 + the opportunity cost of not growing, compared to his $300,000 annual cost.
Joe got the contract. Interestingly, right after he started, he realized that the owner needed to invest another $140,000 in new hardware because the old hardware was too slow.
This did not make his client happy, but Joe set up a demonstration of having one processor do work on an old computer (the one they had in the office) versus a new computer (the one he was recommending). The one on the new computer processed three times as many claims since the office was stretched beyond capacity, which made the cost of the upgrade seem trivial.
So, calculate the cost of not doing business with you and compare that to the cost of your services to them.
Sell the value
The next step is to sell the value, the new price, and the new business model to your current clients and future prospects.
When talking to your current clients, we recommend using the Strategic Business Review format to guide the conversation. The business review meeting allows you to demonstrate value and develop the relationship.
Converting existing clients to MSP services tends to inspire a significant amount of fear. For some reason, most people prefer to talk to prospects rather than clients. But think of it this way: if your clients already know and love you, why wouldn’t they be happy to pay for your services?
In our experience, whether converting clients to MSP or raising their prices in line with improved services, if you are delivering high-quality service, most of your clients will stay with you. Often, the ones you lose are the ones you least like anyway.
Sell value to prospects
When you meet with prospects, be ready to talk about the value you add to their business. Remember that your value extends beyond technology: you help them run their business better.
Use prescriptive selling techniques to show them you understand their business, problems, and needs.
Provide a proposal immediately – so many MSPs meet with prospects and then take weeks to deliver a proposal. Since you know exactly what you are selling and have no need to invent anything, you should be able to deliver a proposal in hours rather than days. This puts you way ahead of your competition.
Sign contracts and agreements
Break-fix companies can get away without having signed agreements. They shouldn’t do that; it’s a bad idea, but many do.
You cannot do this as an MSP. There are too many variables at play and too many obligations that you take on. Contracts specify exactly what your responsibilities are and, crucially, what the limits of your liability are. If you backup data, for example, your contracts help you specify:
- how often do you do it,
- what level of backup do you have,
- how secure the backups should be,
- your obligations to test the backup,
- the speed of recovery and restoring data,
And so on.
With every client, you should put in place, at a minimum, a proposal with your pricing and obligations spelled out, a Master Service Agreement (MSA), which you can include in your contract as terms and conditions of service, and a Service Level Agreement (SLA) which defines expected levels of service (is your help desk 24/7 or 8/5 for example).
There are several other agreements that you may need, including:
- Nondisclosure agreements.
- Bring your own device agreement.
- Project Statements of Work.
- Disaster recovery plan.
There may be more depending on your situation and how you support your customers; the important thing is to ensure you have the terms of your agreement defined clearly in writing. Agreements avoid confusion and will be crucial when (and it is a when) service issues arise.
Deliver business results
The final part of the MSP business conversion is to deliver the results. Be proactive in your approach and communicate often. Never stop learning about your clients’ businesses and needs. Conduct regular strategic business reviews.
Converting to an MSP can sound daunting, but it isn’t nearly as hard as you think. Follow the process, and you will make the switch. The best news is that this is not only more valuable to you, it’s more valuable to your clients as well.