Converting A Business from Break-Fix to Managed Service Provider

In this post, I share a story from an MSP about their journey of converting their break-fix shop into a managed service provider I collected over multiple message exchanges last month. In no way is it a guide to starting your own MSP; for that, I would suggest checking out a great collection of training courses on specific aspects of running an MSP business, yet the stories here can be a source of inspiration for entrepreneurs in the managed services business.

The story’s hero asked not to disclose any information about them besides being a proud American MSP. The story covers over three years as of today, and it started during the Covid pandemic.

The mentor

After struggling to maintain sustainable income from one-off jobs at hourly rates for years and getting to the stage of life when predictable income was necessary for the family’s well-being, the break-fix business owner was considering taking a corporate job. Managing a break-fix shop with four employees and a few part-time contractors was an exciting experience, and the freedom to run their own business was the reason they started the shop in the first place, yet struggling with getting enough contracts to pay salaries and not being able to set aside money for the rainy day was too much.

Reading Reddit posts about people starting their MSP businesses and attending courses of MSP gurus like Chris Wiser and Eric Simpson convinced the hero of our story that a long-term contract model is the only way to continue running their IT business. Yet, they were lacking confidence in their ability to start it. It was a many months-long struggle, and the owner was close to shutting down their shop until they met another MSP owner in the local community at one of the events. The MSP owner suggested serving as a mentor to help with the transition.

The mentor gave the owner confidence and reassured them that failure to do so would not take away an opportunity to join a corporate IT department. The mentor also suggested that the break-fix owner try the transition before letting their employees go. As they became family, forcing them to look for jobs will have a detrimental impact on the mental health of our hero.

Having a person with the experience of the transition from break-fix to managed services to advise you and instill confidence in your abilities helps you make the first step.

The plan

Our hero sat down with his mentor and made a transition plan.

Firstly, they planned the capacity to continue the engagements with an hourly rate for their existing customers and estimated the capacity for one-off jobs that were coming their way based on their experience of the previous years.

Secondly, they agreed on a cutoff date for accepting new break-fix customers. They have decided not to accept any work from new customers without a six-month long-term contract. And then, if they get enough customers on the managed agreements to maintain their operations, they will get back to their existing customers and ask them to switch to annual contracts.

They prepared a plan, documenting everything they needed to prepare, from contracts to marketing to recruit new customers, and planned the budget for the transition. In the process, they realized how little structure they had in their business and how little attention they paid to driving the business growth, acquisition, and retention of customers.

In the process, they also spent time reviewing their technology stack and realized that they never had preferred solutions documented, and they were supporting whatever infrastructure customers had. As a result of the planning exercises, they selected RMM and PSA solutions to manage customers remotely and automate their business operations and decided to standardize their backup, agreeing that they would accept customers “as is” and then, over time, standardize their infrastructure-based on the preferred technology stack.

Building a checklist of activities and assets needed for an MSP business and then building a specific plan with dates, resources and dependencies is the key for the successful transition.

The transition

Our hero was offering managed contracts for any new customers reaching out for IT support through word-of-mouth. Yet, he admitted that he still readily accepted one-off projects until the first three customers signed annual agreements, as he had struggled with cash flow. After getting the first three customers with long-term contracts, he took a firm position not to accept break-fix jobs anymore and had to refer a few customers to his competitors, with a few exceptions.

In the first few months, our hero learned that the choice of RMM and PSA solution was not the best and switched to another vendor. After a review of the contracts by attorneys per customer requests, many changes were implemented. Service level agreements (SLAs) were defined for the work customers expected from the MSP.

They also had a few major security incidents with compromised infrastructure and some of their customers’ data being encrypted for ransom. Since then, they added additional security services and partnered with an MSSP to offer incident investigation, as they acquired customers that needed this for compliance with cyber insurance requirements. They also introduced a policy to mandate offsite backups for customers and run recommended security on all computers on customers’ networks.

They switched to another distributor due to regular billing issues and the distributor’s lack of support.

The transition period barely looked like they had planned. Yet, in about a year and a half, they had built a working MSP model delivering over 50% of their revenues. Transitioning break-fix customers took longer than expected, and they had to retain some older accounts on the break-fix model due to personal commitments and relationships that were chosen not to strain.

Surprisingly to them, the difficulty came from the employees, who were not used to working with customers on long-term contracts. Shifting their mindset from a one-time project to continuous maintenance of customers’ infrastructure took a while, and one person left the company unwilling to handle the incoming volume of support tickets. Initially, the team had to increase the hours they worked per week, yet after the transition was completed, they saw a significant reduction and “in general are much happier people to be around.”

Being flexible and open to making changes to their plans during the transition was something that allowed them to see it through.

The learnings

Most customers were reluctant to transition to annual agreements and required special discounted offers to agree to sign the managed services agreements. Most received a 30–50% discount from the initially published rates for the first year, with some having discount reductions for a few years after the initial contract.

The owner thinks that they would retain 50–60% of their existing customers without the deeply discounted offers if they were not afraid to push harder and would be open to losing some customers. Yet, they were constrained with cash flow. Therefore, they retained almost 80% of their break-fix customers after the transition, and then about 80% of the overall customer base renewed contracts after the first year and nearly everyone after the second year.

Most customers left for MSPs offering lower prices, yet a few returned after a year of getting lesser quality of service. Looking back, our hero claims that making discounted offers instead of selling value was their biggest mistake, and they would be better off with fewer higher-paying customers. Yet, they don’t have precise calculations, and they only speculate.

“Exit interviews” with leaving customers were the most important ways to learn how to improve the services and offers and taught how to sell value rather than price.

The hardest part was learning to pitch the services to prospects. The old pitch of “we will fix issues when you have them” was easy, and selling on the value of a long-term agreement was hard. Luckily, most of the new customers were coming through word-of-mouth referrals and did not require convincing regarding the quality of the service.

The key asset for the transition was the loyal customer base. What started as a break-fix shop for friends and family evolved into a sizable MSP business, thanks to loyal customers helping recruit other customers and actively advocating for the MSP in the local community.

Fostering relationships with customers helped generate a constant flow of referrals and references, leading to prospects signing up. A quick conversation with an existing customer is an effective sales tool.

Still, the hardest thing to do is to say “no” to prospects unwilling to sign up for long-term agreements. Some projects look like easy money and are hard to refuse. Our hero sees that they are improving at that while still accepting projects if those are small, simple, or “come at an outrageously good rate.”

The road ahead

Their immediate plans include investing in marketing to acquire more customers, adding additional services to make their offering more valuable, and increasing the amounts they charge their customers based on the different packages of services they offer.

They started by charging $75 per workstation and $150 per server per month for a limited scope of service, with additional service coming at an hourly rate of $200 per hour, and over time, introduced additional options that would include everything at $120 per workstations and $300 per server, with some of the customers paying $150 per workstation and over $300 per server, plus $75 per printer or specialized endpoint like POS terminal.

They still maintain hourly rates for some agreements, yet they are trying to transition customers to the all-inclusive model with defined service SLAs.

They aspire to transition most of the on-premises infrastructure to Azure and all file servers to Microsoft 365 OneDrive and SharePoint. Yet, they are not pushing it hard due to existing contractual agreements.

Their other aspiration is to include the annual price increase in their agreements at a 3–5% rate. They missed that at the beginning of the transition. Many customers agree that it has become a standard practice and allows both parties to plan their financials.

They have doubled their revenue in the last two years and look forward to expanding and hiring more people as they grow. The next hires they plan to have soon are an operations manager and a marketing manager. For technology, they want to build their own stack to make a standard for all customers at onboarding to grow their operational maturity and increase productivity.

They are cautious of signing large customers, even though they have a few strong prospects, as they are afraid of the workload with those customers and are scared of growing dependency on a few large accounts. Our hero considers going “upmarket” as the next step after he builds efficient operations.

The conclusion

The transition from a working break-fix model to an MSP may seem scary. Yet, it is not only doable but also necessary to maintain a sustainable, predictable income. Building a detailed plan, finding a mentor or adviser to help with the plan and to answer questions on the go, and finding the courage to start making changes open up the opportunity to succeed.

The market for managed services is large and growing. Canalys, in July 2023, estimated the global market for managed services at $488 billion in 2023, with over 300,000 companies offering managed services, yet less than 50,000 generate more than 50% from the managed services. Given the model’s predictability, we can expect more and more companies to transition to the “pure” MSP model. I hope the story inspires the break-fix shop owners to plan the transition today.