Strategy for Managed Service Providers

One of the toughest challenges in business is defining a strategy. For a new MSP, the typical approach is to acquire a few customers through existing contacts, friends, and family, bringing revenue to cover expenses. However, it is essential to develop a strategy for expanding a business or remaining competitive while rivals pursue their customer base. After speaking with thousands of MSPs over the years, I've noticed that successful MSPs share one key characteristic—they have a strategy documented in one form or another. So, let’s explore a simple framework for defining and documenting that strategy.

The strategy framework

We will define a strategy framework as five components:

1. Opportunity – well-defined, well-understood opportunity based on the understanding of the market.
2. Differentiation – unique (and better than the competition) business qualities regarding the opportunity.
3. Capabilities – the existing capabilities that can be developed to support differentiation and work for the opportunity.
4. Focus – things you choose to do and things you decide not to do.
5. Execution – the plan to make it work, the team, the motivation, the financial plan, the operational plan, and continuous learning required to develop the capabilities, maintain differentiation, and go after the well-defined opportunity.

Let’s discuss each component and devise a simplified example of defining a strategy based on my observations of the success of mid-size MSPs over the years.

1. The opportunity

The world is still going through digital transformation. It may seem that most businesses already use technology, and it is impossible to run any business without technology. Yet, it is far from reality. A vast number of companies are still in the pre-digital era, and most are only scratching the surface of what is possible with modern technology. If you think about AI-based tools, most companies barely scratch the surface of what is possible.

Multiple analysts project that digital transformation will accelerate by the end of 2030, with small and medium businesses heavily demanding MSP services. Many predict that the MSP market will double by 2030, while ongoing digitalization is expected to increase the server market by 75%, the endpoint market by 119%, and the data center market by 48%. Simultaneously, by 2023, analysts foresee a shortage of over 85 million IT professionals worldwide.

This means there will be significantly more IT infrastructure and insufficient IT personnel to manage it, creating a massive opportunity for MSPs.

However, simply knowing that the market will grow doesn’t help develop a strategy. Creating a strategy involves defining the opportunity for your business. To identify that opportunity, the MSP needs to understand how many businesses it can serve, what types of services those businesses require, and whether they can afford the level of service they need.

Let’s consider an imaginary example of an MSP named Gilgamesh IT. They are launching a business in a small town. They know about 1,000 SMB customers in the finance industry within a four-hour drive from their office. They understand the types of companies and the infrastructure those prospects require, along with the challenges these businesses face in obtaining cyber insurance, ensuring compliance, and enhancing cybersecurity. This represents the identified opportunity – a specific type of business, in a certain location, with particular needs.

Defining the targets will help shape the rest of the strategy. While providing any service to anyone may seem like a good idea (it, indeed, does not), it will quickly deplete resources, lead to a break-fix model, and fail to support a competitive advantage. Therefore, begin by identifying the target market and constructing your strategy from there.

2. The differentiation

There are many IT professionals providing services to your target market, and they do a good job if they have customers. How will you stand out to win over customers, and what is that “better” you can provide that others can’t?

The differentiation should be clear for the customer. The story can’t be too complicated; otherwise, it will be hard to market and won't “stick” with customers. Therefore, consider the differentiation you can easily explain that resonates with the customer. They should be able to understand and agree that differentiation is essential.

Imagine choosing to differentiate your business through your own integrated technology stack. While other companies deploy various tools to different customers or support whatever tools customers had used before signing a contract, you provide a standardized technology stack. You have chosen a remote management and monitoring tool that integrates with security, backup, and reporting tools. Consequently, your technician can quickly assist any customer, spend less time resolving issues, and deliver much faster resolutions. You offer your customers a significantly better SLA, increased reliability for their infrastructure, and a slightly lower cost for your services.

What do customers care about? They care about how much money they will pay you, how quickly you resolve their issues, and how much downtime they may experience.

Let’s say you are the MSP offering your customers a standard package with disaster recovery and guaranteed downtime of no longer than an hour. You can calculate the “usual” downtime for their business and the cost of that downtime and estimate how much you will save them by offering quick recovery.

You may be the MSP that can quickly dispatch a technician to the customer's location. This means the customers will receive service quickly because you have a wide network of technicians to drive to them.

Or, you can offer unique security expertise that no one else can, guarantee compliance with regulations and cyber insurance checklists, and lower the cost of cyber insurance.

Whatever your differentiation is, it should be clear to the prospects and customers. They should know they can choose anybody to support their infrastructure, yet your company offers them a distinct differentiation they care about.

Gilgamesh IT chose an integrated technology stack, which is standard for all customers. When customers sign an agreement, they must agree to get a standard image for their workstations and servers deployed during the onboarding period. Therefore, Gilgamesh IT can offer a much better SLA and slightly lower cost than the competition, as its technicians can serve significantly more endpoints than other MSPs in the area.

A good test for differentiation is a conversation with customers and prospects. If they understand the value of differentiation, you can pass it on to other prospects as you grow, and it works to recruit and retain customers for you.

Another good test is to replace your company's name with another company while you are discussing your differentiation and see if it works. If it does, it seems like the others can claim the same, and it is not a real differentiation.

3. The capabilities

It is easy to imagine anything, yet when it comes to reality, we are limited to what we have available. For example, you may envision being a leading provider of cybersecurity services to your customers, but you may not have any cybersecurity expertise in your team, rendering the vision nearly impossible to implement without recruiting new people or partnering with a cybersecurity services provider.

Your capabilities may include your team or people you know and can recruit quickly, experience and skills, technology and know-how, contact database, partners and customers. These capabilities support your unique differentiation, and you should either possess them or have a clear path to develop them.

For instance, if you have technicians spread all over the area, you can offer your customers on-site presence within a very short time. Having people with software development skills will allow you to develop scripts for automation and increase your team's productivity. Having relevant expertise in specific verticals and knowing specialized infrastructure and business applications may allow you to establish a leading position for those verticals.

The key to leveraging these capabilities is figuring out your available resources and planning how to leverage them for your business.

Let’s say our Gilgamesh IT team has a bunch of IT professionals with software engineering backgrounds and automation experience, and they can build tools that would automate deployment, testing, maintenance, and roll-back of the software and patches. The capabilities play along nicely with differentiating better SLAs than the competition. Better SLAs on issue resolution are critical for their chosen industry vertical.

When defining capabilities, one must be true to oneself. Being willing to offer services to a specific vertical, like healthcare or finance, yet lacking relevant experience, reference customers, and experts in the field willing to help means one lacks capability.

4. The focus

Opportunities and projects are flying around all the time. Some of them may seem interesting. Quite often, many seem interesting and easy to get. Yet, if you don’t clearly define which opportunities you take and which you say “no” to, you may end up chasing too many targets and getting stuck with the projects that will undermine your strategy.

From my almost twenty years of experience in IT, focus is the hardest part for nearly every organization. Customers seem similar, products look easy to build, large contracts with new types of customers look attractive. Yet, chasing multiple targets rarely leads to success, and deciding what to do and what not to do is crucial. With time, you may reconsider, as the strategy may have to change, addressing the market situation and changing economic conditions. Yet, from the beginning, defining your targets and clearly documenting what is outside your scope is crucial.

The focus may be on customer sizes, types of businesses, industry verticals, geographies, and IT infrastructure requirements. You choose targets that align with your opportunity, differentiation and capabilities and stick to them.

Let’s continue with the example of Gilgamesh IT. They have people with experience working with hedge funds and investment family offices; therefore, they decided to target only those customers. They have blueprints for the infrastructure, recommendations for the business processes, case studies and reference customers in the defined verticals, and their website clearly states that they offer services to those types of customers. From time to time, they get requests from customers from other industries and are tempted to consider. Yet, they know they have a sizable opportunity in the niche they selected; they have experience and standard operating procedures to serve those businesses. 

Saying “no” is hard. It does go against human nature. We want to be nice, and we want to grab whatever goes our way. Yet, saying “yes” to an opportunity at some point automatically means saying “no” to something else. You may pick up a few unusual and not strategic opportunities for you, and it will bring you some extra revenue in the short term. Yet, it will hinder your growth in the long term, as your resources will be distracted by supporting something new and solving new types of problems, leading to a reduction in the quality of service to your existing customer base.

5. The execution

Now, to the most down-to-earth part of the strategy – the execution. When you define your opportunity and differentiation, map out your capabilities, and define your focus, it is time to plan how you will execute your strategy. Below is a short list of questions that give you direction toward building and documenting your plan.

• Who is your team?
• What is the management structure and management cadence?
• What are the metrics you are going to track?
• How are you going to motivate your team to execute the strategy?
• How will you develop your team, technology, and business processes?
• What is your financial model?
• What are your standard operating procedures – help desk, incident resolution, escalation process?
• How are you doing sales and marketing?
• How are you providing customer support?
• Who is managing customer relationships?
• What is the cadence of working with customers?
• What is the schedule for software and infrastructure refresh?
• How often and what kind of reports do you provide to them?
• How will you ensure continuous learning in your team?
• How will you keep your market knowledge up-to-date and your strategy relevant?
• How do you educate your customers?
• What are the metrics you will track and the goals you will set?

The execution part of the strategy explains “what” you will do to achieve your goals. The parts of the strategy before that document “how” you are going to do it (differentiation, capabilities, focus) and “why” you are doing it (the opportunity on the market). Think about the specifics of what you need to do to execute the previously defined strategic directions, and make sure you document it and make everyone on your team aware of what they need to do to implement the company’s strategy.

Putting it all together in a financial model

Now, let’s continue with our Gilgamesh IT imaginary friends. Knowing what we know about their strategy, let’s try to put some numbers behind it.

Let’s assume they were right in their estimates of having 1,000 businesses matching the profile of a customer they want to serve. An average customer would be worth a $30,000 annual contract based on the competitive pricing in the location. Thus far, the market opportunity for Gilgamesh IT is $30,000,000 if they assume they have all of the companies in the region signed up as customers. However, Gilgamesh IT’s founder is realistic and believes they can get only 10% of the market; therefore, realistically, they are targeting only $3,000,000 in business.

This sounds good, but do they have the capacity to serve those customers? Based on their estimates, their customers have, on average, 26 endpoints. Thus, 10% of the market, or 100 customers, would have 2,600 endpoints to manage. Gilgamesh IT has only 8 technicians, meaning each technician should be capable of supporting 325 endpoints. Based on their current experience and given that Gilgamesh uses a standardized integrated tech stack, the technicians can manage over 500 endpoints per person. Thus, the target of 10% of the market is within their capacity. In addition, they may have time for additional customers if they can acquire more customers and time for one-off projects for those customers. Not to mention that by continuing to automate their tools, they expect to decrease the average time per ticket and free up more time for technicians to learn new technology or serve more customers, generating more revenue and receiving higher bonus payments.

Putting a financial model, even a simple one, behind the strategy is a way to validate thinking, make assumptions, and reconsider capabilities and capacity.

Wrapping up

Having a well-defined and well-documented strategy and aligning the whole team around it brings many benefits. It creates clarity regarding the business goals and the approach the business takes to achieve them, and it helps focus resources on what matters.

In the MSP business, it is very easy to get distracted, start picking up business from all over the place, and get swamped by one-off break-fix projects. While it may work for a business that just wants to maintain a particular lifestyle of the owner and the employees, it does not work for a company with aspirations to grow and successfully compete in the long term.

Building a strategy may be a frustrating exercise, and that is why many MSPs involve mentors and consultants to help them with that. Yet, by merely applying the effort and doing the exercise of documenting the strategy, you may identify the opportunities and gaps you have not seen before and turn your business from being a stagnating, not growing lifestyle business into a growing, competitive, profitable MSP.