I recently sat down with Adam Mayo, NetSuite Industry Principal for Services, to discuss the risks and benefits of adding a new revenue stream – specifically a new managed service revenue stream – to your business.
Evan Heby: What are some of the growth trends for the professional services industry in 2019?
Adam Mayo: A growing trend amongst Professional Services organizations is diversifying their business by including multiple offerings to their client base. In particular, Managed Services has been a focus of these organizations to provide high quality value to their customers as well as a recurring revenue stream not available from a traditional services model. These organizations have a vision for future growth while realizing the challenges with opening a completely new delivery model. Many firms are asking not only if they are ready, but if they are equipped to grow the business in this way.
Heby: Why are firms moving towards a managed services model? Can you give insight into the differences / benefits between a traditional model vs. a managed services model?
Mayo: Traditional consulting organizations typically bill customers on a contract basis such as Fixed Fee or Time and Materials for services delivered in the form of a project. They quote a project, sign the contract, deliver the work and get paid. A services organization selling products and services such as an IT value-added reseller follow a similar model for services. They may resell products receiving a margin on the sale and provide complimentary services to the products sold. Additional revenue from the client relies entirely on selling new products or project work. The question they are asking; how can we achieve a more recurring source of revenue?
Heby: It sounds like, the biggest gap services businesses are trying to close is to increase recurring revenue. You spoke briefly about IT VARs in your last answer, can you talk about how their models are changing?
Mayo: As I mentioned earlier, businesses such as IT VARs traditionally resell products and services. They are now building out their teams and capabilities to build a more complete offering for their customers. Not only are they reselling network equipment and the service to install it, they will offer to maintain the network as a managed service maintenance contract. Their customer pays a recurring fee to get a higher value service of network maintenance that the customer cannot provide themselves. The IT VAR now has a consistent revenue stream with a recurring contract that will extend for months and years.
Heby: What about other types of services organizations aside from IT VARs – like traditional consulting firms?
Mayo: Beyond IT VARs, traditional consulting organizations are looking to provide their own managed service offerings. How does a company typically focusing on project work turn that into a recurring model? Like VARs, consulting organizations have also focused on a high value offering to their customers: On-demand services and support. These offerings allow the customer to have a direct line to consultants and support staff for any issues they may encounter. That on-demand access is worth the premium to the end customer to get ahead of the line when issues may arise on a project or product being supported by the consulting organization.
Heby: How do businesses hoping to increase their recurring revenue make the transition to managed services?
Mayo: As these services organizations look to grow the business with managed services they are realizing the complexities associated with supporting the new model. Often, they are hiring dedicated sales, delivery and support staff to provide the new offering. Systems must be in place to handle business operations complexity such as sales processing, recurring billing and appropriate revenue recognition. An IT services firm may create a Network Operations Center (NOC) with dedicated space, equipment and resources to deliver real-time monitoring and support. The value is there for services businesses to offer Managed Services. However, a well thought out sales and delivery model must be built or acquired to ensure success.