Most businesses are limited by the initial investment which is required to develop the working structure of the organization as well as to create its physical elements. Managed Service Providers (MSPs) in the IT industry used to face the same dilemma initially, as a lot of capital was required to establish physical resources such as network centers, servers and database systems that form the backbone of most IT services.
Recently, MSPs have new partners available to them that allow them to overcome their limited financial capacity to rapidly expand business from the first day onwards. This allows them to spend more in organizational hierarchy as well as in developing more complex products and aggressive marketing strategies.
Here, we compare the traditional model of IT services which have front end costs and compare it with the new model where third party hardware services are available for hire.
The analysis of a traditional MSP shows that the business starts with investing a great deal in static resources such as establishing a Network Operating Center (NOC) and similar facilities. There are also costs that are attached with recruiting the talent required to take care of these network facilities, although there is currently no revenue stream to cover their costs.
The business therefore, starts with a large negative offset and already has financial strain. As the MSP finds clients, it is able to use the hardware that it has, to take care of work each day. The organization also has to invest in new resources whenever it wants an expansion in the future or simply for maintaining the current network.
A simple look at the initial investment and the average time taken to reach customers reveals that most traditional MSPs run in the negative at least for the first year. They gradually start to make profits as customers come on board. The business has a lot of fixed costs that it has to pay regardless of receiving any business.
Business expansion is also difficult in this model as it requires reinvestment to buy new devices as well as more experts to maintain the growing network. The fixed operational costs are extremely corrosive in this model and dampen the profit making capability of the industry. These problems are reduced though, when we take a look now at the new model that MSPs can use.
Now, if we compare the performance of modern MSPs who can form a partnership with an existing RMM/NOC service provider, we find that the dynamics of the business costs change completely. Third party services are usually based on the amount and time of resource used, which means that there are no capital requirements for taking these services from the other company.
An MSP which employs a third party NOC service can start its business operations from day one. These services are availed in exchange of a fee, which is far cheaper than having to install all the network services. The business quickly starts to make money as clients are found and in all probabilities, a partnered MSP will achieve a positive balance book in a maximum of two quarters.
It saves costs not only in terms of not buying the equipment, but it also saves money because very few experts are required to manage the offered services as the upkeep of physical devices is the responsibility of the NOC partner.
This presents a low risk model that allows the MSP to think innovatively about the services it can offer because it is sure that it can support any new service by simply renting out more utilities from their technology partner. This model reaches a positive cash flow very quickly and it has a much more sustained business structure.
This business model is excellent for expansion as well. Once an MSP starts to get more clients, it can develop better service models and expand by simply making a new contract to get more physical resources to support the new clients. It offers better profits and there is little chance of failure even if the number of clients is reduced.
All businesses have variable expenses. They are difficult to control, but the real difference that appears between the two MSP service models is that you can confirm the fixed expenses in the third party technology partnership model. It is achieved by paying a fee to the partner who allows a business to have complete knowledge of its expenses.
This means that it is easier to control these known expenses and ensure that all the revenues that are received from the clients produce a profit for the organization. These new MSPs have their entire focus on product development and generating excellent customer relations. The first model depends on the greater utilization of the already available resources.
The traditional MSPs therefore, direct their efforts on both product development as well as an efficient use of the organizational resources. This divides the attention of the organization and results in reduced efficiency.
Outsourcing in this regard is quite helpful. An MSP can also use a hybrid model where it establishes a small amount of physical resources while also partnering with a third party for additional physical IT capabilities.
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