Maximizing IT Service Delivery Profits During Economic Downturns
What does the current economic downturn mean to us as IT service providers? Businesses Traditionally are much more careful in their spending during times of economic uncertainty, and IT projects are typically among the first batch of initiatives to be placed on hold, as clients and prospects tighten their belts to weather the storm. It's important for us to identify this reality and shape our deliverables, message and value proposition accordingly so that we can take advantage of these opportunities.
Did that last sentence confuse you? If it did, let me explain my position. If we, as IT service providers, shape our message, delivers and pricing in such a way that we are seen as a cost-saving solution to clients and prospects that can mitigate their business risks and increase their efficiencies and productivity; and therefore net profits, we have a really good shot at not only weathering economic downturns ourselves, but actually growing our businesses during these periods. Sound crazy? Let's dive a bit deeper …
As a reactive IT service provider, we are most profitable when our clients are experiencing the most pain. If there is an outage or disaster event, we react to and remediate the problem, then bill our client our emergency response rate. Our clients are never prepared to pay for these reactive emergencies, so the negative impact to their cash flow and operations is very high. This is the reason many clients and prospects have a less than positive opinion of IT maintenance costs and reactive providers in general.
As a proactive IT service provider; however, our relationship with clients is the complete opposite, as we are most profitable when our clients are experiencing the least pain. The better we proactively manage and maintain their environments, the higher their efficiencies, productivity and profits. The more we integrate tools and technology, and utilize processes and procedures to remotely monitor and manage our client environments, the higher our staff's utilization becomes, increasing our net profits. So in this example, our business goals are in perfect alignment with our clients' – we are the most profitable when they are the most profitable.
So how can we shape our deliverables, message and value proposition to take advantage of the current economic downturn, and counteract its impact on the spending behavior of business owners who tend to tighten their belts during periods of economic uncertainty, and seek cost-cutting measures in order to "hunker down" until the storm blows over?
Well, in extreme conditions, these same business owners also look to staff reductions and outsourcing labor-intensive business functions such as HR, Payroll and IT Services, which is an excellent opportunity for the well-prepared IT service provider to capitalize upon.
With the proper messaging and an effective marketing and sales process, Managed Services Providers will have the most successful at winning business and increased profits in 2009 than system builders, reactive break-fix and professional services providers.
The second most profitable group will be professional services providers, followed by the reactive break-fix group, with system builders bringing up the rear. Let's break down the reasons why, and what can be done to improve the outlook of each group:
Of the four types of service providers mentioned (system builders, reactive break-fix, professional service providers and MSPs), the system builder's profit margins are generally the lowest, and worsening this initial disadvantage is the reality that orders tend to slow drastically during economic downturns. In order to increase revenues, system builders should look to diversify their deliverables portfolio with services, either by partnering with other providers or vendors to deliver services to their clients, or building the capacity to deliver these services themselves.
An attractive option for system builders is to partner with providers looking to deliver Hardware as a Service (HaaS), and work with a financing resource to underwrite this offering, while they provide the hardware and warranty service component of the deliverable, increasing their revenue opportunities .
Reactive Break-Fix Services Providers
This group's profit margins may be higher than the system builder's, but the challenge will be in maintaining and growing revenues while clients and prospects are trying to cut costs. Existing clients may not be quite so willing to authorize a billable service call, choosing instead to attempt to troubleshoot matters themselves, and in many cases exacerbating the issue and creating an even more expensive problem to resolve. This does not do much to engender goodwill with the reactive break-fix service provider, who must now attempt to collect on an invoice that has become a high, unexpected expense for their client.
In terms of winning new business, the responsive break-fix service provider has their work cut out for them, as business owners are less likely to switch vendors for critical services when times are tight, instead opting to "ride it out" with existing relationships , especially when there is not a compiling differentiator to tip the decision in the new provider's favor. In these situations, many proactive break-fix service providers resort to cut their rates in order to win new business, further eating away at their profits, and creating a service relationship that becomes increasingly difficult to sustain profitably.
This group of service providers must do everything they can to cut internal costs, and look to transition reactive support delivery and block-of-time agreements to long-term annuity-based service agreements. In addition, the ability to deliver services remotely must be seriously considered in order to reduce truck rolls and increase staff utilization. The discipline of implementing annual service rate increases; even if only in single-digit percentages, will go a long way towards maintaining and increasing profits over time.
Professional Services Providers
When times are good, delivery of professional services is an ideal way to win new client business, and create a consistently sustainable revenue stream as clients' business needs can be effectively identified and properly managed through quarterly business operations and annual activity road-mapping activities, allowing for budgeting and forecasting of regular infrastructure and service upgrades over time.
But, as mentioned earlier, unless critical to a business' operation or profitability, IT projects are among the first to be put on hold during economic downturns, so the professional service provider may find themselves resorting to cost-cutting measures themselves in order to weather the uncertain economic climate, just like the clients they serve.
While each of the previous groups, the professional service provider is perhaps the most easily adaptable to delivering proactive services through long-term annuity-based agreements, as they are already effective project managers accredited to adhering to strict process and procedure to insure project profitability. In this example, options include building the ability to deliver long-term services governed by SLAs themselves, or partnering with other partners or vendors to deliver these services to their existing, as well as new clients.
Managed Services Providers
Of all the previous groups stated, the MSP enjoys the highest profit potential of all, based on their ability to illustrate real cost savings to their clients and prospects. As business owners look to reduce their costs in 2009, the ability to outsource the management of their IT infrastructure for a fraction of the cost of maintaining their own internal staff for this purpose is very attractive.
With the right tools and technology, processes and procedures, the MSP will benefit from the highest margins for their services as well. Implementing and extending the capabilities of their existing technologies gives the MSP the competitive advantage to increase profits in 2009 and beyond. Maximizing the remote management and remediation capabilities of the MSP's existing tools and technology reduces truck rolls and increases the MSP's efficiency and utilization significantly, netting additional profits to their bottom line.
Strategies for all Service Groups
The key to maintaining and growing profits is to target the right clients. Typically, the more dependent upon technology a client is, the easier it is to sell them solutions that increase their efficiencies and productivity and mitigate business pain and risk. So we are looking for heavily technology-dependent clients and verticals as well as technology-strategic clients. Technology-strategic clients are those that see their IT expenditures as strategic investments that help them achieve their business goals. These are the best clients to have, and economic downturns will have a lesser effect on their IT purchasing decisions than it will on other clients. In fact, in many cases the opposition may be true, as these clients see these downturns as opportunities to gain a competitive advantage in their markets by investing in their technology and infrastructure.
Messaging and Marketing
True for all service provider groups, effective messaging and marketing is the key to increasing client opportunities, but what messaging is the most effective during uncertain economic periods? Messaging that conveys the following concepts seem to work well:
· Cost savings
· Improved efficiency / productivity
· Pain reduction
· Risk mitigation
A consistent marketing process is crucial to maintaining a consistent sales funnel of opportunities, and increasing marketing activities over historical levels is recommended in 2009. Look to vendor co-sponsoring opportunities and leverage marketing development funds wherever possible in order to defray marketing costs. Include multi-vendor participation for local events where your message can be delivered to large groups, instead of individuals.
In order to maximize service revenues during uncertain economic times:
· Reduce internal costs wherever possible
· Look to tools and technology, process and procedure to increase efficiencies and utilization
· Partner with other providers and vendors to deliver additional valuable services to clients
· Target technology-strategic and technology-dependent clients and verticals
· Build deep client relationships as your clients' Trusted Advisor and outsourced CIO to ward off competitive threats
· Leverage providers and distributors' services and support offerings, as well as other benefits such as facilities tours and product and solution demos and Marketing Development Funds
· If your client base rates less than 26 users, move up to the 26-100 user space
· Add financing as an option to each and every proposal