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The Hybrid Business Model

This digital white paper examines the business model that meets evolving customer technology demands

What Business Model Will Take You Into the Future?

(Download the PDF version here.)

There’s an important shift taking place that will affect your business forever. If you’re a Unified Communications provider or IT VAR and you built your business on selling product-based solutions, you probably already feel this shift. Cloud and subscription service models have fundamentally changed the way technology is being delivered today. With those delivery model changes comes a change in compensation for those services. The days of receiving a single large payment for your work are going away. Customers have evolved and so have their expectations. As a result, you must adapt your business model or run the risk of putting your business in a dangerous position concerning its sustainability. Thankfully, there is a clear path that can lead you and your company to unimagined levels of prosperity and profitability.

In this paper, we’ll discuss the changes taking place in the IT industry and how you can adjust your business to deliver a hybrid of products and services. It is critical to balance one time sales and recurring revenue — without crippling your cash flow. We’ll detail the services and solutions you can deliver to customers, highlight common mistakes to avoid and discuss the changes you’ll have to make to your business. In the end, you’ll have a playbook to help you transition to a powerful new business model that can lead to profitability and sustainability.

 

The Hybrid Business Model

The hybrid business model is a mix of traditional product sales with the addition of hardware, software, cloud offerings, and other services via subscription. Customers are contracted to pay you a monthly fee for the delivery of these ongoing services. This results in a steady, recurring revenue stream for your business on top of any project-based work you perform under the old model.

Why Adopt the Hybrid Business Model?


Thanks to overall commoditization, increased competition, and the industry pricing itself to the bottom, product margins have evaporated. In many places, new powerful cloud solutions have replaced the need for on-premises infrastructure. What will things look like five years from now? We won’t see a shift back to product sales. Rather, the cloud will grow in power and popularity, and remain a relevant option.

In addition, many VARs have tied their fates to one or two vendors. They are essentially acting as sales agents for that vendor. What happens when that vendor goes out of business and your line card disappears? It’s time to build or strengthen your book of business with monthly recurring revenue (MRR).

“Get comfortable being uncomfortable.
If you do not change, someone else will eventually consume your client base.”

Matt Kanaskie, Product Manager Marco Technologies

However, although there are plenty of MSPs (managed services providers) and born-in-the-cloud solutions providers who relentlessly pursue nothing but monthly recurring services revenue, it’s unrealistic to expect traditional Solution Providers to make such a drastic change to their organization.

As we’ll discuss, the changes are complex and require quite a bit of work. Additionally, unless you are flush with cash reserves, making such a dramatic change would create significant cash flow challenges for you. The most prudent approach for established VARs is to adopt a hybrid model to ease into offering recurring revenue-based solutions alongside traditional sales.

“Recurring revenue business models are not a little bit better than non-recurring models. They are 10 TIMES better.”

Jeff Bussgang Flybridge Capital Partners

4 Benefits of Hybrid Approach

Once you begin adding solutions that provide MRR, you’ll begin to experience some or all of the following benefits:

1. Customers See the Value in Monthly Services


The buying patterns of your customers have changed; in particular, as younger generations get more involved in running businesses, they want to consume technology differently. Today, we live in a subscription economy where many decision makers are used to paying monthly fees for services. As all industries look to control their costs, shifting traditional costly IT expenses to monthly payments is more manageable and appealing.

Additionally, as we’ll detail in a later section, many of the services you can provide under this model give your customers a higher-quality level of service and solution reliability than they currently experience. There is a peace of mind provided to customers under this model, as is shown in the survey results of over 500 IT Buyers views on buying technology.

Download the Survey Findings

2. Level Revenue Peaks and Valleys

If you feel the recurring stress of needing to make enough sales to cover payroll every month, this business model is ideal for you. As you build MRR under a hybrid model, you’ll notice the peaks and valleys of your traditional sales model leveling off and you’ll see a more stable, predictable cash flow. Not only does MRR allow you to rest easy knowing that expenses are covered, long contracts ensure you don’t have to worry for months or even years.

3. An Improved Lifestyle for Yourself

Many business owners wear multiple hats, including that of lead salesperson. Working 70+ hours a week to keep the lights on is tiring. With steady MRR, business owners can free up their time for family or to re-dedicate themselves to other aspects of the business.

4. Increased Business Value

Many traditional VARs are shocked and disappointed to learn their business isn’t worth what they think it should be after dedicating years, even decades, of blood, sweat, and tears into them. If, or when, you attempt to sell your business or merge with another organization, there are a number of factors that will dictate the value of your company.

Perhaps the most heavily weighted factor is the MRR you’ve earned by providing subscription services. Merger and acquisition specialists will talk about multipliers. The multiplier used to value your company will differ depending on the types of revenue you have. Product sales have a much lower multiplier than recurring services. This makes sense when you consider that a product sale-based technology company really doesn’t have much to offer a prospective buyer. Sales come and go, and there is no predictable way for a buyer to estimate what they can get from the company. Traditional Solution Providers with mostly product sales will find their business isn’t very valuable at all.

However, having a book of recurring revenue contracts is predictable and, therefore, more valuable. The multiplier for these companies is much higher. That said, the details of MRR contracts can greatly affect the multiplier. For example, having a book of business made of three-year contracts is more valuable than month-to-month contracts. If those three-year contracts have easy outs for customers to cancel for any reason, they might as well not exist. Overall, buyers want predictability. Adding service revenue is the best way to get a better return for your business.

Take a look at the infographic case study of one business, NAC Technology Group, that saw huge results after making the switching to the hybrid business model and expanding their monthly recurring revenue contracts.

“We’ve been able to increase margins, monthly recurring revenue, and commissions paid to our team.”

Travis Phillips, CEO, NAC Technology Group

Download the NAC InfoStudy

Adding Services to Your Offerings

Once you begin adding solutions that provide MRR, you’ll be able to expand your offerings to include some or all of the following:

 

Remote Monitoring and Management

A staple of every MSP, Remote Monitoring and Management (RMM) takes your current reactive support offering and makes it proactive. Rather than waiting for problems to occur, you use an RMM tool to keep 24/7/365 vigil over your customers’ IT. Monitoring can include servers, desktops, mobile devices, printers, and more. The system can alert you to things such as hard drive failures, low disk space, failing memory, and even low toner. The idea is that problems are found and fixed (using remote tools) often before the customer is aware. Customers pay for the monthly service because it gives them peace of mind that things will work as they should. A benefit to you is that RMM tools can do the work of many people, allowing you to be more efficient and profitable with fewer people. RMM providers have different cost structures, but, generally speaking, expect to pay per device being monitored or per user.

 

Business Continuity (Backup and Disaster Recover [BDR])

Typically the first service offered outside of RMM, BDR or business continuity solutions ensure that any sensitive or important customer data is backed up. However, BDR isn’t simply about storage of data. A key component of BDR is the ability to restore data as quickly as possible to minimize downtime. Additionally, today’s modern tools include validations to ensure the data is backed up. Today, it’s common to see data backed up to local storage and mirrored to cloud storage as an additional precaution. Some BDR providers also offer appliances that slip into the server rack and provide additional levels of redundancy. Costs will vary by BDR vendor.

 

Cybersecurity

One of the most significant IT trends today is centered on the security of customer data. If you operate in heavily regulated verticals such as healthcare, banking, or even retail, you understand the importance of data security. Regardless of the industries in which your customers operate, the proliferation of ransomware means no company is safe. Criminals have learned that every business has valuable data, and many are willing to pay the ransom to decrypt. Today, you can provide security services that include constant monitoring of customer endpoints to protect against such threats.

Hosted Email

As businesses look to save money, shifting email from local servers to the cloud is appealing. Offering Hosted Exchange is a great way to get started with recurring revenue.

X-As-A-Service

Today, everything can be offered as a service — infrastructure, solutions, security, hardware, software, communications, and more. Take a solution and sell it for a monthly fee. There are many ways to do this without breaking the bank.

 

In all of these cases, it’s important that you ease into this model and figure out how to get involved strategically. For example, rather than attempting to establish your own private cloud service, you might be better off reselling someone else’s established white label service. There is a variety of cloud providers that allow you to own the customer relationship and bill the customer under your name. Additionally, rather than build your own NOC (network operations center), you can use the NOC of a master MSP or take advantage of an RMM tool that includes NOC services.

For telecom-focused VARs, it’s possible to sell a cloud solution with an up-front equipment sale (endpoints), plus monthly recurring for the associated network and dial tone. With the right financing arrangment, you can offer your customers a monthly payment plan for endpoints while you get paid up front.

As you pursue adding services, the final bit of advice is to try to marry your core competency to a recurring revenue approach. Most likely everything you offer can be offered as a service today. What makes sense for you and your customers will depend on your capabilities and desires, as well as your customers’ needs.

HaaS Alternatives

Traditional Hardware as a Service or HaaS calls for the Solution Provider to purchase the necessary hardware, software and licenses up front and then recoup the cost over the course of the HaaS agreement. Many times, this ends with the Solution Provider running out of cash to keep buying equipment. However, Solution Providers have found creative alternatives to get around this issue.

 

1. HaaS backed by a Bank or Credit Card

Some Solution Providers partner with a bank to enable them to purchase the inventory needed to rent to customers. However, they can run into issues with scaling if the bank places a cap and they still bear all the financial risk.

 

2. Manufacturer-Based HaaS

The Managed Service Provider pays the manufacturer directly on a monthly basis and then marks up the cost to rent it to customers. However, there are often other hardware and software elements left out of the monthly payment.

 

3. Lease the Hardware

Leasing lowers the Solution Providers up-front costs and the finance company takes on any risk if your customer stops paying. There are some trade-offs, like the customer pays two separate invoices and there isn’t as much control on what happens at the end of the lease.

 

4. Hardware as a Rental® (HaaR®)

HaaR is similar to a traditional lease, where the Solution Provider is paid for the hardware, software and installation up front. They do not assume any of the financial risk. All payments the customer owes are rolled into one invoice and there is full control when the lease ends. Generally, the customer upgrades without significantly changing their monthly IT spending.

Download to Alternatives to AVaaS Guide

However, although there are plenty of MSPs (managed services providers) and born-in-the-cloud solutions providers who relentlessly pursue nothing but monthly recurring services revenue, it’s unrealistic to expect traditional Solution Providers to make such a drastic change to their organization.

As we’ll discuss, the changes are complex and require quite a bit of work. Additionally, unless you are flush with cash reserves, making such a dramatic change would create significant cash flow challenges for you. The most prudent approach for established VARs is to adopt a hybrid model to ease into offering recurring revenue-based solutions alongside traditional sales.

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