Tackling your Questions on Building, Growing or Scaling your IT Service Provider Business.
I’m Terry Rossi and in this episode of the IT Provider Network podcast, I want to share with you some of the feedback I have received on the show as well as some of my opinions on the questions you’ve sent in. We are going to talk about getting started, sales compensation, contracts and more.
Crazy week this week for me. It was Thanksgiving week in the US which means my company was closed Thursday and Friday, but it also means that many of my customers are closed too so we had a bunch of projects to be done during the downtime.
I had two large-scale data movement projects to do myself. One was a multi-location lift and shift to the cloud for a tier one automotive manufacturer and the other one was a series of big database dump and loads for over the counter pharmaceutical manufacturer.
I started on Wednesday night, the day before Thanksgiving and I am just finishing today Sunday. To make matters worse, I am sick. I have the worst type of illness known to man… the man cold. Misunderstood by most females, the man cold can be totally debilitating.
I suffered through but it wasn’t easy 🙂
I hope everyone in the US had a great holiday and enjoyed a little downtime and that you’re ready to hit it hard this week. Remember you have 34 more days to kick it in the ass for 2017 and then the year is over.
Questions from Steve in MN -Starting an MSP
Our first couple of questions today comes from Steve in Minnesota – the first one is
What advice would you give someone who is working a full time IT job who is looking to break away and start an MSP?
A couple of things come to mind right away. First is to understand that it is a big risk. According to Bloomberg, 8 out of 10 entrepreneurs who start businesses fail within the first 18 months. A whopping 80% crash and burn. That’s not great odds but it doesn’t mean you can’t beat them. Starting as a solopreneur with a skillset in IT it’s pretty easy to take the risk because if you really have chops but somehow still fail you should easily be able to get a job again.
If you do decide to bust out I would look for to secure a key client. The client can be your sugar daddy. If you work for an IT provider now don’t even think about poaching their clients but go find one on your own. Ideally, this client should be able to cover your initial nut, your bills, and keep food on your table. I don’t know you Steve but chances are you are a techie and you aren’t going to have any problem with the technical work but you really will need to force yourself to do the non-techie type work. In particular SALES.
You can’t launch a successful business sitting in front of your computer. You need to force yourself to get out and meet people, ASK for business, give away services to prove your worth but then ASK for a deal. Ask for the business. Make sales and marketing a consistent part of your week. Schedule it and then execute.
If you are buying tools, go for cloud-based monthly services. I think you can get Connectwise Manage monthly for as little as a 2 user commitment. Heck, don’t even buy any tools, use a master MSP like Continuum or Collabrance. I’ll put linked to all of these services in the show notes at the itprovidernetwork.com/episode24
And lastly, don’t forget about your silent partner Uncle Sam. I have seen many soloprenuers think that if they bill $100 that’s $100 profit. Sorry, Charlie, you have another hungry mouth to feed. The mouth of the government. I’m not a financial advisor but if you put away 30% of your revenues you should be in decent shape come April 15th.
There is way too much to go into but let me just remind you of a couple of important things.
- Corporate Structure. Start an LLC or a Sub Chapter S corporation if you are in the US. I am not sure of the structures in other parts of the world but make some entity to protect yourself.
- Especially Professional Liability Insurance or E&O Insurance. E&O stands for errors and omissions. Make sure you have this to protect yourself. At the end of this episode, I will show you how to save some money on this insurance and take advantage of a great deal.
- Get some contracts in place. These contracts help set the ground rules for whoever you are doing business with. These could be for employees, vendors or partners, and most importantly customers.
And this brings me to Steve’s second question:
Is there a resource to obtain general MSP contract forms?
YES! There are some books, courses, and resources for contracts.
- The book “Service Agreements for SMB Consultants – A Quick Start Guide for Managed Services” by Karl Palachuk is a little dated but still provides value.
- The book “A Guide to Selling Managed Services” also a little dated but includes 18 templates and a CD with a pre-recorded webinar.
- The book “Information Technology Consulting and Other Professional Services Agreements Line by Line” written by a lawyer
The book “The Tech Contracts Handbook: Cloud Computing Agreements, Software Licenses, and Other IT Contracts for Lawyers and Businesspeople” THE TECH CONTRACTS HANDBOOK is a how-to guide for drafting and negotiating IT agreements, written in simple English.
If you want to purchase a product. Robin Robins sells the “The Ultimate MSP Contract Kit” which couples agreement templates written by a lawyer, Greg Phillips, along with some prerecorded webinars and a chat group. The product runs around $600 so that’s the most expensive recommendation but the only one that I can actually vouch for. We use the agreement framework from this kit as the basis of all of our managed services and cloud agreements.
Whatever you do please have an IP or Technology lawyer review them. I can recommend Thomas Stanton of Stanton IP Law. Thomas will review or create from scratch MSP contracts. He also works with cloud contracts, software and vendor agreements. You can reach Thomas Stanton at stantoniplaw.com
Steve, I hope this helps and good luck! Keep me in the loop if you break out on your own!
Question from Jonathan in CT – Compensating Hunters
My next question was from Jonathan in Connecticut
We are trying to remodel our sales compensation plan. Our current plan is too cumbersome to manage. Do you have any recommendations on the outline of a plan that has been successful for you or have a recommendation for someone I might be able to speak to about their plan?
I asked Jonathan about his sales department and he gave me the following additional information.
We have three salespeople, they are each in charge of making their own cold-calls, drop-ins, sales presentations, and getting signatures on agreements. Once the sale is closed they have limited responsibilities unless there is a collection issue or an expansion issue.
Jonathan this is a topic that I often struggle with. Comp plans can get complex easily and even if they are simple it still is difficult to design a plan that accomplishes what the company needs
Taking Jonathan’s company for example. His salespeople are essentially hunters. They are responsible for everything up to the onboarding then they are basically out of the picture. So what should they be compensated for? The easy answer is landing new managed services clients but it is more complex than that. They need to land new manage services clients that are:
- First and foremost profitable. They need to sell at the right price and at the right profit margin
- A good fit for your organization. Since these salespeople are not involved in account management. They are essentially not in the picture after the customer is onboarded you really need to make sure that the deals they land are good deals from good clients that can benefit from your services and pay your bills!
- The sales person needs to sell what you actually deliver. If the expectations set by the salesperson are not the same as the reality delivered by your service team then you are setting yourself up for a lot of churn…usually after you have paid out the commission.
In our company, we are moving to a hunter/farmer type of sales structure where we will hand off the client from the outside sales person to the account manager after they are onboarded. I don’t have these structure yet but we are actively seeking to flesh out our team.
For the last 10 years, we have had an inside/outside model where our inside salesperson was dialing for new appointments and our outside salesperson was responsible for everything else. The problem with that model is that when you grow the outside salesperson has too much to do and could easily spend the bulk of his time churning out quotes for existing clients…and failing to bring in new MSP clients.
So back to the sales comp plan. Here is what we have done in the past and be warned it is a little rich in my opinion.
How our commission plan worked for the first 10 years.
In addition to a good base and full benefits we paid out on the following:
- 20% of all new managed services contracts. 20% of the first year contract value paid out over the first 3 months of the contract. If we land a $5000 a month contract for 3 years we pay out three payments of $4000.00 for a total of $12,000 commission. This is based on an ACV or annual contract value of $60,000 and a total contract value of $180,000. This is based on the quoted contract and doesn’t adjust as the clients’ bill goes up (or down) and we pay it over 3 months so we don’t create a cash flow problem.
- 10% of any projects. This is how we compensate for one time projects. This is based on the quoted project amount.
- 5% of hardware and software sales – Provided we have a minimum amount of profit in the sale we will pay out 5% on stuff we resell.
This was the plan for the outside salesperson. To compensate the inside salesperson or the telemarketer we simply paid him 10% of the outside salespersons’ commission. All boats rise together.
Going forward the outside salesperson will be making less of a percentage. He or she will be taking advantage of the big investments we’ve made in the process, and in content and digital marketing. In addition, he will not be responsible for account management so he will strictly be a business development “hunter”.
The account manager will be responsible for meeting our revenue goals of selling projects (40% of MRR) and hardware/software (20% of MRR). He will be compensated at the 10% and 5% level.
The sales manager will also get a little taste of what his team provides to the company but I haven’t been able to devise that scheme yet.
One other thing about sales comp plans, it is easy to give more if you haven’t made the comp plan rich enough, it is quite difficult to reduce commission amounts for a good performing salesperson if your plan is too rich.
Some portion of variable comp is definitely the way to go but try to keep the sales team hungry to land new business. You will never make your revenue goals in the installed base UNLESS you have new clients flowing into the MRR pool.
Jonathan, I hope this helps. I bought two books on Amazon that dive into sale compensation. You might want to check them out.
- “The Complete Guide to Sales Force Incentive Compensation: How to Design and Implement Plans That Work”
- “Compensating the Sales Force: A Practical Guide to Designing Winning Sales Reward Programs, Second Edition”
If put links to both of these books in the show notes at the itprovidernetwork.com/episode24
The plans in these books are not simple plans but they do give you lots to think about and formulas to apply. Good Luck Jonathan and if you’re comfortable with it please share your new comp plans with me.
Our next and final question for episode 24 is from Fred in Ontario.
Question from Fred in Ontario – Where to Start
Your show has really opened my eyes to the big blue sea that is the MSP space.
I’ve really enjoyed all the business development/management content. I love learning about how I will work ‘on’ the business rather than ‘in’ the business. Keep up the great work.
It seems there are a plethora of services a company could provide from end-user device management to backups to cloud infrastructure hosting.
Wondering if you have any way to categorize these. Where does a 1-5 person shop start?
Which services are better for more mature providers? Which services provide a solid foundation for recurring revenue vs ones which are a loss leader.
Smarter people than I are thinking about this subject of how to categorize and what to tackle first. The cliff notes version concentrate on what you are really good at and also passionate about.
I referenced Arnie Bellini’s keynote in Episode 23 of the IT Provider Network podcast. I recommend you listen to Episode 23 of the podcast and click on the link to Arnie’s keynote on YouTube. You can find the podcast and the youtube link at the itprovidernetwork.com/itnation2017
Regarding your question on which services are more suitable for more mature providers. We used to have a spreadsheet we used to make these types of decisions. We called it “The Death of PICS Spreadsheet”. It was the nineties version of “The RiskMaster” used in the Ben Stiller movie Along Came Polly.
Fred, so what I think you should avoid until your company is more stable is anything that could easily bring you done. I would avoid things you don’t fully understand. For example, don’t take on a big Linux client if you are a windows only guy. Don’t say you can implement SAP if you are googling it to find out what SAP is.
The other thing I would avoid is “subjective” type of work. Anything where it is not 100% clear what the offering is and what the expected deliverable is. Things like website design, custom software, even SEO or PPC services. Anything that the customer might have a valid reason not to pay you and leave you with a cash crunch.
Hope that helps Fred. Good luck getting ramped up and thanks for listening!
Thank you, Thank you, Thank you
Before we wrap up episode 24 of the IT Provider Network I wanted to thank some people that are inspiring me and helping the show by spreading the word or using affiliate links.
Please note that the only affiliate links you will find here are for products I either use or would recommend.
First, we had three new Coinbase users this week. As I am writing this bitcoin has just crossed 9000 a coin. It was 7300 dollars when I recorded episode 23! HOLY MOLY!
Congratulations and thank you to Andre Dowding Michael Hamilton and Greg Harris for signing up for a new Coinbase account using my URL startbuyingcoins.com. This isn’t some crazy multi-level marketing thing but if you open an account with as little as $100 with Coinbase they will give you and I both $10 of bitcoin. You don’t need to buy a whole bitcoin you can by just a portion of one. You can also buy Etherium and Litecoin on Coinbase. Easy to use and it is going through the roof.
Thanks to the Vendor Community
Second I want to thank the vendors in the space that are tuned into the show. Founders and employees of Connectwise, Marketopia, ReframeYourClients, ID Agent and more have all written me with words of encouragement. I appreciate you listening and the free press you have given me and the IT Provider Network.
Thanks for the Reviews!
I also want to thank Jeff Prouse, Josh Risser, and John Kelsey for your kind reviews. I love love love seeing new reviews of the podcast. IF you have a couple minutes I would appreciate a rating and review. Makes my day!
For You ,For You, For You
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That’s it for episode 24 of the IT Provider Network podcast. I look forward to your questions and comments for the next free coaching episode. Until then have a great day and remember We Are IT! #WeAreIT
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