Managed services organizations have never had a problem with technical capabilities or genius. I can account for that firsthand. The work managed services providers do for their customers is really, on the whole, quite amazing. Not to mention, often under appreciated. To bring together disparate technologies, people, and processes and make it all work for not just one, but many customers, is a testament to the organizational prowess and power of efficiency most managed service providers wield.
This same proficiency with technology, however, does not always hold true for financing skills. More specifically, the managed services profession has some work to do when it comes to financing growth to ahieve greatness. I’ll explain.
Any average MSP can continue operating at a safe level, growing at modest rates annually, retaining more than 85% of their customers, making minor improvements to their service delivery capabilities. Whether you call these lifestyle companies or just normal MSPs is up for interpretation. The point I’m making is there are plenty of examples of MSPs who maintain a viable managed services practice.
The problem with this is that many of these MSPs do not achieve stellar growth, or at least growth that would be viewed as fundamentally improving the quality of service, the number of customers under management, or the profitability of the firm. This is a problem that needs to be solved at a professional level. In my opinion, this problem is not solely due to the MSPs, but can also be blamed on a financing industry that just does not seem to understand the basics of managed services.
Banks
For many MSPs, banks are the first lender of choice. They can provide lines of credit that are crucial for MSPs when they find cash flow to be constrained, offer financing for the purchase of buildings, and in general, make life easier for many MSP owners and operators. The problem with banks is while they enjoy close dealings with the principals, they often do not fully understand how managed services firms operate. The distinction between a value added reseller selling hardware (which the bank does understand) and a managed services firm selling IT services on a contract basis (a more complex notion for some banks) is an important one to grasp and many banks likely do not understand it or cannot effectively change bank policy in order to make effective loans to MSPs.
Private Equity
Venture capital and private equity firms have long been involved in the managed services profession. The early stage MSPs would never have made it off the ground were it not for these firms making their capital available. These firms, however have somewhat limited function during the intermediate growth phases many MSPs find themselves in after a few years of operations. Because these firms frequently like to have involvement with the MSPs to whom they are lending, many MSPs are reluctant to take private equity money, either for this reason or because they do not want to be tied into a non-traditional loan vehicle.
Angel Investors
The least formal of all the investors mentioned angels tend to be friends, family, or other business partners who have less formalized motives for making loans. While this may be ideal for MSPs, the trouble is there aren’t a lot of these types of investors around. Furthermore, these investors tend to get involved at the beginning of a MSP lifecycle, but tend not to be relevant throughout the rest of the MSP growth phase.
The Problem
The problem we need to solve as an industry, and why I provided this summary review of various lenders is because MSPs need to seriously address the issue of cash flow and growth. There are critical stages in the lifecycle of any MSP where reinvestment into the company is necessary in order to achieve sustainable growth. These investments come in the form of more staff, new technologies, and the often hidden human resource costs related to most growing organizations.
MSPs need access to better lenders. Period. Lenders like banks need to understand the real value of MSPs and how they are different from other IT firms. This needs to happen in order for the many thousands of MSPs out there to grow.
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