Should Managed Service Providers Stop Selling Hardware?

Hardware and MSP Valuation

It should be a well settled issue that hardware and software do little to nothing in terms of helping improve the valuation of a managed services business. Other than helping with net income or EBITDA, buyers will typically discount most or all of a MSP's hardware resale revenue. The reason for this is it is very difficult to predict if that revenue will repeat in the future when the new buyers have ownership. So, if you do sell hardware or software, you need to closely evaluate how you are doing it and what that revenue does to your overall valuation, not just your bottom line.

Hardware as a Service

Fortunately, there are some methods for incorporating hardware/software revenues into a MSP business that do not have a negative impact on valuation. Hardware as a Service (HaaS) is one of those models.

HaaS has been around for many years, with roots in leasing. The essence of HaaS is the bundling of hardware with a service component whereby the hardware can be tied to a service agreement. This achieves the simple effect of making the hardware a recurring and predictable revenue.

Some of you may be thinking this is a great solution to your hardware business, and it is. However, you should be aware of a few things. Most notably, some jurisdictions may have tax laws that attempt to tax that revenue because the managed service has been bundled with hardware or software. You should consult with your accountant to make sure your HaaS program is structured properly to minimize your tax burden.

Separating Hardware

Some MSPs have learned that selling managed services can be difficult when the salespeople have hardware to fall back on. The common scenario is when promoting a managed service offering, some sales people will revert back to hardware sales because it is easier. This could happen for a number of reasons, including the sales commission structure, culture of the company, sales team structures, etc.

For this reason, some MSPs separate their hardware into a different division, sometimes even a different company. This can help segregate hardware from managed services, keep sales teams focused on what their core objectives are, and keep the managed services division as a pure services entity.

Cloud

Cloud is actually revolutionizing hardware and software for MSPs. While most customers look at cloud as the ability to consume services without hardware or software ownership, MSPs are realizing there are tremendous opportunities in cloud, especially private and hybrid cloud. MSPs who are not satisfied with merely reselling a public cloud offering are turning to hybrid and private cloud solutions. In these scenarios, the MSP will monitor and manage the cloud environment, regardless of who owns the underlying cloud infrastructure.

For some MSPs, selling or acquiring hardware and software can be necessary to delivering these cloud solutions. The only primary difference from a VAR model is that the MSP is internalizing or "consuming" the infrastructure and offering the cloud solution.

Summary

While hardware was a divisive issue in the early days of managed services, mostly due to the problems it caused for VARs who were migrating to managed services business models, today's MSPs are finding out that hardware can not only be useful, it is necessary for some cloud service delivery models.

Wherever your cloud or managed services business model may be today, hardware is not something that is a thing of the past. Hardware is important to incorporate into your business and must be done in the right way!