Paul Dippell: Business Value Creation for MSPs, VARs

Service Leadership Inc. CEO Paul Dippell
Paul Dippell

How can VARs and MSPs create business value -- and raise their overall company valuations? Service Leadership Inc. CEO Paul Dippell is describing business value creation during HTG's IT Channel Partner Summit in Omaha this morning. Here's a recap.

Among Dippell's key opening points:

  • Even large solutions providers lose money on services if they mismanage their businesses. So don't be misled by large service provider revenue claims.
  • All you need to do to get into the IT services business is "lose your job in an IT department," he quipped.
  • By the time an IT service provider grows to five people, "scaling" the business becomes really, really difficult because most of the entrepreneurs lack formal business training.

> Related: Join Paul Dippell, Teanna Spence and ChannelE2E for our Sept. 22 Webcast: 2017 Sales Compensation Plans for VARs, MSPs and CSPs

VAR vs MSP Profits

  • Dippell doesn't get too caught up in company monikers (VAR, MSP, CSP) and instead tracks each service provider's predominant business model (product reselling, recurring revenue services, etc.).
  • Median profitability for a service-centric company is 7 percent. Best-in-class product-centric firms are still making 11 percent profit margins. The point: Product-centric players can still thrive, but product-centric players are paranoid about account control and lack of sticky customer relationships.
  • MSPs are certainly interested in reselling hardware -- particularly when on-boarding customers. The idea is to upgrade everyone to standardized infrastructure -- thereby driving down support costs.

Creating Value

  • Why service providers launch their businesses: 80 percent do it just to create jobs for themselves. But they "stay in" the market for value creation -- to fund their next venture or to fund their retirement.
  • Company value by revenue: In 2015, a dollar of "product" revenue was worth about a dime. So a $50 million pure VAR is worth about $5 million. A pure MSP is worth about $1.25 per dollar of revenue -- dramatically more than the product-centric player.
  • Company revenue by profit: If bottom-line profit is under 7.5 percent, there's $5 in value for each dollar of profit. Or a 5X EBITDA rate. If the margin is over 15 percent, then the value is about $8 in value for each dollar of profit -- or 8X EBITDA.
  • Operational Maturity Levels: Check in with Dippell directly about this. I don't want to steal his thunder. So I'll offer only this: Service Providers have various operational maturity levels. Dippell tracks these maturity levels, and can pinpoint what that means in terms of a company's profits and growth rates. Like I said: Ask him about it.

Keep checking back for minute-by-minute updates from Dippell.

Joe Panettieri

Joe Panettieri is co-founder & editorial director of MSSP Alert and ChannelE2E, the two leading news & analysis sites for managed service providers in the cybersecurity market.