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