To the members of IT professionals. I am a Partner Channel Development Manager for Microsoft. My responsibilities are to help partners grow and navigate Microsoft and build profitable practices. I am going to post discussion topics that I think are thought provoking and could possibly help the members of this group. I would like to invite the members to comment and provide their thoughts.
"Say goodbye to the Information Technology Technician"
" IT, as we know it is dead." I have attended many strategy meetings over the past year and have come to the conclusion that the IT / VAR business is dead in the water. The small IT technician and up through the medium sized Managed Services Provider are at risk of quietly becoming extinct. The future is hear and now, and if current IT professionals don't change and evolve, they will be consumed by smarter, faster, and more nimble software vendors. So this leaves the current state of the IT industry in a precarious position. Either change or fade
I have seen the metrics behind product, Project, Managed and Packed IP. Simply devastating to current IT technicians. As we look into the future, these margins will slowly erode as computer networks start to self heal. Software as a Service is fast approaching to take over this space. Internet of Things is scary. Being able to control individual lightbulbs with your phone, unreal! Hardware margins are so low today, that it is typically a better idea to have the customer purchase direct and reduce the hassle of purchasing and deploying. Consider this metric, 2.6 years is the average time an IT technician is contracted to work for a client.
The current business model employed by IT Technicians and MSP's are dependent on break fix or project based contracts. This has been the model for years and many IT professional coming into the industry see this as the only way to provide services. New partners look at the way their peers are providing services and are adept at solving problems. Their contracts are project based and are reliant on small hardware and projects margins to be profitable. Current IT companies charge by the hour, manage infrastructure, assess security threats and manage clients virtually. Moving in to tomorrow, I believe we will have self healing computers and networks. Information will be stored in more secure locations. In house server farms will be obsolete. Customers will not need the small technician to help. New "Born in the Cloud," partners see this and have seen what the power of creating their own IP can do for them. Creating software that works for vertical industries and encapsulates, CRM, Office, Accounting, VoIP, and SharePoint provides for a business strategy similar to Oracle. Imagine that! A new partner could use Microsoft Software and create their own intellectual property and see high margins. Margins on IP services that include licensing fees for the access to the product and project based revenue for implementation. These partners now focus on software and productivity enablement. Partner margins are simply far greater than current project based margins. Their revenue turns into a growing annuity as they add each client. Most importantly, they have an exit strategy. Investors like to see recurring revenue streams.
How do you value an IT company and what is their exit strategy?
I have had many conversations with partners in this industry about valuation. Let us look at a small IT organization that has $300,000 in project revenue per year, 10 years running. From the outset, this would seem like a great company and a good value. In the eyes of investors, and my opinion, it is not the case. I would surmise that the valuation of the organization would be about 1/3 the revenue. My valuation is based on projected loss of clients as the owner exits. I would pass on this opportunity all together as the brand built by the owner, exits when it changes hands. Many partners I talk too, think their companies are worth much more than my assessment. They are looking for a 5x multiplier on yearly revenue. The bottom line, not worth the time and effort.
So, what is their exit strategy? How do they value themselves in 3 years when their margins reduce significantly and their long term clients move to a self healing architecture and software as a service?
The answer to both of these questions is to simply change their business model. Evolve and retool.