Transforming your IT Professional Services company to a Managed Services provider?

One of the goals I faced both in the IT corporate environment, as well as later on when freelancing & building up my own businesses was how to transition from a body-shopping business (sell people on projects per hour / day / week / month) into something more sustainable as service provider or managed services provider.

I remember the words of one of my Japanese conglomerate bosses who was saying “when the times are tough, I expect all of my business unit leaders to go out and get to the basics of our business”. He meant back to body shopping. This was the exact same thing when I was building up my own businesses. Apart from that it gives you an opportunity to start somehow (and potentially to sell yourself as well to reduce your overhead costs), it also puts feet into the doors of your prospective long-term customers, giving you potential foundation to start selling services, out-tasking, or managed part of the non-core company business as a managed service.

Starting up yourselves as a IT Professional Services provider (body shopper) has some challenges that you have to think about. It is a capital-intensive business. It works great in a corporate budged and money abundant worlds, though could be challenging in a one-man show company. Why? Typically, your first customers payment terms will not match the payment terms expected by your contractors. Example? Try to supply 10 contractors in a single month on a project to IBM with their T+60 payment terms, when you have to pay your contractor typically in less than T+15 or T+30. That’s easily 30 salaries you need to pay out of your own pocket before the money hits back in from your customer.

Once you have enough staff onboard, you can start planning to transform your business towards something more sustainable in the long-run. Your IT PS contractors would hopefully build enough credibility for your business with existing customers, and you would start seeing opportunities for longer-term managed services contracts.

Rule of thumb from own experience, from start to finish, a decent size 5 year managed services contract with 2 years option to extend tends to have a typical sales cycle of approximately 24 months.

So how you bridge this gap then that will allow you not to stick with the negative cash-flow intensive growth of a IT Professional Services company forever? Look for quick wins in non-resource intensive services areas, such as (few examples):

  • your customer may need to monitor their or their customer’s infrastructure?
  • parts of their tasks are not related to their core business and could be outsourced or provided as SaaS?
  • there’s an in-house solution that could be taken over and provided as SaaS?

You can buy yourself time (and cash-flow) by providing such services to your otherwise strict body shopping customers. The side effect is it will help to increase billable time of your contractors & employees, as well as buys you time to work and onboard your first large Managed Service deal.

In Managed IT Services, there are additional areas to consider, such as:

  • overall profitability of the deal and when your sweet spot in time of the contract kicks in
  • your readiness (processes, cash) to take over existing customer’s stuff
  • additional hiring to be able to meet contractual SLAs
  • overall utilization of your staff (expect your stuff to be over-utilized in the first year of the Managed Service contract, the resource-intensiveness gradually decreasing over time of the contract)
  • how you scale your business and get ready for your next contract(s)

We may be looking into the details of these topics in future posts.