ISVs are by nature specialists in a segment – software tends either to be functionally or vertically aligned – i.e. for accounts or marketing, or maybe for telcos or retail (other niches exist such as security, but these are becoming increasingly overcrowded). At the same time an ISV’s IP is encapsulated in the software that it sells.
[easy-tweet tweet=”Analyse #Channel migration with @BillMew, from #MSP to #ISV” user=”comparethecloud”]
Alignment and differentiation:
MSP a (the specialist)
MSP b (The generalist)
Previously we suggested that differentiation in future will increasingly depend on specialisation. Compare the advantages of two different MSPs:
MSP A specialises in dealing with legal firms, understands the legal value chain, is familiar with all the main legal software packages, has experience in managing and integrating them, has specialised process models and methodologies, has sales staff and consultants with IP in this area and maybe has even developed its own software modules to integrate with or between other legal packages and platforms.
MSP B is more of a generalist. It is great at what it does, but serves a mixed bag of clients from a number of different sectors and industries.
Both MSPs have made the transition from the transactional tech world and have successfully established annuity revenues in new areas of operation such as Cloud, Mobile, Security and Cognitive (including big data and analytics) – all the areas touted by IBM to its business partners.
MSP A is able to establish a reputation for being the best at what it does – managed services for the legal sector. As its brand and reputation increase it evens achieves a level of eminence in this area where it becomes well-known for providing managed services for the legal sector and prospects from this sector start to beat a path to its door (reducing its cost of sale).
MSP B is less focused and finds it more difficult to establish a differentiated brand. With less ability to build IP or replicate services across all its clients as they are in such different businesses, the cost of services this disparate set of clients starts to rise with time.
When pitching for new business MSP A focuses on a sector where its chances of success are high, its cost of sale is lower and its ability to add value and therefore charge a higher margin is greater.
When pitching for new business MSP B struggles to differentiate itself. On too many occasions its excellent client service reputation gets it as far as the final short list, but it loses out on the final deals to rivals that have greater differentiation or value to offer. A series of lost bids have pushed its cost of sale up significantly.
[easy-tweet tweet=”#MSP specialists out-compete the generalists as a result of their greater ability to build #IP” user=”billmew”]
Over time specialists like MSP A start to dominate each niche. They out-compete the generalists as a result of their lower cost of sale, lower cost to service clients, and greater ability to build IP or replicate services. At the same time their reputation for expertise and added value in their niche not only makes marketing easier, but it also allows them to charge a premium for their services. Generalists like MSP B find it increasingly difficult to compete with these specialists.
Automation (becoming become more ISV-like)
Much of the value that MSP A is able to provide as a specialist is in its IP. Not only is this inherent in the specialist knowledge of its staff, but it can also be applied through replicable solutions, templates or modules that the firm has developed over time. MSP B may well be excellent as what it does, but focus in its IP is too widely spread and impossible to codify and automate in this way.
The more that MSP A codifies and automates its IP, the more ISP-like it becomes. Eventually it is able to fully automate elements of its IP into mobile apps, or plug-ins and modules that integrate with the applications and processes that it regularly supports. As competition increases this automation enables MSP A to increase its value add and margins further, giving it even greater competitive advantage over generalists like MSP B.
This may appear a like a rather theoretical scenario, but the trends are already apparent and pressure already exists to focus in order to increase differentiation and automate in order to increase efficiency. Things aren’t going to change overnight – after all there is still some margin to be made in resale. Nevertheless it is telling that a vendor like IBM (that has been encouraging its partners to migrate from VAR to MSP for years) is refocusing its channel programmes to encourage greater specialisation around key competencies.
IBM is refocusing its channel programmes to encourage greater specialisation around key competencies
The pace of change isn’t going to let up any time soon and fresh from transitioning into MSPs many firms are already finding it a very crowded market in which any form of real differentiation is hard to achieve. They need to look ahead and start to plan their next migration already by understanding how they can specialise, differentiate and automate in order to become more ISV-like.