The Great MSP Dilemma: Cost vs Quality

Even as managed service providers (MSPs) face growing complexity in their managed IT environments, many are stuck between what customers say they want and what they are willing to pay for.

Therefore, an important strategic decision looms large for many MSPs:

“Should we focus on providing differentiated service quality or on cost-cutting?”

The two approaches can seem diametrically opposed. MSPs that opt for differentiated (or superior) service quality typically must make investments in systems/tooling, talent, and other service inputs.

Conversely, MSPs that try to win at cost-cutting do not invest in their capabilities (ultimately their product), leaving price as the primary opportunity to differentiate in a crowded marketplace.

Let’s examine the two approaches and identify some pros and cons.

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Prioritizing Cost-Cutting as an MSP

Pros

• Given that businesses are increasing outsourcing IT operations to MSPs for cost-cutting reasons, it can seem intuitive for MSPs to also emphasize cost-cutting, giving customers attractive “bottom-of-the-barrel” prices and preserving gross margins for the MSP.
• When cost-efficient labor can be an advantage for MSPs (as it is for MSPs operating in low-cost regions of the world), it can seem unnecessary to invest in automation and other similar force multipliers.

Cons

• Inexpensive labor is no substitute for processes aided by automation, especially when it comes to eliminating human error. (Example: “When 24/7 Isn’t Enough…”)
• Focusing on cost-cutting and cut-rate pricing to win/retain customers can become a “race to the bottom” between competing MSPs and is not a durable differentiator, whereby: (1) price becomes the primary differentiator rather than service quality (i.e., commoditization), and (2), net margins (i.e., profits) eventually approach zero due to intense price competition amongst similar MSPs

Prioritizing Service Quality as an MSP

Pros

• If visibility into MSP performance is good (i.e., with good monitoring and reporting), MSPs can demonstrate to their customers that their focus on quality is translating into better results: meeting/exceeding SLAs, better data protection, lower RTOs/RPOs, etc.
• Service quality becomes a differentiator, enabling better-performing MSPs to charge more for their services (i.e., higher prices and higher gross margins) elevating them out of the race to the bottom” other MSPs are stuck in.
• Recent data indicates that poor service quality (as measured by SLA compliance) is the primary reason for customer churn at MSPs, even more important than cost.? Focusing on improving SLA compliance can therefore lead to improved customer retention.

Cons

• Improving service quality with better people and better tools requires investment, even if those investments pay off in the long run.
• When customers do not have visibility into service levels (i.e., poor reporting systems and customer communication), they may not be willing to spend more on quality, since those changes won’t be observable to the customer.

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The Best of Both Worlds

To this point, we’ve used an overly simplistic assumption that MSPs can only pursue cost leadership OR differentiated service quality, not both.

In practice, there are many investments modern MSPs make that improve both service quality AND reduce long term operating costs.

For example:

• Using RMM tools enables MSPs to be more proactive about maintaining client systems while reducing the need for on-site visits
• Using Automation for routine and time-intensive tasks (like backup monitoring with Bocada) can both reduce the amount of manual work required AND eliminate errors due to that manual work. This can significantly improve customer outcomes while offering cost efficiency as you scale (e.g., more supported backup tools, more customers, etc.).
• Centralizing Ticketing Systems can improve both response times (improved service quality) and resource allocation (cost efficiency).
• Embracing Cloud Computing gives customers improved reliability/uptime, flexibility, and scalability, while eliminating wasteful spend (because cloud resources are consumption-based)
• Automating Service Level Reporting gives customers confidence in your work quality while reducing costs from customer churn, reporting, and other service delivery functions.

For MSPs, the best investments are those that improve both service quality AND long-term cost efficiency. Yet, many MSPs today cling to outdated processes and systems, sacrificing their future success to preserve present-day gross margins.

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It Pays to Emphasize Service Excellence

CBTS is a large American MSP that is consistently recognized as one of the best in North America (CRN, Palo Alto Networks). One important reason why the company has been successful (despite what might seem a disadvantage in higher regional labor costs compared to overseas providers) is the company’s commitment to providing excellent service quality.

For example, CBTS uses Bocada for automated centralized oversight of all their customers’ backups. While implementing Bocada represents an investment in CBTS’ managed backup & recovery tech stack, “this automated approach overcomes complexity, drastically improving the time taken to begin reviewing backup performance and removing the human error that would exist with an otherwise manual approach.” (source) This investment helps CBTS protect its customers’ most valuable asset: their data.

CBTS has prioritized customer outcomes, and this strategy has enabled the company to thrive.

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Key Questions

Whether you are a managed services customer or provider, here are several critical questions to ask:

• Does our MSP focus more on service quality, cost-cutting, or better yet, cost-effective service quality?
• If our MSP is focused on service quality, how do we (or they) demonstrate that the differentiated service quality is producing better results?

Bocada’s automated backup monitoring & reporting platform is used by many of the world’s most successful MSPs (e.g., Capgemini, Kyndryl, Datacom, Dimension Data, DXC, CBTS, Atos, Alestra) to improve data protection outcomes for customers and automate SLA compliance reports. If you’d like to improve your managed backup service quality while enabling cost efficiency in your monitoring/reporting function, let’s talk.