Subscription models shape future of IT services providers
Forrester researcher Jay McBain discusses how subscription models work, how to look at customer behaviors in a trusted way and where IT services providers should invest.
Dave Sobel is host of the podcast The Business of Tech and co-host of the podcast Killing IT. In addition, he wrote Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business.
In this video, Sobel interviews Forrester researcher Jay McBain about IT services companies moving to subscription models and how to quantify success by looking at the numbers. They also discuss what the marketplace will look like with subscription models.
Since this recording, McBain has become chief analyst at Canalys, a market research company.
Transcript follows below. Minor edits have been made for brevity and clarity.
Dave Sobel: What trend or news do you think isn't getting enough attention that involves these IT services companies that they should be paying attention to?
Jay McBain: We almost see it come out every day in different forms, but the news is this: Every single one of your vendors, if they're not already, is going to be 100% all in subscription consumption. Every company you work with and the way they're going to get measured on Wall Street, or private equity, or whichever ownership, is like Netflix. How many subscribers do you have? How many new subscribers did you get this quarter? And what's your churn rate? It's not revenue. It's not profit. It's not customer [satisfaction], the thing that it has been for 40 years. Yesterday was Dell revamping its entire program to start moving money before the point of transaction, at the point of initial transaction -- which, in Dell Apex, is a 30-day trigger -- and then they're moving money after to drive adoption, to drive integrations and stickiness, to drive this upsell and cross-sell and enrichment.
They're going to spend $0.33 before the point of transaction. They're going to spend $0.33 at the point of transaction. And you know, Dell for example, is a third direct, and they're going to be a third marketplace, and it's going to be a third indirect. It really doesn't matter how the money flows to Dell. But they do understand that 90% of that business is partner-assisted. They're going to then move that last $0.33 after the point of transaction.
Any IT service provider of any type should be looking at the economics of where the money is to be made. The money that comes from a manufacturer or one of your software providers is going to be such a small part of it. It's the multiplier. It's the $5, $6, $7 that every one of those dollars kicks out. What skills do I need? What practices do I need to build? What is the overall economic makeup in the era of subscription? And managed service providers who are recurring businesses are experts at this and need to be understanding where the trillions of dollars of opportunities sit in our industry.
Sobel: Now, implied in that though is the idea that, because they're going to be tracking subscribers, they're going to want to have really good visibility into that. It makes sense to me to understand it when we think about their direct business because they'd understand that really well. And conceptually -- and we'll get back to the marketplace ecosystem a bit, too -- but I think that makes some sense. How do you think they're going to be going about measuring success on that indirect side?
McBain: I run a channel software tech stack, so I get to watch almost 200 companies build software and innovation around what the 35,000 companies who run channel programs ask them to build. One of the big areas on that tech stack right now, I call it 'ecosystem management,' but there's five layers to that. The things we're watching, interestingly enough, come out of the consumer world. Attribution is going to become the No. 1 measurement because there's not going to be a point of sale. There's not going to be a sales-in or sales-out report that they're following as much as they are following behaviors. If one of their customers goes through 28 moments to make vendor selection and you participate in five of those -- they read your e-book, they listen to your podcast, they go over and read a magazine article that you were quoted in, you have some local intelligence and industry intelligence… You bump across five of those moments, and the ability for a vendor to see that today is almost zero. But going forward, there are companies raising hundreds of millions of dollars -- like they've answered it in the Kim Kardashian consumer world. They're starting to answer that in the B2B world. And those vendors are going to recognize all the work you do before the point of sale and start funding that in a different way. That's just one example: attribution.
The second example is data sharing. None of us want to share data with vendors. And trust me, I worked at IBM and Lenovo for 17 years. I don't know, as an MSP, if I'd want to share data with a big company. The direct people look over and other things, and strategies can change. No, I'm not ready to give up my list of customers.
But, if I could share that in a secure, data escrow, double-blind kind of way; and there could be an AI bot looking to connect dots, account mapping, opportunity mapping; and if one plus one could become three; if there's ways I could coinnovate or create value, leverage network effects of all the marketing my vendors are doing, and that could get mapped back to me; and obviously that data would never leak out of there, I would be highly encouraged to participate in areas like that. That's a second layer of technology that we haven't had for 40 years that's going to become a core measurement element of this going forward.
Sobel: I get this idea of, if you can have that double blind, if you can have it secured that the two parties can do. But it feels like that space is not particularly well defined from the perspective of 'we know instinctually what it should be.' There's been some plays in this area that haven't quite made it. And there's that trust element in getting people to sign on. Do you think this is near term? Is it coming in the next six months, 12 months, or is this directionally something we're looking at over the next 24 to 48 months?
McBain: I called this the 'decade of the ecosystem' on purpose. If you go back two decades, it was the decade of sales, and a small little company called Salesforce got its start. By the end of the decade, it was on track to become one of the next trillion-dollar-valued companies. The last decade of marketing, we know that 8,000 [marketing technology] companies and 10 years ago, you would've made a decision to go with Marketo, or Eloqua or Pardot. Fourth place of the decade was like HubSpot. I remind people that the first three were acquired by Fortune 100 companies. HubSpot today is worth $47 billion on less than $1 billion of revenue, 47x valuation. Not bad for coming in fourth place. So, now, we're in the decade of ecosystem. We're a couple years in. It all comes to the channel tech stack and how these measurements are going to happen.
It is underway. I look at the vendor program announcements. I'm in the inside of them, working with them as they announce them, so I get to see how they're moving dollars around. I get to see how they're publishing their multipliers, how they're looking at this differently. Every MSP should be looking at this market. We track 250 categories of technology, and you should be staring at that list from biggest growth numbers to the smallest. We talked two years ago about RPA -- robotic process automation -- growing at 73%. UiPath went public and was worth $30 billion the next day. This 73% growth is more than the 11% growth that MSPs as an average are driving in their businesses. We're watching the hyperscalers last week report another quarter, the seventh in a row, at 50% growth.
They're growing 50% on top of 50% on top of 50%. MSPs are growing at 11%. I would be asking more questions out of Microsoft and AWS and Google about where that growth is and how every one of those dollars is kicking out $5 or $6 for us. But it's getting collected by other people. System integrators, ISVs, everybody's coming in. We have millions of people coming into our space, but they're collecting these big multipliers, and they're making 75% margin on every dollar of that multiplier. These are the questions I would be asking. For any industry or for any product that's growing faster than 11%, I'd be looking at how adjacent is that to me? Can I build out a business practice? Can I build out some skills? Can I do maybe a small acquisition? How would I go and grab onto that opportunity?
Sobel: What's implied there is a premise that I've been thinking about. I'm going to offer you this premise, and I want you to tell me your reaction to it. I've alluded to this. I think you've heard it in my 2022 predictions. I think consulting as a space has been underrated by IT services firms and particularly by those that have embraced managed services that have lost a bit of the idea of being a consultant and delivering strategic advice is the most important bit versus everything else. And I think, if anything else, this is the year of consulting as your lead bit. What do you think of that premise?
McBain: I can quantify it. I know exactly where the $5.80 goes for these SaaS companies. And I know that a $1.25 of it is consulting. But here's my advice: Don't call it consulting. For decades, that word has taken on alternative meanings for buyers. When they hear consulting, they hear flying somebody in, staying at a Holiday Inn down the street for six months, implementing something. They think of Accenture, Deloitte, PwC, or at a high level, at their board level, they think of McKinsey or Boston Consulting [Group]. They think of things that cost millions upon millions of dollars. The words to use are architecture, design, implementations, integrations, the actual stuff that has consulting built right into it before, during and after those processes. And these are these triggers. These are these multipliers of how do I go earn, for every dollar that Microsoft earns, how do I go earn $2? What would it take for me to go earn $3? And what do I call it? How do I build the customer? How do I build that education, training, certifications, the competencies to go do that on the resume? And then how do I build the confidence, the sales and marketing confidence to be able to, with a straight face, go and charge $300,000 for a $100,000 Microsoft deal? That's what other companies are doing. And I don't think MSPs yet are at that point of confidence to start thinking about their own skills in that way.
Sobel: Let's make it concrete for that group. We both know that the vast majority are sub-$5 million in revenue in this space. And there's a good portion of this space that's hovering at $1 million or even less in revenue than that. When every single dollar of reinvestment is that tight based on only turning off 11%, as you've talked about only having so much, where would you advise them to spend those critical dollars to start their transformation?
McBain: The one thing is, in the early days when I met you, Dave, in MSPs, we had a lot of opinions. We had a lot of gut feels. Well, 22 years later in this industry, we're actually sitting on a mountain of data. When you say MSPs, there's 75,000 of them. The average MSP has eight people. The average MSP's kicking out about $200,000 per person. You can get the numbers in terms of what the average and the standard deviations and what the bell curve is. I know what the average price they're selling at, which happens to be $113. We know what the average margin is, which is about 17%. We know these numbers. When I take these numbers and I benchmark my business against it, that's one thing. And there's some great peer groups and user groups and other things that you can go engage and get some really rich data. And we know who those are. But again, when I'm at the end of the day, thinking about my business, thinking about where it's going to be post-next year. I'm always thinking about planning. I'm always thinking about where I need to be. But what am I looking at three to five years from now? Am I going to continue to let multi-cloud grow four or five times bigger? Am I going to allow other people in to capture that? Is that a place I want to go? Do I want to capture security? Seventy-three percent of MSPs kind of want to become [managed security service providers]. Is that a place where I get serious and go look at the 2,000 security companies which have channel programs today. But that's what I'm really doing is quantifying where I want to go and what the outcomes are and not navel-gazing or putting my thumb in the air, trying to decide which way the wind is blowing.
Sobel: Last couple of questions here. I know you're a listener of The Business of Tech. I want to actually give you a little bit of an opportunity to say, from an analyst's perspective, of the areas that I've been looking at, where do you think this industry is lacking in terms of analysis that I should spend more time on?
McBain: That's a good question. … I've always appreciated your take on things and your editorial on things. If I look to just get rehashed press releases, I would go read them somewhere else. Like you, I have a list of things at an uber-level of where things are going. I mentioned subscription consumption models. There's an explosion of product-led growth [PLG]. And is there ways that I can help these PLG companies as an MSP? I'm thinking about these new usage and value-based models. I'm looking at these multipliers.
There's a lot of elements there that are growing quickly. This explosion of marketplaces, which grew more in the first three months of the pandemic than the last 10 years combined. This industry, which today is almost $4 trillion in business and government spend, doubling in size this decade. By the end of the decade, a third of that's going to go through marketplaces. I'm going to want to look at the top 20 marketplaces, and they're all building out very serious capabilities for service partners of all types. I want to be there in my geography. I want to be the first company competitively to go and anchor myself in these key marketplaces, where I show up on page one, where I'm in that community. And a customer, when they're in there acquiring the layers of technology and when they're thinking about the multiplier, I'm there facing them off. Almost like Google, I'm on page one, and they can see that they can check a box. I'm thinking about all these things every day.
Sobel: Marketplaces bring up a great last area to cover here. For the traditional IT services organization, or in a way almost any services organizations, they're very used to customer acquisition plans that take them to go out and do marketing and do engagement. What do you think they need to be doing to prepare and engage for this marketplace-driven approach?
McBain: I always remind people that we don't buy Netflix from our cable guy in the white van. We buy subscriptions digitally. We consume things digitally. This is why one-third of this industry is going that way, with all the buying behavior, with all the mountains of research that we're looking at. Obviously, Wall Street is a big driver of this. Demographics are a big driver of this. If you sit back and accept that that's going to be the growth, and those are going to be the numbers -- we're already, by the way, at 18%. We're already halfway there. And that's only during a pandemic. I'm going to sit back and say, 'How are others being successful in a marketplace mode? And what does it look like?' Because here's the value to customers. One is they get to extinguish enterprise credits.
Now, I get to buy everything I'm already buying, but I buy it through AWS, and they'll lead me to bigger and bigger and bigger discounts. I'm not going to go buy from each vendor uniquely. I'm going to go all in there, so I get to bigger discounts by volume. Number two is everybody at AWS, right up through the executive team, is paid on enterprise credits. They get paid as much to sell me as an external vendor as they do their own products. It's wonderful. For the customer, I get to procure and provision in the same spot. When I add a user, I go click one button. I don't have to go get somebody to chase down the average of seven companies that each company invests in for each solution. I get to provision and procure in the same spot. I get to level it up, level it down. I've got a degree of management. My CFO likes it. My COO likes it. There is no shadow IT or rogue IT. It's just the way things are going to work. But marketplaces are very open in the fact that those seven layers don't integrate themselves. They don't implement themselves. They don't secure themselves. They don't comply on their own. They don't govern themselves. They don't do the data and automation. They don't do the $5 multiplier. They're getting ready now for opening it up to all different kinds of partners to participate. I can drag down even more enterprise credits by buying MSP services through that AWS marketplace. I just want to be on page one. I want to make sure my listing is there. I want to make sure that I'm in that community, talking up my differentiation and why you wouldn't hire Accenture to go do the stuff I do because they don't know how to do it. And why you wouldn't hire a consultant. Why an ISV can't do what you do, and why all these 16 other kinds of partners all fit within this broader multiplier in how I can go carve off my fair share of every deal.
About the author
Dave Sobel is host of the podcast The Business of Tech, co-host of the podcast Killing IT and authored the book Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business. He owned and operated an IT solution provider and MSP for more than a decade and has worked for vendors such as Level Platforms, GFI, LOGICnow and SolarWinds, leading community, event, marketing and product strategies, as well as M&A activities. Sobel has received multiple industry recognitions, including CRN Channel Chief, CRN UK A-List, Channel Futures Circle of Excellence winner, Channel Pro's 20/20 Visionaries and MSPmentor 250.