White Labeling Managed IT Services Pros and Cons
Traditional channel partners considering making the move to selling certain products as a white label partner should evaluate certain factors before making the jump.
As demands and complexities on today’s IT organizations grow, businesses are becoming increasingly dependent on various partners to help them accelerate the transformation of both their organizations and their business. There’s no shortage of analyst reports that demonstrate that IT organizations are expected to lead strategic programs, largely tied to various digital transformation initiatives, while at the same time ensuring the business is protected from security threats, and continuing to manage all of the tactical parts of the organization such as IT helpdesk. In fact, Support Office states that the net global spending on digital transformation in 2018 was approximately $1 trillion. This number is expected to increase to more than $2 trillion by 2022.
Combined those factors are driving demands on two fronts that we’re going to dive deeper into. For a Channel Partner to serve the CIO as a ‘Trusted Advisor, and for Managed IT Services to serve as a means for IT organizations to lessen the strain on their organizations to invest their time and resources on things that are either not core to their business, non-strategic, or in areas where they’re struggling to support. For example, Market researcher Vanson Bourne suggests 74 percent of CIOs spend more time maintaining existing IT systems than searching for new solutions to business challenges.
Now we'll go into the white label, which we're starting to see a whole hell of a lot more of that. This is where partner now productizing NETRIO's underlying offer. To the market, they're going to take their own branded managed service offering, surround it with some other things that they're doing that are core to their business.
And they're going to then develop their own market strategy, sales strategy, marketing strategy, but building off of what Netrio already has. So my advice, anytime somebody is thinking about doing white label step one, emulate exactly what the white label provider suggests because you don't want to go off and reinvent the wheel on something new, emulate it, copy it. Those tools are there.
Then once you've gotten up to speed on doing it the right way, then you can start modifying it, customizing it, surrounding it with other things. Some of the benefits we've talked about; its ownership of the client, it's adding more value, it's enhancing that trusted advisor status. It's going deeper into not just stopping at the sales and the implementation solution, but taking that further.
The other thing it does that I don't want to understate, and that is the financial profile. By taking on ownership of this, absolutely if you do it the right way, it will improve the financial profile of your business. And that equates to top line revenue, five to six X increase in top line revenue, improved EBITDA profile, higher margin, and ultimately the end of the day, higher valuation.
So, factors to consider, for those watching that are thinking about making this, do I go ahead down this direction?
I say company strategy is one factor because for the channel partner who's looking to come cement their trusted advisor status, vertically expand their solution suite, this makes a lot of sense. But there's also companies out there that might be...It might be traditional MSPs that may be thinking about transformation, that your business is being threatened or disrupted. And this is represents a path to get into building a recurring business in a meaningful way. It's got to be known, aligned with the executive team top down, and something that the executive team is rallying around and committed to.
It does require having either A, hiring or earmarking support resources to support the capabilities we outlined. Certainly requires the ability to do billing. There's certainly risk versus reward because any time you're taking on customer billing and accounts payables, there's certainly risk. But that's obviously offset by the financial improvement. The more volume you drive, the more attractive it is if you're making an investment on the front end.
But as you can see here, from the left to the right, setting up the product will help you owning most of the sales process. The only exception being that when it comes... Because it's a white label, when it comes to certain technical for certain out of the box solutions need to make sure that Netrio has the capability to deliver that solution. But as you get into ordering, because setup is so critical, even in this white label case, Netrio is going to do a lot of that. Partner is going to be jointly part of it is through the project management set up phase. And then as it gets into lifecycle management, certain things that Netrio is going to own. Thus the reason that companies white label to Netrio because they don't want to go set up 24/7/365 NOC, they don't want to deal with the engineering support, and they don't want to do certain elements of managing the product. But then in the bottom right hand side, all-green, means that partner in this case is doing the billing, collections, contract management, single point of contact.
There's white label partners out there that the client would never know it's Netrio under the hood and that's by design. But I want to show the side by side reflecting on the prior slide about the financial. In this very, very high level example. If you take the.., Let's just take an average customer who's going to consume managed services and let's say the price tag is ten thousand a month in services. And we're going to do side by side comparison of what the economics look like if you're doing that as an agent versus doing that as a white label, part So the agent world, Netrio is going to build a client, Netrio is going to pay a commission to the partner, and that commission is recognizable by that partner is their gap revenues are top line revenue. Below that line comes all the expenses for running the business, LDSGA, commissions that get paid out. And then you get down below that to an EBITDA number, earnings before interest, tax, depreciation and amortization.
Your annualized gap revenue top line revenue is twenty one thousand six hundred on that ten thousand dollar client. When you look at the white label model, the difference here being that the partner in this case is the one doing the billing owns the client. And so if we start at that same exact ten thousand dollars, the gross margin on that in this example, I'm just using round numbers assumes that that partner's buying these same services from Netrio for 7000. Gross margin is the difference between the buy price and the sell price to the client.
But in this case, annualized topline revenue is one hundred and twenty thousand dollars. So that's where you get to that five to six X number. Now, what are the drivers behind this? Certainly you've got resource cost. You've got management costs. So there's going to be expenses in that white label side that you don't have on the media side. But at the end of the day, you're going to have higher topline revenue and more likely because you're taking on more risk nine times out of 10 more attractive bottom line profit to the business than in the agent model because you're taking on more risk.
Now, I'll put an asterisk here, because there's variability in these and is typically around things like total volume. If a white label partner, the more they take on, the more margin they're going to make on the deals. And it's also going to factor in unique customers, because as we get into pricing out very complex solutions, the variability in cost can vary greatly. But if you're watching this in your channel, partner, you're VAR you're an MSP thinking about getting into a white label, managed services, and you have kind of on the back, you know, off on the horizon an exit strategy or you want to build value for the business, for raising capital or things along those lines.
These are the factors you need to be thinking about. It's EBITDA performance, its revenue growth rate, its topline revenue. Some folks probably explored doing M&A have heard about the rule of 40 and that is the combined EBITDA percentage plus the annualized growth rate. The higher that number is above 40, the higher the multiple as a general rule of thumb. Customer ownership is key intellectual property, proprietary things, and certainly revenue mix. And the more strategic it is, the stickier it is, the higher the multiple.
And so in this case, we're talking about managed services and that commands a very high multiple at this point, as does things like contact centers service cybersecurity, which when you look at managed services, that solution supports all those.
What Is A Trusted Advisor and Why Is It Important to IT Leaders?
Merriam-Webster defines trust as “assured reliance on the character, ability, strength or truth of someone or something; one in which confidence is placed,” and defines advisor as “someone who gives advice.” Combined, and applied in the context of meeting the needs of today’s IT organizations, it simply means helping IT organizations simplify the complexities of navigating and managing today’s technology so they can more effectively execute and meet the demands of the businesses and customers they support.
The right Trusted Advisor not only helps the client navigate the various stages of the buying process, such as defining needs & requirements, gathering and documenting inventory, developing new solutions, and managing the sourcing process to the successful selection of suppliers and contract negotiations. Given the increased acceleration of adoption of emerging technologies in recent years combined with an entirely new landscape of suppliers, having someone act as a ‘sherpa’ to help navigate that journey can lessen the load significantly for an IT organization. It can also improve the outcome by engaging an independent party to validate requirements, hold suppliers accountable to the right solution, and by ensuring the project plan meets the business objectives.
Otherwise said, today’s channel partners who act as a Trusted Advisor act as the ‘General Contractor’ across multiple technology providers. Why is this valuable to the CIO of an organization? Rather than having to run multiple sourcing exercises against disparate technologies and suppliers tied to them, a Trusted Advisor can run the process for them from beginning to end.
Over time, Trusted Advisor status is earned and cemented by executing what they say they will do, being an advocate for their client, delivering the right solution that meets the underlying business objectives, and in the process enables the IT organization to increase its focus on delivering business-critical digital transformation programs.
How Managed IT Services Adds Value to Trusted Advisors
The acceleration and increased speed of adoption of technologies such as Unified Communications (UCaaS), Contact Center as a Service (CCaaS), SD-WAN, CyberSecurity, and others has driven exponential growth in the numbers of technology suppliers for an IT organization. Combined with the disaggregation of the traditional vendor model, whereby a single vendor would deliver dozens of services, often-times, today’s best-in-class solution will likely come from companies that specialize in their respective areas of technology.
While a Trusted Advisor can certainly help the client navigate the sourcing process, it is the execution of the delivery and lifecycle management that will make the difference between success and failure of a project. A primary driver for Managed IT Services market demand is for the Managed Services Provider to serve as the ‘General Contractor’ across multiple technologies, and what can become dozens of technology suppliers.
Whether we look at the Project Management phase, the Service Delivery phase, Customer Onboarding phase or Lifecycle Management phase, there’s tremendous value in enabling the IT organization to have ‘one throat to choke’ for handling all post-sales related issues.
Enabling Trusted Advisors – White Label vs. Agent Model
Let’s take a deep dive into white label partners vs. agents and outline the advantages and disadvantages of each. Last week we went over the basic definition of each, here is a refresher!
The Admin Bar defines a White Label Partner (WLP) as an individual or team who does work on your client’s project but appears to be part of your core team. A WLP partner of NETRIO would sell our services as an MSP under their brand. NETRIO would be delivering MSP services under our WLP alias. When NETRIO works with an WLP, we are an extension to their team and the customer does not know the difference.
An agent is a trusted advisor who works with clients to help them through their journey to finding a solution. For example, an agent would be selling NETRIO services to a client as a way to outsource Managed IT Services. The agent would guide the customer through their journey of signing a contract with NETRIO. NETRIO would then be aligned with your business requirements and help your company meet its strategic goals.
Benefits of White Label Partners
NETRIO is seeing more and more companies adopt a white label model. This allows a company to develop their own market strategies, sales strategies, and marketing strategies by building off of what NETRIO has already established. Our biggest advice when entering a white label partnership is to emulate what they are suggesting. One huge WLP benefit is not having to reinvent the wheel.
Other benefits of WLP:
- Customer Ownership
- Additional Client Value
- Improved Client Retention
- Financial profile improvement
- Higher Top-Line Revenue
- Improved Margin Profile
- More attractive EBITDA
- Increased company valuation
Factors to Consider:
- Customer Strategy
- Executive Alignment
- Support Capabilities
- Billing Capabilities
- Requires Investment
- Risk vs. Reward
Is WLP Right For Your Company?
These are the factors you should take into consideration when choosing between WLP and Agent. Things like performance, revenue growth and topline revenue are going to be extremely important when making a choice that is right for your company. If you would like to explore White Label Partnership with NETRIO, contact us for more information.