RESCUECOM Says Mom and Pop Computer Shops Need to Become Franchised
From the June 25, 2007 issue of CRN
By Damon Poeter, CRN:
Franchised IT Services move into the SMB space
Franchised IT services are moving beyond the residential market and into the SMB space. Should the channel see this as a challenge or an opportunity?
For half a century, R.K. Black sold office equipment in Oklahoma, Missouri and Kansas. These days, the company still sells and services copiers, fax machines and printers, but it's added a new offering?managed IT services for SMB and SoHo users.
The small, 80-employee company didn't build an MSP division, though. It bought one. Three, to be precise. R.K. Black now owns three territories as exclusive franchisees of proactive, remote network management services run by The Utility Co., an Ottawa firm that opened its doors in 2006. Owner and President Chris Black calls R.K. Black's move into managed services "a natural progression [that] allows us to become a one-stop shop" for business products and services. All in all, not an unusual play for a reseller looking to grow its business and stay ahead of the competition.
"We had given some consideration to providing managed services in other times, using our internal resources," Black said. "But unless we could provide a superior service, we didn't want to do it. [The Utility Co.] can do 80 [percent] to 90 percent of what we consider the heavy-lifting on the front end."
MSP franchisors are sprouting up like mushrooms in the IT world. Established franchise companies like 1 800 905 GEEK, Computer Renaissance, Fast-Teks, Data Doctors, CMIT Solutions, RescueCom and Computer Troubleshooters are stacking managed services onto their break-fix offerings. Upstarts like the Utility Co., Concerto Networks and Team Logic IT have entered the market in the past few years with MSP strategies firmly in hand. Those 10 companies boast 1,138 North American franchisees between them. And they're making serious inroads in the SoHo and SMB markets. 1 800 905 GEEK CEO Richard Cole, for example, estimates his 275 franchisees generate 60 percent of their revenue from businesses.
Independent VARs and MSPs that service small businesses now have to contend with competition that has national advertising firepower, branded mind share and, theoretically, standardized service levels. The question for those independents struggling to keep up is, do you still try to beat the franchises or do you join them?
You Brand It, We'll Sell It Best Buy's Geek Squad is a national brand. The name, the logo, the uniforms and the VW Beetles all work toward embedding the Geek Squad brand in the consumer mind.
It's that sort of mind share that R.K. Black hopes it can build with the Utility Co. "The plans they have for branding are exciting," said Cynthia Black, COO of the company. "We want them to become a household name."
Those sentiments aren't typical of most would-be MSPs, said Mark Scott, CEO of the Utility Co. Scott, formerly CEO of MSP platform vendor N-able, said he thinks many VARs entering managed services are too locked into building their own infrastructure and brand in a rapidly crowding field.
To that end, the Utility Co. doesn't necessarily target the systems integrators many MSP vendors see as their natural constituency to sell managed services. Instead, Scott said, he wants franchisees like R.K. Black, which had $14 million in revenue last year and has a sales-first philosophy, regardless of their IT backgrounds. "The DIY-Home Depot approach resonates so well with VARs and tech people because that's their comfort zone. Frankly, when they get some tools, they think they've bought an ATM machine that they can plug in and cash is going to come out," Scott said.
"If you told me back in 1999 or 2000 what were the typical capabilities of people in the channel to do managed services well, we completely overestimated their capabilities. So today you have to ask, why are people in the IT channel, who've invested so much money in managed services, struggling so much?"
Scott contends that the cure for that pain is not just to resell a third-party network operations center?a service offered by channel-oriented MSPs like Do IT Smarter, ClearPointe Technology and InCompass IT?but to also buy into the existing brand of a franchisor.
Scott hesitates to completely rule out solution providers as a fit for franchising. He points to QuickFix Computer Support of Brunswick, Ga., whose owner, Andre Jones, struggled as a VAR trying to build an MSP profile before opting for a Utility Co. franchise.
"I'm not dismissing the IT channel. We call what we do 'franchising' but it's still a channel approach," Scott said. "Everybody says, 'It's going to take away my independence' and 'I'll have to wear a uniform.' But it's more about sales. In managed services, strong sales is mandatory. If you're talking about that 10-person MSP that's bought some tools, well, they're not salespeople."
David Milman is more blunt. The CEO of Syracuse, N.Y.-based RescueCom said he thinks smaller VARs and MSPs are going to have to find highly specialized niches, join up with a franchisor or disappear. "You're got 65,000 mom-and-pop shops that make $100 to $250,000 a month. But growth is elusive for them. They're getting squeezed by Dell, by Lenovo going direct, HP on one side and the franchises on the other side," Milman said. "Those who are not affiliated with a franchise are going to have to do something to grow, to affiliate themselves with a brand name that will give them some cachet."
Geeks In Cute Cars Are Targeting Your Clients Cole believes in the power of the geek, but only if wielded responsibly. He is critical of competitors stuck on a purely break-fix approach to IT services or who aren't attacking the SMB market. But Cole saves his real wrath for the Geek Squad.
1 800 905 GEEK techs drive PT Cruisers, but beyond the cars and the name, the similarities with Best Buy's tech team are slim, he said. "Best Buy, honestly, is switching the paradigm back in the wrong direction. They couldn't work it with guys getting paid $10 an hour to go to you and fix your computer. So they set up their computer repair facility in Louisville, Ky. And now the Geek Squad goes out, tries to sell you a bunch of new stuff, then ships your computer to Louisville. That's no good."
For IT service franchisees to really make hay in the SMB space, Cole said he believes they'll have to serve as trusted IT advisors that deal from professional expertise rather than as a vested interest pushing product.
Whoever can do that has an enormous market to court, he said. "The future is in managed service agreements and in the SMB space. SMBs are a $100 billion space," said Cole, founder of the Norfolk, Va., franchisor formerly known as Geeks On Call. "Yet the penetration now is so minimal that there's plenty of room for others. It's not the lack of business but the paradigm shift, which is people actually believing that they can get their computer fixed in a more efficient manner than going and getting a new computer, or taking it to some shop to get fixed."
Market penetration numbers, particularly in the SMB space, have several franchisors licking their chops.
"With households, 5 percent penetration is huge. We're seeing that in a few markets. We get 2 to 3 percent in most of our markets. For SMBs, when we see 2 to 3 percent penetration, we're thrilled," said Brandon Disney, director of operations at Data Doctors, a Tempe, Ariz., company with 78 franchises sold.
RescueCom's Milman, whose company pulled in $10 million in revenue last year, wants more?a lot more. "Five percent market share is not a good goal. RescueCom's goal is to dominate in every area," he said.
The future for such empire-builders is bright, said CMIT Solutions CEO Jeff Connally, whose Austin, Texas, company is emphasizing managed services sales to its 84 franchisees operating 95 territories in 32 states. "We're expecting year-over-year growth of more than 50 percent through the first quarter, and it's managed services that's driving it," Connally said.
Not a believer yet? "One-third of all revenue in this country goes through a franchise business," Milman pointed out.
So Many Models, So Many Markets The bread-and-butter for the oldest and largest IT franchisors is a variation of break-fix work charged by the hour. Some, like 1 800 905 GEEK and RescueCom, are building up corporate managed services profiles. Others, like Fast-Teks of Tampa, Fla., encourage franchisees to add on MSP capabilities on their own. One of the biggest franchisors?Computer Troubleshooters, with 260 North American franchises and an additional 210 operated internationally?has added limited MSP services but seems to largely be sticking with its single-technician, break-fix formula.
Meanwhile, companies such as the Utility Co., CMIT Solutions, TeamLogic IT in Mission Viejo, Calif., and Concerto Networks in San Diego, are betting on nearly pure MSP plays. The models on offer are varied, to say the least.
Investments range from the $1,990 it costs to become a Soft-Temps Worldwide computer consultant, to the $284,000 it can cost to open a Computer Renaissance brick-and-mortar storefront. Figuring out the true costs can be difficult?RescueCom franchisees sign a five-year contract but pay 18 percent in ongoing royalties, while Data Doctors charges just 5 percent in royalties but locks franchisees into 20-year deals.
Franchise models can get so specialized that franchisees are more agents than business owners. That's the case with Scottsdale, Ariz.-based DataPreserve, a data backup, storage and recovery company that franchises out sales for franchisees to bundle onto other vendor deals, such as MSP services from Do IT Smarter.
It's a wide-open space, and vendors are taking notice. Software giant CA, Islandia, N.Y., has quietly built up strong relationships with 1 800 905 GEEK, Computer Renaissance, RescueCom and Computer Troubleshooters, whose technicians push CA's firewalls and antivirus solutions to clients.
"We saw the burgeoning business of companies like 1 800 905 GEEK servicing the home and SMB," said George Kafkarkou, senior vice president of CA's home and small office division. "With the nature of solution providers evolving and the growth area this market represents, this is a material opportunity for them. And I think this is something the end-user wants?otherwise you wouldn't see it growing."
The managed services franchisors generally work in tandem with MSP platform vendors. The Utility Co.'s network operations center is powered by Ipswitch, while CMIT Solutions resells Zenith Infotech, Data Doctors works with N-able, Computer Troubleshooters lists Level Platforms as a partner, TeamLogic IT runs Kaseya's platform, and Concerto Networks franchisees have their choice of Kaseya, N-able and Zenith.
Bill Stewart, N-able's vice president of marketing, likes how franchised MSPs are positioned to sell up to SoHo customers. "Most VARs tackle SMBs directly. But a Data Doctors goes to the SMB and says, 'We'll do your home offices, and if we do that well, how about your real office?'"
N-able is taking the model seriously?it recently hired a major accounts representative to focus entirely on franchises.
The Rise and Fall of the Franchised Empire?
Some in the industry are very leery of what they fear may be the over-commoditization of IT services, or worse, an eventual triumph of sales over substance.
John Igoe, CTO of MSP software vendor SilverBack Technologies, for one, wonders if franchisees selling managed services know what they're taking on. "Do they have the operational capability? Do they have the know-how to really deliver managed services? It's a lot different than traditional break-fix," Igoe said. "Will they ever be able to offer service-level agreements of any substance? The complexity of this model, especially with regard to compliance, is enormous. Is a customer really going to like that the organization touching deep into their network is two or three levels removed from their sales contact?"
Craig Brenner of New England Data Services said franchised IT services "haven't penetrated any market that we do." The CEO of a pure-play MSP in Waltham, Mass., Brenner said he sees some value in the franchise model as an engine of horizontal growth but doubts that a typical franchisee would ever be able to scale vertically. "The franchise model is riddled with difficulties. It's a great way to grow the business, but a very difficult way to scale the business. Every customer has different needs?different printers, different firewalls, different everything?how do you scale that? You're going to standardize performance in an environment that has an unlimited number of variables? You can't," he said.
Perhaps not so strangely, RescueCom's Milman agrees?more or less. "A lot of people getting into franchising get a slick franchise sales guy. I did it?I'll admit it?and it wasn't long before I said, you can no longer represent me. As you research the franchises, you'll see that many people are out there signing franchisees up simply because their check can clear," he said. "We don't want to do that. We want our franchises to be able to service every level of customer from the grandma who can't print her photos to the enterprise-level company. Look, I've turned down more people who have wanted to become RescueCom franchises than we've sold."
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