I admit, I’ve borrowed the title from an excellent presentation given by Dr. Joseph Williams, Managing Director, Microsoft WW SaaS Channel. He gave a presentation at the recent Microsoft Hosting Summit, and the point was this:

The hosting market is crowded and includes huge players such as Microsoft itself. If you want to maintain a healthy hosted services business, don’t chase the same commodity offerings as everyone else, and especially don’t try to compete with the basic online offerings of Microsoft itself. Instead, compete using one or more of the many ways to differentiate your service.

Just because the market for Managed Services and Hosted Services is growing, that doesn’t guarantee that you can preserve margin. And if all you do is compete on price, it will be a race to the bottom…

The differentiation spectrum

One way to think about service differentiation is along a spectrum.  At the low end may be commodity services that have to be offered – such as email or dedicated servers – which help win the basic business.  Or perhaps they are just “check mark” requirements the MSP is expected to offer.  However these basic services are generally low-priced with low margins.

But as you move along the spectrum to the right, your offerings (as well as sales, support and technology models) will need to shift. Perhaps you begin to offer cloud services. Or perhaps hosted applications. Or even basic hosted desktops.   These services can command much higher prices – as they are higher value – but will require you to re-think how you provide them.  Rather than offer commodity offerings or customized “bespoke” services you’re accustomed to, higher-value offerings need to be scalable. That means fewer SKUs and a more cookie-cutter approach to sales and set-up. Why? They are inherently more complex at their core, and thus need to be replicable – avoiding risky customization.

As your customers migrate to higher-value services, everyone is served better: The customer – whose IT needs become met at every level, and the MSP – who benefits from higher-value services and (presumably) a more “sticky” customer relationship.  We try to emphasize this theme as part of Citrix’s Service Provider program partners as well.

The many ways to differentiate 

As Dr. Williams pointed out, there are many dimensions along which an enterprise can differentiate its brand.  But in the case of a crowded, commoditized market such as services hosting, often competing on price alone is futile.

Instead, the best strategy is to focus on a specific market or aspect of service. Perhaps it’s a unique technology or product bundle. Perhaps it’s providing exceptional service and support. The strategy could be to focus on the trust/security needs of a particular set of users, or on the specific application requirements of a vertical industry. It could even conceivably cater to the needs of a local market (or even local legal requirements such as data sovereignty).

By focusing and developing one or more of these areas, MSPs can command added margins because they are providing specific value.

And, any small business will tell you, the most difficult part of this strategy is saying “no”. That is, saying no to trying to do them all. That is, trying to cater to all forms of differentiation – which results in no differentiation at all. It may seem counterintuitive, but by focusing on a smaller market, you’ll find it easier to market, sell, and ultimately retain customers.  As I’ve pointed out earlier, the market for Managed services (for example, hosted desktops) could be as large as $5.6 billion in a few years.  The pie is big enough for everyone. So focus.

Determining what to pursue

So you’ve decided to focus, perhaps by catering to a vertical market. Perhaps you have a number of customers in a given vertical, and you have learned about the specific needs, applications, regulatory issues and service-levels these firms need. You’re lucky – keep pursuing that and developing your brand and reputation.

If you have not yet chosen a focus, consider aptitudes you may have already developed – do you offer a HIPPA compliant service? Are you ISO9001 certified? Can you guarantee Data sovereignty? Do you support specific industry association standards?  These may be competitive advantages to exploit.

The other approach is to pursue a vertical specialty. In a recent MSPmentor study, the majority of MSPs focused in one or more verticals – the most popular being Healthcare, Banking/Financial services, Legal and Accounting.   But even these are broad – consider an even narrower specialization – perhaps legal discovery services or medical billing. Remember, the more focused, the more marketable and the more valuable.

One other observation about the MSPmentor study you may have noticed: Nearly 34% of respondents indicated “no vertical market focus”.  Unless they have some other differentiation in their favor, I would call into question their long-term viability.

Your next move…

Andy Grove of Intel famously said “Only the paranoid survive”. In our differentiation context, we have to assume that there will always be bigger players with deeper pockets who can compete on scale/cost – and win.

Your job as an MSP is to find ways to serve unique angles of the broader market – areas where your brand, value, and ultimately your margin – is maximized. It’s all about focus and differentiation. And with a multi-billion dollar market for hosted services, even a small percentage can be more business than you may be able to handle.

Coda: If you are a Managed Service Provider looking to expand your business, consider working with Citrix to offer additional hosted services including hosted apps, desktops, mobility services etc.  We’d love to help you build your business.