Restructuring MSP Contracts for Recurring Revenue
A Blueprint for Value Creation
Over the years, Managed Service Providers (MSPs) have understood the critical role that recurring revenue plays in their enterprise value growth. Traditionally, hardware sales and projects offered short-term financial boosts but added little to long-term value. A shift in strategy has led to many MSPs adopting Hardware-as-a-Service (HaaS) models, which allow customers to continuously upgrade their networks and bundle hardware refreshes into monthly recurring revenue (MRR) models.
The HaaS Success Story
HaaS has proven to be a win-win for both MSPs and end-users. While clients enjoy up-to-date systems, MSPs benefit from the sticky and predictable nature of recurring revenues. The transformation of hardware sales to recurring revenue has led to substantial value creation, making HaaS a successful blueprint for further adaptations.
The Next Frontier: Projects-as-a-Service
Capitalizing on the success of HaaS, MSPs are now turning their attention towards another significant revenue source: project work. MSPs are beginning to integrate project work into their managed services agreements. By agreeing on a list of planned projects each year and spreading the project fees over monthly payments, MSPs can create additional MRR without incurring new client acquisition costs.
The Value Proposition
For many MSPs, above-scope project work can represent a significant portion of total revenue. Even successful MSPs can have 30 percent of their revenue coming from project work and hardware sales. Transitioning these projects to a recurring model allows MSPs to grow their MRR and, by extension, their enterprise value. This is because MRR growth is a key performance indicator for MSPs, and exit multiples are often based on MRR.
The Operational Benefits
Aside from the value gains, moving towards a project-as-a-service model enables more efficient project management. With projects planned in advance and spread across the year, MSPs can manage resources more effectively and eliminate the feast-or-famine cycle often associated with project work.
In an industry that’s evolving rapidly, MSPs need to constantly innovate to maximize their value. By following the HaaS blueprint and transitioning project work to a recurring model, MSPs are poised to see significant gains in MRR and overall enterprise value. The project-as-a-service model represents a strategic move that not only increases the value of the MSPs business but also benefits their customers by providing consistent, predictable IT costs.