Xylotek Solutions' CEO Sells Traditional VAR Business And Creates A Cloud-Focused MSP

Xylotek Solutions President and CEO Douglas Grosfield is selling the company's more traditional VAR business and starting up a new managed services provider business, chasing an opportunity he said will yield a "tenfold increase in profitability."

The sale of Cambridge, Ontario-based Xylotek Solutions, which was named to CRN's 2012 Next-Gen 250, is indicative of a larger trend as VARs begin to tap into the opportunities generated by recurring revenue and managed services.

Grosfield hopes to tap into this new model by starting a cloud-focused business, called Five Nines IT Solutions, based in Kitchener, Ontario, which he hopes will be as close to 100 percent recurring revenue services as possible.

"An MSP play is a lot more profitable … at this point, we're looking at a tenfold increase in profitability with an MSP business that is a lot easier to deliver on," said Grosfield. "There has been a paradigm shift in the market in terms of what customers are looking for and how companies are redefining their business models."

[Related: Blockbuster Deal: PCM Buys North America Systemax B2B Business, TigerDirect Brand]

Grosfield said he entered into a deal to sell Xylotek Solutions with current company COO Chris Pickard Friday. Terms and conditions of the sale, including the price, were not disclosed.

Xylotek Solutions is a 10-year-old solution provider offering services in IT virtualization, backup and disaster recovery, and unified communications. However, said Grosfield, the recurring revenue opportunities an MSP model offer are far greater than the low commodity-based margins of a traditional VAR model.

Up to 60 percent of Xylotek Solutions' annual revenue is product-based, while 30 percent is from project-based and outsourcing services. Only 10 percent of the company's annual revenue comes from recurring services, said Grosfield.

Five Nines IT Solutions, for its part, will focus on Microsoft and its Office 365, Lenovo, VMware, IBM and other vendors to provide managed services such as backup and disaster recovery, Hardware-as-a-Service, data leakage protection, content management and filtering.

"Going forward, I'm looking at an MSP model with back-end infrastructure and outsourcing network operations, to reach and deliver higher levels of service to broader audiences," said Grosfield. "With Five Nines IT Solutions, you can deliver that with a lower headcount."

As business models undergo sweeping changes due to shifting recurring revenue and services, solution providers are seeing more consolidation and mergers in the channel.

Most recently, PCM Wednesday said it is buying the $800 million North American B2B assets of Systemax.

"The timing of this [Five Nine IT Solution] venture makes it a good opportunity … technology is mature enough and Infrastructure-as-a-Service supports the growth of everything cloud," Grosfield said. "We're seeing record consolidation and at the same time we're seeing VARs get into it and adopt these business models."

Grosfield added that one challenge he will face in transitioning to an MSP model will be customers who are used to the channel's traditional VAR model and may be hesitant to buy into the new recurring revenue model.

"There is risk in trying to get customers to understand the change in the MSP model. … it is radically different than what they're used to," he said. "On the flip side, what's the risk to me as an MSP in terms of how I'm delivering my services?"

PUBLISHED NOV. 20, 2015