Wednesday, January 18, 2012

How the Cloud is Changing the MSP Landscape

According to market research firm IDC, worldwide revenue from public IT cloud services exceeded $16 billion in 2009 and is forecast to reach $55.5 billion in 2014, representing a compound annual growth rate of 27.4%. Industry watchers and major players are predicting the next wave of cloud adoption will take place in the SMB segment, the primary market for managed service providers. At MSPexcellence, our focus is on helping MSPs grow a recurring revenue business with efficient sales and marketing strategies and, from our vantage point, we see the cloud changing the MSP landscape in a big way.
We’ve seen it before . . .10 to 15 years ago IT services in mid-sized companies of 50 to 500 employees were provided by internal systems supported by a small and over-worked IT staff that was, at best, reactive to the needs of the business. These companies purchased their data systems from VARs, their phone systems from interconnects and they augmented their internal IT staff with break-fix support and professional services for maintaining their hardware and software. It was a heavy capital investment for systems and a heavy operating expense for labor. Let’s call this phase “IT version 1.0”.
Then an evolution happened called managed services.  IT service delivery became far more efficient (and less expensive) when outsourced to an MSP. The MSP was able to achieve greater efficiency with the help of a disruptive technology called the remote monitoring and management (RMM) platform and it allowed them to spread their superior expertise across a very large community of companies and end-users.  The MSP model took hold in the industry because it was a win-win for customers (big OPEX savings) and service providers (long-term recurring revenue). Let’s call this phase “IT version 2.0”.

And now there is an even more revolutionary evolution taking hold . . . the impact of the cloud on the MSP landscape.  Just like RMM, the cloud is a disruptive technology ushering in a new evolutionary phase of IT service delivery, only this time the change will be even more profound. Let’s call this phase “IT version 3.0”.  This phase represents the era of cloud services and the dominance of a new kind of IT service provider - the Cloud Solutions Provider (CSP).  

The CSP will deliver integrated cloud services and managed services, a best of both worlds “solutions” approach to IT.  Cloud services will dramatically reduce capital expenses for cash conscious mid-sized businesses, a huge advantage over premise-based IT services. Additionally, as premise-based systems become centralized and virtualized, the support burden will be further reduced and the concept of the truck roll will effectively disappear - all leading to even lower operating expenses. With this new and powerful value proposition, the CSP will be able to attract new business and displace traditional MSP competitors.
However, there is still one problem with this shift in the landscape. How does the CSP make money?  That’s the key question for 2012 and you can bet every MSP is thinking this through very carefully. Virtual data centers are prohibitively expensive to build and operate and reselling commodity cloud services seems to offer little value while diminishing the role of the MSP. We have been thinking about this question too.  In fact, we have been doing more than just thinking about it. We've been working with MSPs to help them develop and execute a CSP business plan. This is not a simple process and there are a lot of moving parts, but we can tell you this:  the CSP model will survive and thrive in the era of the cloud.
However, this evolution will require the MSP to think differently about their business by blending their in-house managed services with out-sourced hosted cloud services.  It will require them to think in terms of integrated customer solutions and how they can deliver the greatest customer value with a blend of cloud and premise technologies. It will redefine their role as a trusted IT advisor to include cloud migration and integration expertise. And it will require business planning tools, where pricing, profitability targets and cost of service elements can be plugged into a model and applied to customer scenarios – scenarios that represent a repeatable sales formula for predictable revenue and margin results.  We will be blogging about all of these topics in the days and weeks ahead so check back often; as always, we welcome your feedback.
NEXT:  How to Add Cloud Services to your MSP business

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