10 ways MSPs can drive managed services growth in 2018
Will 2018 be a year of above market growth for your company? If you invest aggressively in the right opportunities you’re putting the odds in your favor. We believe MSPs should maintain focus on managed services as growth, profitability and acquisition trends continue to strongly favor this revenue source over resale and professional services. MSPs should also embrace a multi-cloud approach as the number of clouds used by end customers continues to expand. Read on for 10 growth plays to organically drive more managed services revenue. Each includes a next step to quantify or advance the opportunity. We recommend you pick the three that represent the best potential for your business and complete the first step to validate the opportunity.
1. Manage your customers existing on-premise IT
Managing on-premise IT represents an enormous opportunity for MSPs. More than 60% of IT infrastructure sits in company data centers (including over 30M VMWare virtual machines), and less than 20% of it delivers a cloud experience. The weaknesses of the traditional on-premises, non-cloud IT model are driving customers to shift to either private or public cloud. This shift offers a large opportunity for MSPs to take over management of this existing infrastructure and add a cloud layer to convert traditional IT to a self service private cloud for their customers. MSPs can not only drive MRR growth but help their customers make full use of their existing infrastructure investment and let customers focus on what drives their business – typically data and custom applications rather than infrastructure and platform services.
Next step: Assess the revenue potential from current customers who have on-premise, non-cloud IT based on their virtual & physical server count.
2. Convert project & resale work to managed services
Many MSPs operate with a hybrid model of a majority of managed services supported by break/fix, resale and professional services work. Offering customers the option to buy their IT as a service provides an opportunity to improve the value of the MSP’s business as lower valued HW & SW resale (valued at 10c per dollar of revenue by MSP acquirers) and professional services (valued at 63c per dollar of revenue) is converted to higher multiple managed service revenue (valued at $1.27 per dollar of revenue). Note all figures come from Paul Dippell at Service Leadership Inc.
Next step: Determine the valuation impact if your company converted 50-100% of its resale & project work to managed service.
3. Manage public clouds for your customers
Public cloud is growing at around 30% a year and now accounts for around 26% of all infrastructure spending. However, this spend is poorly managed today with estimates of public cloud waste ranging from 30%+ of cloud spend and over $6B a year being lost. Customers are paying for idle resources, not getting negotiated discounts, struggling with complex bills and chasing down rogue spending across their organizations. Customers need help to manage this spend, as well as their initial moves to the public cloud (67% of customers looking to expand public cloud wanted MSP help according to a NetEnrich survey). Providing value added management support to solve these problems will also allow MSPs to earn margins above the typical 7%+ for cloud services resale alone.
Next step: Assess the additional revenue potential if you were able to reduce customer’s public cloud waste by 50% and could capture 20% of the savings as revenue. P.S. Try our new interactive MSP revenue growth calculator for another quick way to size the opportunity for your business.
4. Expand your own cloud services e.g., IaaS, VDI
Cloud infrastructure is growing 25% a year according to IDC (a mix of public cloud at 30% and private cloud at 10%). MSPs can provide cloud services profitably at pricing below the list prices of leading public cloud providers if they have the right infrastructure platform in place. With advances in pre-integrated cloud offerings, the game has changed for MSPs as the investment, complexity, skills & risk of running their own clouds have decreased. If their initial scale is low, there are also white label options to acquire the necessary capacity, further reducing the time and cost to get started. MSPs report gross margins of 50%+ from their own services, significantly above other service lines.
Next step: Assess the gross margin potential if you provide services equivalent to 20-50% of SMB customer (1-1000 employees) and 10-20% of enterprise (1000+ employees) customer infrastructure usage.
5. Move customer public cloud workloads to your own cloud
MSPs can deliver value to customers and improved margins through targeted migrations of workloads from public clouds to their own infrastructure platforms, if they have an optimized infrastructure platform in place, assuming the workload does not use proprietary public cloud services (e.g., machine learning). Customer motivations for moving workloads out of the public cloud can include:
- Better pricing
- Control / compliance concerns
- Dissatisfaction with support (e.g., smaller customers may find it hard to get quality support from AWS & Azure that matches the white glove support MSPs can deliver)
These moves can create savings for customers vs. public cloud provider list prices while providing MSPs gross margins of 50%+. MSPs can also use online pricing tools that compare public cloud to on-premises costs available to support migration assessments. Part of the assessment should address the one off migration cost, as public cloud providers do not always make it easy to move workloads out of their environments.
Next step: Send a short online survey to your customers asking about their public cloud usage, satisfaction with support, and required savings to switch providers. Analyze the results to determine the number of VMs that could be moved and the revenue potential.
6. Deliver self service IT to customers across multiple clouds
Our research with IT professionals has found that they consistently rate delivering self service IT as the top thing that would make them heroes to their end users, but have struggled to deliver this internally as they face high one-of costs and a lack of skills (which has contributed to the relatively low growth rate of private cloud). The ideal solution for end customers is typically a user interface that allows end users to quickly & easily deploy on whichever cloud (on-premises, colo / MSP operated or public) that makes the most sense for their workload within the cost and governance guidelines set by the IT team. A broad set of clouds should be supported – Gartner’s latest research shows the average customer is using more than 4 clouds. MSPs that can deliver this high quality experience to their own customers will achieve higher customer retention rates (a major profitability driver – research done by Frederick Reichheld of Bain & Company, the inventor of the net promoter score, shows that increasing customer retention by 5% increases profits by 25% to 95%) and drive more growth with current and new customers.
Next step: Survey your customers on their progress to self-service IT across all the clouds they use, and willingness to pay for that experience on a per-VM basis.
7. Become a trusted source for cloud cost data
The rapid growth of cloud providers and services has created an incredibly complex environment for deploying workloads with the right instances on the right cloud. There are now literally millions of potential combinations for deploying a VM given the permutations of compute, memory, storage, IO, region, etc. The ability to provide customers with real time accurate data on cloud costs, including the optimal instance for their workload has become highly valued, particular given costs on different clouds can vary by 2-4x or more. The ideal solution would also include the MSPs’ own services, and support inclusion of the customers’ on-premises and other environments. MSPs that can provide this functionality to end customers can deliver cost savings and peace of mind, and drive greater loyalty. MSPs can also move up the value chain, becoming a trusted partner supporting the customer’s full multi-cloud strategy. Online services have recently become available to deliver these capabilities, which would otherwise be infeasible to create and maintain.
Next step: Offer a small subset of your customers a cost savings assessment based on optimizing their cloud usage, and use online cloud cost tools to help complete the assessment.
8. Strengthen enterprise capabilities to grow upmarket
More enterprises (1000+ employees) are bringing in MSPs as part of their IT mix, often to enable staff to focus on strategic projects. To capitalize on this opportunity, MSPs will need to upgrade their offerings including more advanced multi-tenancy capabilities, support for charge back to multiple customer business units etc.
Next step: Size the revenue growth you could achieve an additional 10-20% of spend at your enterprise accounts. Identify the key capability gaps that may be limiting your ability to capture this growth.
9. Streamline operations to free up funds for growth
Productivity improvements are a common component of growth platforms, freeing up resources (people and financial) to invest in new initiatives. One key leverage point is the usage of a highly automated IT infrastructure platform. Not only can automation drive down labor costs (e.g., VMs per admin can vary by 2-3x or more across platforms) for Day 1 / Day 2 activities but also enables superior customer service through shorter deployment times. The most critical automation is around the most frequent or time-intensive tasks (e.g., deploy VM, add storage etc). From a Day 0 deployment perspective, pre-built infrastructure building blocks reduce the effort to install new capacity, allowing teams to move faster.
Next step: Quantify the cost savings from improving your key metrics (e.g., VM/Admin) to best practice levels, and assess how much revenue growth could be achieved by reinvesting those savings.
10. Buy IT on an opex basis to free up cashflow
The MSP market is outgrowing the broader IT market creating an environment for a high return on investment. However, most MSPs are constrained by access to cashflow to make these investments. In particular, delivering services from MSP-owned assets is a more capital intensive model. If you could convert your capex to opex . A small number of IT vendors now offer consumption based pricing (e.g., pay per VM used) for infrastructure hardware and software that delivers an opex model, reducing upfront investment and reducing risk as you pay only for services used. If space is a constraint, utilizing colo facilities can provide a similar benefit. MSPs have recognized the advantage and rated utility based or consumption based pricing as the top form of support IT vendors could offer to support their profitability in a recent survey by Channel Masters.
Next step: Evaluate the 5-year cashflow impact of shifting from capex to opex and the additional growth that could be achieved. How much enterprise value is created?
Looking for help with these plays?
The above growth plays form part of our forthcoming HyperStart MSP growth platform, based on the HyperGrid team’s experience in driving cloud success for MSPs around the world. Please drop us a line at firstname.lastname@example.org if you’d like help implementing these growth plays or have feedback. We’d love to hear from you. The HyperStart program is also designed to work best with HyperCloud, the industry’s most advanced MSP platform for multi-cloud management. Feel free to learn more at hypergrid.com.
“MSP, VAR Valuations: What Your Business Is Really Worth“, Channel e2e, (includes interview with Paul Dippell of Service Leadership Inc).
“Market Guide for Cloud Service Brokerage”, Gartner Inc, Sid Nag, 23 August 2017, select data here.
“IDC’s Worldwide Quarterly Cloud IT Infrastructure Tracker“, IDC June 2017.