The Cloud Business Model
Updated: Apr 18, 2019
Every MSP CEO that has aspirations of evolving their MSP towards cloud should develop a business model that supports their cloud strategy. If you haven’t, then this blog will give you some guidance and ideas on how best to accomplish this vital step.
We discussed this topic recently in a webinar hosted by The Channel Company and Axcient, titled Build Your Cloud in 8 Steps . While this webinar covered a broader scope for MSPs to develop their cloud practice, this blog dives a bit deeper into the initial steps that every MSP should undertake to build a successful cloud practice.
This effort of developing the Cloud Business Model is significant and requires the MSP CEO to thoroughly design a plan for this initiative. This is an A-team kind of effort that draws on your key executives and best engineers in order to be successful.
What are the steps and how do you approach building this Cloud Business Model?
To begin with, review and determine how your current client base is trending with cloud solutions. Are you having conversations with a segment of clients about cloud? What is the size and complexity of these clients’ technology? Are there regulatory issues to be considered (i.e. HIPAA, PCI, SOX, etc.)? By looking for pockets of opportunity within your own client base you will find a common cloud solution that can be implemented across this segment.
Starting with your existing clients is also a good idea since you know their business and their technology. This buys you time to ramp up your internal efforts and processes before engaging new prospects. You also typically have more ‘goodwill’ with existing clients for the times when you need a little forgiveness as you develop this new cloud offering.
With this in mind, develop a strategy that defines the target client demographic and their key business needs as it pertains to cloud. The resulting strategy will frame all other decisions you make regarding your Cloud Business Model.
For example, a common cloud offering for many MSPs today is Infrastructure-as-a-Service, commonly referred to as IaaS. The MSP may decide to build out their own IaaS infrastructure, or they may elect to partner with a vendor that specializes in IaaS. Each of these decisions represent a different financial model.
Understanding the cost of the proposed cloud solution is just the beginning. As you also have to understand the metrics for generating sales revenue and targeting your gross margin production.
The costs for developing a cloud offering will vary, but the approach is the same. This approach relies on the MSP to identify specific metrics and key performance indicators (KPIs) that are associated with this solution.
Developing effective metrics and KPIs requires a breakdown of goals, tasks, events, resources, staffing and other matters required for a successful cloud practice. Many of the standard KPIs include metrics such as # leads per month, conversion rate, cost per lead, cost per associate, and others that lead to successful outcomes and results.
With a well-defined Cloud Business Model the MSP CEO will make better business decisions and produce better results. Jason Bystrak, Vice President, Cloud Business Unit, for D&H Distributing, states this helps the MSP adjust their efforts while building their cloud practice:
“If the plan does not produce the expected ROI, do not adjust the results, adjust the KPIs that create the results.”
This is great commentary from Bystrak as it keeps the MSP focused on generating the ROI required to sufficiently sustain a cloud practice. A proper cloud solution costs what it costs. The MSP CEO must be focused on driving revenue to be successful.
By modeling out the variable KPIs you will then have an idea and a framework by which to go about establishing your sales effort. The MSP should have a predictable knowledge about what activities generate and lead to cloud sales, and the resources required to do so.
For instance, a webinar is a common marketing event intended to attract qualified leads. The MSP will identify the cost of producing the webinar and expected number of qualified leads generated as a result. Based on the conversion rate of these leads, the MSP will anticipate generating a specific amount of revenue. This event, and others like it, will be part of the MSP’s business plan for generating the expected ROI.
Pricing of cloud services is a key component of the Cloud Business Model. The most successful approach is ‘value-based’ pricing that focuses more on the business outcome for the client, rather than competitive price.
Value-based pricing is driven by bundling the MSP’s offerings into a single bundled price package. This helps the MSP deliver their solution based on the client’s need to solve a business problem. With bundled pricing the client does not have the opportunity to shop you by line-item; which may direct the conversation more towards pricing versus business value.
Staffing is another part of the Cloud Business Model that the MSP CEO should carefully consider. This includes staffing for sales, marketing, pre-sales engineer, support engineers and other roles identified for a specific cloud solution. Some of these roles may be part-time and fulfilled by another staff member. However, it is still important to approximate the cost of this role to ensure your ROI is determined accurately.
As there are significant expenses associated with building a cloud practice, the Cloud Business Model should also include an understanding of the MSP’s cash flow requirements. The slippery slope here is that the MSP will have to invest in training, startup costs, staff, marketing and, in some cases, infrastructure before the MSP becomes cash flow positive on this venture. The MSP needs to be sure there is sufficient working capital while ramping up sales.
The Cloud Business Model is one of the more important aspects of today’s NextGen MSPs. By conducting the diligence for understanding the costs, margins, ROI, KPIs and efforts to generate cloud revenue the MSP will have a much higher success rate for their cloud practice.
For a sample spreadsheet model of this Cloud Business Model, go to www.mspceo.com/resources to download.