Cloud continuing to challenge SMB MSPs and frustrating VARs but helping CSPs

In a word, the most significant potential disruption factor for the managed services market and channel partners is still cloud. Techaisle data shows that 68% of VARs are offering managed services to their SMB customers but only 46%, that is, less than one-third (31%) of all SMB-focused VARs have been very successful in achieving consistent growth and profitability within managed services. On the flip-side, 83% SMB-focused MSPs have become very successful in their managed services business model. But the MSPs have not achieved the same success in cloud. Only 63% of MSPs are currently offering cloud and although 72% of them have achieved cloud success, it is still, only 45% of all SMB-focused MSPs, slightly less than half of the managed services success. In fact, when extended, data shows that VARs are still caught in a spaghetti junction, they are neither achieving great success in cloud nor in managed services. In the case of MSPs, the overwhelming vendor forces are proverbially narrowing the banks of the river with over capacity.

The success in SMB mobility-focused business model is even lower than cloud and managed services.

If MSPs act as a logical extension to channel activities (by providing discrete services that can be delivered in an efficient manner, optimizing the primary source of profit within the channel model), cloud acts as the ‘next step’ in the MSP’s path, externalizing delivery not just of specific technical services but of entire applications and/or environments. Through this lens, cloud can be seen as an extreme form of the MSP approach: the acronyms built around the concept of ‘as-a-service’ (SaaS, IaaS, PaaS) refer directly to delivery of remotely managed services.

Yet, cloud businesses are not MSPs and vice-versa. MSPs are services businesses. At some level, cloud requires capital investment, and the services delivered to the client are dependent on the cloud service provider (CSP)’s ability to translate efficient management of IT resources into business benefit for customers. Like the MSP (or SP), the CSP is apt to offer customers a service or a portfolio of relatively rigidly-defined services; however, these offerings are rooted in a CSP’s ability to invest in infrastructure (as product or as XaaS offerings) and in staff capable of managing these assets in a way that supports creation and delivery of higher-order services. From this perspective, the MSP is closer to the business models of SIs, consultants and VARs (staff directly create and deliver customer services; little capital investment in underlying systems, as these are provided by, or at least purchased by, clients) than that of the CSP (staff is allocated to both customer delivery and asset management/optimization; internal experts need to address capitalization/investment requirements).

This is not to say that cloud sounds a death knell for the MSP model. MSPs are well aligned with the business requirements associated with cloud sales, as they understand recurring revenue business models and packaging of offerings into discrete, deliverable services (vs. ‘whatever the customer needs’, which is not a winning proposition for a cloud provider). But again…cloud suppliers have unique business requirements and partnering and go-to-market (GTM) practices that may prove challenging for today’s MSPs.

Cloud suppliers have some business requirements that are not common within the MSP community. As noted above, one important distinction is the CSP’s need to source infrastructure, which may entail capital investment. MSPs do not have experience at capitalizing delivery assets, and may lack needed expertise and/or investment capital.

CSPs also need to dedicate skilled resources to operating infrastructure. This seems like it wouldn’t be a significant point of departure from the MSP (or IT services generally) business approach, but there is a meaningful distinction: in an MSP/IT service provider, virtually all skilled resources are directly billable to clients, while in cloud, these resources are needed to create, operate and enhance an offering that is then sold (often in conjunction with other IT services) to the customer.

MSP staff tend to be focused on supporting clients; there is no substantial need to dedicate staff to running the infrastructure that underlies customer delivery. A cloud provider, on the other hand, needs to allocate staff to both billable services and to support for the (billable) infrastructure. This adds complexity to management planning and to the prioritization of technical skills within the workforce.