MSPs and the Cloud: A Successful Partnership or Not

Techaisle’s survey of 2115 partners shows that while many VARs offer managed services to their customers, only a small percentage successfully achieve consistent growth and profitability. In contrast, MSPs have been more successful in their managed services business model and have also begun to achieve success in the cloud. MSPs are well aligned with the business requirements associated with cloud sales. They can act as a logical extension to partner activities by providing discrete services that can be delivered efficiently. However, unique business requirements and partnering practices associated with cloud suppliers have proved challenging for MSPs.

Techaisle data shows that 65% of VARs offer managed services to their customers. Still, only 50%, less than one-third of all VARs, successfully achieve consistent growth and profitability within managed services. The data is similar to 2018. Conversely, 71% of MSPs have succeeded in their managed services business model, and 29% are still striving to achieve profitability and success. Unlike the last several years, MSPs have begun to achieve success in the cloud. 89% of MSPs currently offer cloud, and 72% have achieved cloud success. It is two-thirds of all MSPs, up from less than half in 2018.

MSPs act as a logical extension to partner activities by providing discrete services that can be delivered efficiently, optimizing the primary source of profit within the channel model. The cloud acts as the ‘next step’ in the MSP’s path, externalizing the delivery of specific technical services and entire applications and environments.

MSPs are well aligned with the business requirements associated with cloud sales, as they understand recurring revenue business models and the 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 have proved challenging for MSPs.

There needs to be a better perception that MSPs focus strictly on the supply of services to customers. Data drawn from numerous Techaisle research studies show that this is not the case; MSPs encounter demand for products and services, and as entrepreneurial businesses, they respond to both.

What distinguishes successful firms in building MSP businesses is how they lead with services and the resulting ratio of services to product revenues. There is a clear distinction: successful MSPs lead with services. Meanwhile, channel businesses that could be more successful at selling managed services lead with and derive the most significant proportion of their revenue from product resale. Techaisle research shows that very successful MSPs have a revenue mix of 40% product resale (down from 48%, five years ago) and 60% services revenue (up from 52% five years ago). The revenue is also divided into services-led contracts and product-led contracts.

Yet, cloud businesses are not MSPs and vice-versa. At some level, the cloud requires capital investment. The services delivered to the client depend on the cloud service provider’s ability to translate efficient management of IT resources into business benefits for customers. Like the MSP, 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 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).

Cloud suppliers have some business requirements that are rare within the MSP community. One crucial distinction is the CSP’s need to source infrastructure, which may entail capital investment. MSPs lack experience capitalizing delivery assets and may lack needed expertise and investment capital.

CSPs also need to dedicate skilled resources to operating infrastructure. But, again, this seems like it wouldn’t be a significant point of departure from the MSP (or IT services generally) business approach. Still, there is a meaningful distinction: in an MSP/IT service provider, virtually all skilled resources are directly billable to clients, while in the 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 a team to running the infrastructure that underlies customer delivery. On the other hand, a cloud provider needs to allocate staff to both billable services and support the (billable) infrastructure. This adds complexity to management planning and the workforce's prioritization of technical skills.

A focus on refining and delivering tightly-defined, standardized services is one attribute that differentiates MSPs from other channel businesses. Many channel firms, including VARs, SIs, and consultants, have a flexible range of services to meet a client’s overall needs rather than focusing on discrete services that address only a single requirement.

Beyond the difficulty in changing services-related processes, the data highlights channel difficulties in developing SLAs (another requirement of “package and deliver standardized services”), finding sales staff who can articulate the managed services and cloud value propositions, and sales force training/compensation (essential to aligning with recurring revenue), and meet “unrealistic” customer demands and demonstrating value to customers (inherent in the challenge of positioning services to these clients) as top challenges in offering managed services.

Customers are increasingly demanding automation, orchestration, integration, and transformation. MSPs usually position their infrastructure management offerings to deliver on those demands. However, in its transformational end stages, success is defined not by supplier delivery but by customer processes and objectives. Traditionally, MSPs have offered clients advanced and highly efficient solutions to current problems. As a result, they do not tend to customize their offerings for individual clients – doing so would undercut the efficiencies at the core of their business models. VARs and SIs, on the other hand, have pursued 'trusted adviser' relationships that reflect a deep understanding of client needs and objectives, reflected in technology strategy, planning, deployment, integration, and management. The approach, and the core commitment to building solutions appropriate to a client's specific needs, may well be better suited to support clients’ automation and transformation initiatives than the centralized, supplier-driven model at the center of MSP business/delivery strategies. The question, therefore, is, is the cloud still the most significant potential disruption factor for the managed services market and channel partners? The answer is that it depends.