Building Your Cloud Business Model

By Tommy Wald –

Every Managed Sales Provider (MSP) CEO with aspirations of evolving their MSP towards the cloud should develop a business model that supports their cloud strategy. If you haven’t done this, keep reading. This blog will give you some guidance and ideas on how best to accomplish this vital step for success.

We discussed this topic recently in a webinar hosted by The Channel Company and Axcient, while the 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.

Developing the Cloud Business Model is significant and requires the MSP’s CEO to thoroughly design a plan for the initiative. It requires an A-team kind of effort that draws on your key executives and best engineers.

Start Where You Are

To begin, review and determine how your current client base is trending with cloud solutions. Ask yourself the following:

  • 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.)?

Identifying pockets of opportunity within your own client base will help you find a common cloud solution that can be implemented across this segment.

Target Existing Clients First

Start with your existing clients since you know their business and their technology. This buys you time to ramp up your internal efforts and processes before engaging new prospects. Build off of the ”goodwill” you’ve established with existing clients just in case you need a little forgiveness as you develop this new cloud offering.

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.

Understand Cost While Managing Margins

Understanding the cost of the proposed cloud solution is just the beginning. 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 the 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 standard KPIs include number of leads per month, conversion rate, cost per lead, cost per associate and others that indicate the health of your Cloud Business Model.

With a well-defined approach, the MSP’s CEO will make better business decisions and produce better results. Jason Bystrak, Vice President, Cloud Business Unit, for D&H Distributing, explains how 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 return on investment (ROI) required to sufficiently sustain a cloud practice. A proper cloud solution costs what it costs. A CEO must be focused on driving revenue to be successful.

Predict Marketing and Sales ROI

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 predictive knowledge of 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. An 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.

Develop Pricing Structure

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 business outcomes for the client, rather than competitive price.

Value-based pricing is driven by bundling MSP offerings into a single price package. MSPs can 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.

Ensure Comprehensive Staffing

Staffing is another part of the Cloud Business Model that an MSP’s CEO should carefully consider. Staffing for sales, marketing, pre-sales engineers, support engineers and other roles identified for a specific cloud solution must all be considered.  Some of these roles may be part-time and could potentially be fulfilled by an existing staff member. However, it is still important to approximate the cost of each role to ensure ROI is determined accurately.

Maintain Cash Flow Requirements

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. MSPs need 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 due  diligence to understand the costs, margins, ROI, KPIs and efforts to generate cloud revenue, MSPs will have a much higher success rate for their cloud practice.

Download a sample spreadsheet template of this Cloud Business Model.

Tommy Wald is President of TW TechVentures providing consulting services to MSPs and IT service providers. Tommy’s background includes being a founder and CEO of a regional IT managed services and cloud provider. During this tenure he gained a significant experience relevant to evolving business models, M&A, performance optimization, staffing and sales performance.