Finding the Right Cloud Service Mix

October 18th, 2016
Vadim Vladimirskiy
Vadim VladimirskiyFounder & CEO, Nerdio

All of IT is moving to the cloud and new more on-demand models of service delivery, right? Well as most IT departments know, it’s not easy to cut-over to an all-new world of managed services overnight.

Managed service providers should heed the same lesson. As much as MSPs would like to focus only on delivering cloud-based managed services – to the benefit of both their customers AND their own bottom line – the real-world MSP service mix should include non-managed services, things like on-site IT equipment upkeep (so-called break/fix services), IT project work and consulting and even helping customers run and maintain their own private clouds. Such tasks have long sat at the center of IT outsourcers.

Which raises the question: is there such a thing as a pure-play MSP, or is that an elusive goal? What is the optimal service mix (and how is it evolving over time?) for MSPs to best-serve both their customers and their own interests?

old vs new

A number of studies have attempted to better understand the right MSP service mix. By one recent count, 53% of MSPs produce less than half of their revenue from managed services, according to a 2015 survey by Autotask, which sells a platform on which MSPs can run their business. A similar 2014 survey of North American IT solution providers by TechTarget found that 36.5% of firms offered no managed services at all; for those that did, 41% earned less than a quarter of their revenue from managed services.

But while the evolution away from traditional fix/break and hardware-based IT outsourcing may be slow, the pay-off can be large.

For instance, MSPMentor recently unveiled the latest version of its annual MSP 501 rankings, for the first time revealing the method behind its ranking methodology – dubbed Clarity Total Service Provider (TSP) score – which included a major focus on service mix, including consulting, reselling, cloud and managed services. According to MSPMentor, MSPs who derived more than 60% of their revenue from services grew 24% year-over-year, outpacing firms that focused on hardware maintenance by 17%.The Clarity TSP Index dubs an MSP as a “tier one” provider if it generates 70% of revenue from recurring services, “tier two” between 50-69% and “tier three” between 25-49% — a good scorecard for MSPs to measure their own service mix transition.

So while most MSPs have yet to shift fully to a cloud-centric, recurring revenue business model, it doesn’t mean they shouldn’t try. While it may be challenging, there are many advantages to adopting such a strategy, chief among them that it tracks directly to how enterprises are evolving their own views on IT. But don’t underestimate the value to an MSP business itself: more regular revenue streams, higher profit margins, lower operating costs and the ability to serve more cutting-edge IT needs.

For MSPs, that’s an evolution worth accelerating.