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Ten mistakes to avoid in cloud or MSP business model transitions

The process of transitioning to the cloud or MSP business model can run smoother if channel partners avoid these 10 missteps.

While the benefit of recurring revenue makes it worth the effort, transitioning from value-added reseller (VAR) to the cloud or managed service provider (MSP) business model is no easy task.

Solution providers encounter a number of challenges along the way, many of which can be an impediment to success. Here are 10 common mistakes solution providers make while transitioning business models and how to avoid or address them.

Mistake No. 1: Abandoning the idea of a value-add

The biggest mistake channel companies make, according to Jeff Kaplan, managing director of THINKstrategies Inc., is thinking "that the old model of a value-added reseller disappears when you move into the new world of the cloud, when in fact there are still lots of opportunities to be a value-added provider," Kaplan said.

Customers are challenged with determining which cloud services are right for them, and how to customize those services to best meet their needs. "That means trying to cater those services to the particular business process challenges associated with a particular industry or vertical market," Kaplan said. "Very often [VARs] were born doing the same thing -- taking off-the-shelf software and customizing it to meet the needs of particular customers in specific industries. So, the more things change, the more they remain the same."

Mistake No. 2: Not committing to the cloud or MSP business model

Many solution providers have a hard time letting go of their legacy business, according to Carolyn April, director of industry analysis at CompTIA. "Most solution providers don't transition out of legacy business immediately, and most don't do it at all. If you are going to dive into something new business wise -- let's say managed services -- you need to make some commitment to that," she said.

The level of commitment solution providers dedicate to the new business model has a direct impact on its success. "We see solution providers only devote a small fraction of the business to a new venture, so they don't become good at it, and they don't generate a lot of revenue from it, so it becomes a fraction of what they're continuing to generate," April said.

Mistake No. 3: Not improving efficiencies

Another common mistake solution providers make when transitioning business models is failing to do "backwards due diligence," according to April.

A lack of transparency is the worst enemy of an MSP.
Charles WeaverCEO, MSPAlliance

"A lot of VARs get real excited and want to dive in, and they make the mistake of not assessing their current business model to see if they are operating as efficiently and optimally as they can in their current business," she said. "Doing that gut check is important before you take on a new business model, because if you're not firing on all cylinders, chances are you won't be positioned to do the new thing well."

Mistake No. 4: Failing to establish trust

For managed and cloud service providers, transparency is the key to establishing trust with customers. "A lack of transparency is the worst enemy of an MSP. Honestly, you'll never build up enough trust if you're not capable of showing transparency," said Charles Weaver, CEO of MSPAlliance, a Chico, Calif.-based organization for managed and cloud service providers.

Weaver recommends service providers get certified or audited. "There's no place on the planet where you can get licensed to practice in managed services or cloud computing. But early stage VARs turning into MSPs have to earn trust and prove to their customers, and also to the rest of the community, that they are absolutely credible and capable of being a managed service provider," Weaver said.

Mistake No. 5: Not starting with what they know

With practically every technology now available in the cloud, it can be tempting to choose one that isn't already on your line card. However, experts recommend always starting with what you know. "They don't want to discard their track record of success that's gotten them to where they are today," Kaplan said.

"They have to build on that, but also recognize how those hardware and software competencies may be impacted by the cloud," Kaplan said. "If they are in storage, they have to understand the new storage realities of the cloud, how cloud storage works, what the strengths and weaknesses are, where value-added opportunities are and how they can differentiate themselves with those storage services."

Mistake No. 6: Poor vendor relationship management

Transitioning to the cloud or managed services changes the nature of the vendor/partner/customer relationship, and it must be managed accordingly. "In the past, if I was working with a vendor that supplied products and services I sold to a customer, I was still responsible for knowing how it was delivered to the customer, and I may have had exclusive face-to-face interaction. With the cloud, I now serve as an intermediary, but that cloud vendor now has the responsibility and the opportunity to touch the customer," Kaplan said.

Kaplan said partners must have a clear understanding of how their cloud vendors will work with them to satisfy customers' expectations without giving up too much control of customer accounts. The partner must also explain to customers who they should call if they have a problem.

Mistake No. 7: Underestimating what it takes to make the transition

Kaplan compared a business model transition to building a house: "It always takes longer and costs more than you think it will cost to acquire new skills and establish new business processes and find the right strategies for success," he said.

"While it may appear simple and the whole value [proposition] of cloud is that it is meant to be simpler than the old world, and less costly, it is more complicated because it is so different in terms of the way in which it's delivered," Kaplan said. "But the good news is that if a value-added reseller is able to be competent in using cloud services to solve customer problems or support its own processes, it can become a much more efficiently run organization."

Mistake No. 8: Not hiring the right people with the right skill sets

Solution providers pursuing the MSP business model must be careful to hire the right kind of people, which isn’t easy. "Staffing is a challenge, and we've heard it from multiple MSPs around the world. I don't know if we have a plan for how to deal with that, to be honest. It's such a unique profession, even though we've been around for two decades, there isn't a school for MSPs," Weaver said.

Weaver explained that most technicians like to problem solve, so their focus is on fixing what is broken. That differs from the skills and mindset needed to manage a customer's IT systems. "The nature of the MSP is to not to have problems. They fix and work on things before they become broken. That's a very generic way of saying that MSPs and their technicians need to be focused not on solving problems but on proactive daily maintenance issues that will keep IT managed objects from breaking," Weaver said.

Mistake No. 9: Not changing their sales and marketing strategies

Solution providers transitioning to the MSP business model often fail to take into account their sales and marketing strategies.

"Sales and marketing are very different [for managed services]. [A VAR] sales team is used to selling products, speeds and feeds, and that's a different sale than selling services that the customer is not going to touch and feel. The conversation is very different," April said.

In addition, product-centric businesses are used to marketing themselves based on the vendors they sell and with which they are aligned. "[As a managed or cloud service provider], marketing is based on you and your performance and reputation in handling your customers' [intellectual property]. That's a messaging change, and a lot of solution providers are not good at marketing -- period," April said.

Mistake No. 10: Not getting help

Transitioning business models is a big change that involves a lot of moving parts -- all of which must be managed while keeping the current business running. "The majority of companies are small. Who has time to keep the business running and take on the challenge of transitioning business models and all the things that go along with that?" April asked.

There are plenty of resources available to help business owners make the transition, from consultants to vendor- and distributor-led training, to training and other assistance from industry groups like CompTIA and MSPAlliance.

Next Steps

Learn how to create the optimal MSP revenue mix.

Read about MSPs that leverage business reviews to improve their operations.

Get insight into the recurring revenue transition.

This was last published in May 2015

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What's the best lesson you've learned about cloud or MSP business model transitions?
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I'd add:

1 - How will you compensate sales to sell the managed services (OPEX revenue) vs. selling HW/SW/Support/Consulting (CAPEX revenue)?

2 - Do you actually have the skills to operate managed services at a price point that is profitable, since most of your projects for customers aren't focused on generating profit from IT?

3 - Do you believe there will be "recurring revenue" as the cloud business moves to on-demand pricing, instead of long-term MSP contracts?

Cancel
I'd add:

1 - How will you compensate sales to sell the managed services (OPEX revenue) vs. selling HW/SW/Support/Consulting (CAPEX revenue)?

2 - Do you actually have the skills to operate managed services at a price point that is profitable, since most of your projects for customers aren't focused on generating profit from IT?

3 - Do you believe there will be "recurring revenue" as the cloud business moves to on-demand pricing, instead of long-term MSP contracts?
Cancel

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