Cloud to Become a $216B Business – Here’s What ITSPs Need to Know

public cloud

It’s a twelve 12-month journey to become a solid cloud service provider…

With Public Cloud spend accelerating to $216B by 2020, the urgency level is rising for value added resellers (VARs), IT Solution Providers (ITSPs), and managed service providers (MSPs) to add sustainable monthly recurring revenue (MRR) to their overall business mix. It’s critical to make the move to address the market shift that’s well underway.

But in order to exploit the opportunity, there is one small problem that all providers have to overcome—it’s a 12-month journey to become a solid Cloud Service Provider (CSP). What we are talking about here is an organization who is strategically committed to creating, driving and growing a sustainable, long-term MRR business.

Unfortunately, that means that if you commit to the journey today, you won’t be able to grab your fair share of this year’s $114B in public cloud services spend. The theme here is: now is the time to move because the journey is long and your business is eroding everyday you’re not generating sustainable recurring revenue.

The largest impediment facing the community today is easy to identify: most service providers falsely believe they are already equipped and prepared to make the move to a balanced MRR business. They believe that the transition toward a true MRR-friendly business is straightforward and does not require a huge effort.

I can assure you, based on our work and observations, that the transformation required is not straightforward—nor easy, and does require serious rigor and commitment.

All journeys begin with that first major step, which for most organizations is to look inward and determine if they want to enter the cloud solutions space and make MRR a significant portion of their business. Spend some serious time thinking through this commitment—it needs to make sense and you need to be ready for the next 26.2 miles. It’s not a sprint, it’s really an uphill marathon.

Next, you need to commit to perform the work necessary to become a solid player who is capable of driving net-new revenue and profit in a way that may seem unnatural. It’s tough to see that $400K deal that you might have collected in about 58 days now carved into 12, 24 or 36 monthly payments. It’s just not in harmony with the business you’ve built. Also, don’t forget there is an investment component here that can’t be ignored.

Many of the folk’s we’ve worked with have had to confront the simple truth that change is hard and they hate it. Yet change is necessary to ensure they exploit the opportunity that cloud and recurring revenue presents. In most cases moving to a MRR-friendly framework requires altering some, if not all of the following:

  1. Your Business Model
  2. Your Financial Model
  3. Your Sales Model and Plan
  4. Your Marketing Model and Approach
  5. Your Operating Model
  6. Your Packaging and Pricing Approach

Sometimes the alterations and changes are minor and require very little work, but in others a major overhaul is in order, which can be truly gut wrenching. In all cases, the changes are valuable, warranted, and must be undertaken to capture and exploit the long-term opportunity.

The biggest thing to keep in mind is that this is not a game you can enter half-ass and hope to succeed. We’ve seen too much time, energy, and money wasted when organizations view their entry into the space as opportunistic rather than strategic. Tough to hit your blended gross margin objectives if you don’t construct a solid model and focus serious attention on proper packaging and pricing of “your” solution set.

You’ve got to be regimented and disciplined. It’s vital to move, but you must move at a pace you can manage so you can maintain your core business while preparing to drive new business with new customers in a new way.

You need a deep understanding of how the shift in revenue from transactional to an MRR stream will impact your top line, your gross margins and your cash flow. If you mark to market you’ll be looking at shifts in revenue from on-premises to cloud that will grow to 24% of IT budget spend by 2020. No one can handle that shift without being prepared to move, because this is a “transferal of wealth” that can’t be recaptured from your traditional competitors—the transactional on-premises pie is large, but it’s shrinking.

You need to understand that the approach to selling and marketing within the cloud and MRR space is much different than the methodology you might be comfortable with today. Many times, sales model changes are required, and in almost all cases a dramatic alteration to your sales plan is required.

Also, adding inbound marketing capabilities is important as the velocity required to identify and acquire new clients is essential, because you only want to move on-premises deals to the cloud when required by your client. So, finding net-new customers is critical so you don’t artificially erode your core pipeline.

As you can imagine this post is just looking at the tip of the iceberg—there’s quite a bit more below the surface.

Is the Journey worth the Trip?

Gartner recently reported that we’ll see a $1 trillion shift in IT spending to cloud over the next five years. The shift from traditional spend on things such as servers, storage, and software will move to public cloud and software-as-a-service (SaaS) purchases.

As mentioned earlier, the amount of money IT will spend on public cloud services this year is $114 billion, and will grow to $216 billion in the year 2020, according to a recent report released by Gartner. The shift is occurring at a rate of about 2% per year, moving from traditional IT data center spend to public cloud service spend.

On-premises IT spending will still be predominant for several years. Essentially, traditional spend will remain flat, as cloud in all its forms will continue to accelerate and grow on an annual basis.

With $1 trillion moving to public cloud services over the next five years, it’s causing the most dramatic disruption in IT spending in over 25 years. Cloud spending has now become a notable percentage of IT spend and will grow, as mentioned earlier in this piece, to represent 24% of the IT budget by 2020, according to Ed Anderson, Gartner research vice president.

In summary, it’s worth the trip.

So What Now?

It’s important to make the commitment and then to assess your current readiness to make the move at a pace you can manage. Then analyze and understand the gaps that always exist—they’ll seriously hinder your success in transforming if you don’t know they exist. Then you need to apply the proper approaches, content, and tools to begin what always takes most providers 12 months—crossing the MRR chasm.

So, with the journey typically taking providers 12 months, I implore you to get moving today…

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George Mellor
George Mellor is the Founder & CEO of KloudReadiness, LLC. Prior to founding KloudReadiness, George co-founded VARcompliance (acquired by Netformx). George has spent his adult life working within the value added reseller and solution provider marketplace driving innovative approaches that positively affected the growth and profitability of several businesses. He’s held senior leadership roles at several solution providers including CBE Technologies, Netivity Solutions (now NWN Corporation) and Charter Systems.