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MSP cloud investments put IaaS in the spotlight

MSPs are building out their cloud businesses more decisively than ever before. Learn about the benefits of and considerations for investing in managed cloud infrastructure.

MSP cloud businesses are growing alongside the greater attention being given to cloud computing by their customers.

Cloud offerings have proven to be a major panacea as the coronavirus pandemic forced organizations to transition to remote workforces. During that transition, many have increasingly adopted public cloud services and cloud-based communication technologies.

Going forward, organizations are likely to continue using cloud offerings as they retool their businesses. While Gartner predicted an 8% year-over-year decrease in global IT spending in 2020, the research firm forecasted a 19% increase for public cloud services spending. Gartner anticipated cloud-based conferencing to grow about 24% and cloud-based telephony and messaging 9%.

In response to customer demands, many channel partners have pivoted more decisively to cloud services than they had in the past. In fact, 75% of MSPs cited cloud productivity services -- including Microsoft 365 and Google G Suite -- as the top managed services they currently provide, according to Datto's June 2020 "Global State of the MSP Report." The report surveyed 1,800 MSPs.

Additionally, MSPs ranked cloud-based infrastructure design and management as a top service they planned to offer within the next year, Datto found. Partners said they were investing in managed public cloud services as customers seek help with cloud migration, optimization and other challenges.

Benefits of MSP cloud infrastructure investments

There are many reasons for MSPs to consider investing in cloud infrastructure, industry observers said.

For one, there is a general desire among customers to migrate more workloads to the cloud, said Bill Martorelli, a principal analyst at Forrester Research.

"Whereas managed [Microsoft] Exchange services has in the past been a highly attractive complementary service offering to hosting in various forms, Office 365 and other productivity applications serve the same complementary function in the IaaS context," he said. This now also extends to technologies that enable remote worker productivity such as Zoom, Slack and Box, Martorelli added.

Joseph LandesJoseph Landes

"The No. 1 thing an MSP should invest in during this time of uncertainty is revamping their practice and … ramping up their IaaS investments,'' said Joseph Landes, chief revenue officer at software provider Nerdio. "Not only is the cloud a more efficient way of delivering infrastructure services to customers, but it is the only way to have the business continuity [MSPs and customers need]."

Mike CowlesMike Cowles

Logically Inc., an MSP based in Portland, Maine, acquired cloud infrastructure with the 2019 purchase of private cloud provider Carolinas IT. The acquisition aims to help Logically pursue its goal of expanding its MSP model nationwide, said newly appointed CEO Mike Cowles.

"We've been positioning [cloud] for our customers," Cowles said, explaining the acquisition gives customers a single vendor that provides both outsourced IT as well as hosted infrastructure. That way, customers "don't have to have the MSP point fingers at AWS" or other public cloud providers, he said. "It's a one-stop shop."

Logically's strategy is to remove the middle person "from a profitability and marketing perspective" and deliver the same services at the same price point, or less, while realizing more of a profit margin, he said.

Another benefit is Logically can serve customers' unique needs, Cowles said, like running processor-intensive applications such as ERP or other uptime and backup redundancy guarantees. Logically can customize its services in a way that the large public cloud providers currently do not, he added.

"It's expensive for other providers to accommodate specific [customer] needs," Cowles noted. With managed cloud infrastructure, there is "one throat to choke, no finger pointing, no delays in response time."

Another trend Forrester has seen recently is the importance of MSP cloud advisory services as an initial way to engage with customers, with additional add-on project work like migration and operations, Martorelli said. The MSPs that start with advisory services "are well positioned to also get the follow-on work,'' he explained.

This is another way investments in IaaS are proving important for MSPs, "even though overall spending is being watched very carefully," Martorelli noted.

Considerations before you invest

Cowles acknowledged that "the downside" to developing cloud infrastructure "is you have to make an investment." While he said he doesn't know the particulars of the Carolinas IT deal, "it's probably a $1-million investment in hardware and infrastructure to be able to provide best-in-class private cloud capacity," compared to MSPs that have a handful of servers and storage, which would be a $50,000 to $100,000 investment.

The No. 1 thing an MSP should invest in during this time of uncertainty is revamping their practice and ... ramping up their IaaS investments.
Joseph LandesChief revenue officer, Nerdio

Investing in cloud infrastructure also requires changing customers' mindsets in some cases, if they are still entirely on premises and not ready to migrate workloads and applications to the cloud, Cowles said. In that case, "that's fine; we offer MSP services.'' He added that 75% of his company's customers still have capital expenditures for their IT needs.

"Our customers are small and at the low end of medium-sized businesses and have a data closet, basically, and haven't embraced cloud," he said. "But we're encouraging [cloud] and think it's a better option in this environment now."

If MSPs decide to invest in IaaS, they should keep a few things in mind. "You have to believe you will have scale, so the initial investment has to come before you have Customer No. 1, and you have to build infrastructure and bet on the [customers to] come," Cowles said.

The IaaS investment "is not going to be profitable at first," so smaller MSPs need to consider their cashflow, he noted. The initial investment requires a significant outlay of cash that could take up to a year or two to recoup.

Firms should make sure their MSP cloud investments suit their potential customer bases, Martorelli added. They should also "be focused and be selective about which IaaS platforms they support and with which competencies, so they are not spread too thin."

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