If you’re like most IT Solutions Providers, you’ve been reading and hearing about the variations of cloud business models. They include the Managed Services Provider, Cloud Solutions Provider, Cloud Services Broker, and my most recent favorite: Modern MSP. No matter which title you give your cloud business, any of these can bridge the gap between the hundreds of cloud services available and the dozens of customer segments who need them. So now you’re ready to get started building your business...right? Well, before you start putting that sales presentation together, you might want to have a clear MSP strategy.
This includes financial plan for your future revenue, gross margin and net profitability. I call that a Business Growth Model, versus a revenue plan, because it should reflect all of your assumptions about the key drivers for your business. I’m talking about assumptions like:
- The average One Time Revenue (OTR) value on a per-user or a per-deal basis
- The average Monthly Recurring Revenue (MRR) value on a per-user or per-deal basis
- The average deal acquisition rate (for OTR deals, MRR deals or a combination)
- The blended gross margin that you will realize for an average deal
You can do this as a two-step process:
- Create a baseline of your current business by capturing the values for these key drivers as they exist today. Then, model your business over a 3-year timeline. What will your business look like with no changes in cost structure, deal values and deal acquisition rate?
- Formulate some new assumptions about where you plan to take your business next. If you are migrating to the cloud, how will your future portfolio of cloud services affect your average deal size? Well, if all you plan to do is replace on-prem file server management with a virtual storage solution, your deal value is likely to decrease. However, if you plan to assemble a full suite of cloud services and wrap your own consulting services around them (to form integrated solutions) then your deal value is likely to increase. You might also decide to target larger customers and invest more in sales and marketing to accelerate your deal flow.
Ask yourself this question: How will these changes affect your business growth over the 3-year timeline? You can test these scenarios to understand their business impact over the long-term—and use this to establish the right performance targets in the short-term.