February 14, 2013 By Lauren Gibbons Paul
Chad Mosman was early to the cloud party. Founder and principal consultant for MessageOps, an IT consulting company in Charlotte, N.C., Mosman jumped on the opportunity in 2009 to resell Microsoft BPOS (Business Productivity Online Suite), the precursor to Office 365. Mosman was able to make a good living from the “partner of record” fees Microsoft paid for migrating traditional on-premises customers to BPOS.
That was then, and this is now. Microsoft in 2013 changed the margin it pays Office 365 partners from 6 percent after the first year to 4 percent. “That’s a pretty big cut,” says Mosman of MessageOps, which was recently acquired by Champion Solutions Group of Boca Raton, Fla. “Then they lowered the price of the service, and there goes another 20 percent off your partner fees.” Though Mosman has the benefit of volume - his firm has moved more than 150,000 mailboxes from 600 companies to Office 365 - the profit picture is still a little, shall we say, cloudy.
“We have come to realize you can’t become dependent on recurring cloud revenues. The vendor can change the rules at any time,” says Mosman.
To make any money on cloud, you’re going to have to focus on private/hybrid cloud models (not even the service providers themselves can make money on public cloud) and add value on top for which clients will pay you. That, in a nutshell, is how you survive in the new post-hardware world. But it pays to walk through the situation again, so the following four questions and answers explore cloud profits in more depth.
1. What is the median cloud profit margin?
Paul Dippell does financial benchmarking with, and for, channel partners to identify the most profitable business activities and practices. According to Dippell, founder and CEO of Plano, Texas-based Service Leadership Inc., several thousand partners input their balance sheet data into his system every month. So Dippell is better situated than most to weigh in on cloud profits. “Some partners are good at making profit from cloud and some are not,” he says.
The median profit is 4.3 percent - half made more and half made less. The top quartile made 13.3 percent or more with the same model. The disparity “tells you there is a big difference in their approach,” says Dippell, who says that top-notch business management skills are the differentiator. Too few channel executives have thorough grounding in business principles, and it shows.
According to Dippell’s Service Leadership Index, MSPs in the top quartile are building self-branded portfolios of cloud services made up of their own services, white-label services, and branded cloud services, packaged as integrated offerings that the client cannot easily compare or decompose.
2. Why are cloud margins slim?
It pays to remember that the large cloud services providers are not raking in all the profit and leaving crumbs for channel partners. In fact, the large cloud service providers (Amazon and Google in the public cloud and Microsoft, VMware, and Citrix in the private/hybrid cloud) are just beginning the lengthy process of recouping the huge investments they made in building out their cloud infrastructure.
It will be several years before these investments are repaid, and in the meantime, it is unrealistic to expect these companies to give the lion’s share of their own slim profits to the channel, says Lawrence Walsh, CEO and president of The 2112 Group, a Port Washington, N.Y., consulting firm specializing in channel issues. “There is a tremendous capital outlay that goes into developing cloud services. Everyone conveniently overlooks this,” says Walsh.
Many channel partners hold the view that cloud service providers have not yet figured out how to make cloud work for the partners, and that may be true. In the meantime, though, channel pros need to figure out for themselves how to make money with the cloud.