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The Future of MSPs: Leveraging AWS for Profitability
Author: Brett Johnson Posted: Feb 02, 2015

In his two-part article, “The Future of MSPs in a Cloud-Centric World” in Talkin’ Cloud, Jim Lippie points out that the Managed Services Provider (MSP) community finds itself at a particularly compelling intersection in the market. Jim highlights the steady adoption of the cloud in terms of enabling SaaS applications like Office365, Google Apps, and even services like Dropbox in the SMB market as one reason for this. Rather than hosting and/or managing these application and infrastructure requirements for their customers with a strong recurring margin for comprehensive solutions, MSPs are instead given the opportunity to “resell” these offerings at a more modest margin, with the potential in some cases to augment those vendor offerings with additional services and/or support. Jim refers to this phenomenon as “channel eclipse.” What it means for the MSPs is that they need to evolve to survive and thrive.

MSPs need to look for other ways to continue adding value for their customers, whether that includes building out data center infrastructure to host other primary workloads, offer hosted virtual desktops or a range of other solutions. The challenge is this: Should these MSPs build out (or continue to invest in) their own infrastructure to support the new solutions (their own “cloud”)?  Six to eight years ago, many innovative MSPs quickly adopted virtualization technologies from VMware, Citrix and others to build out cloud infrastructures for a range of offerings – defining what we now consider “best practice” implementations – and many have built successful businesses on that foundation. If we look around now, however, many of those virtualization-driven innovations have become mainstream, and with companies like VMware now offering many options with their own cloud, MSPs are again left to decide whether to simply resell this new crop of offerings or forge ahead with their own infrastructure. In my view, those poised to make the next innovative leap ahead will be those MSPs that capitalize on the hyperscale public cloud – and Amazon Web Services (AWS) in particular.

My belief is that MSPs able to leverage their in-house expertise to host and manage appropriate infrastructure for their customers will find it remains a profitable business. Where they really need to look at AWS, however, is with those extremely well suited use cases where the workloads don’t need to run all the time (disaster recovery, for example, in addition to other bursting and agility-driven scenarios). For those well-suited use cases, MSPs leveraging AWS can offer highly differentiated solutions with much higher margins (and better pricing for customers) than otherwise possible. I don’t see the hybrid cloud model going away. While it is theoretically possible that AWS (and MSFT and Google, given their vast capital reserves) can continue to drive the underlying cloud infrastructure costs downward, there will remain a strong value in diversification, and continued advances in converged infrastructure and so forth will ensure the hybrid model remains compelling.

For the right use-cases, though, AWS will win out relative to the alternative approaches, simply due to the underlying economics, and MSPs will need to start working now to define that next wave of best practice implementations. AWS is clearly the front-runner among public cloud IaaS options, often cited as having 5x the infrastructure of the next 15 largest public cloud vendors combined. That’s a pretty significant gap, and AWS continues to push the envelope with regular price drops and continued investments in their infrastructure and offerings. Having said all of this, we are only now emerging into that opportunity phase for MSPs in terms of leveraging AWS. We need to look at AWS the same way now that we looked at virtualization 6-8 years ago. Those MSPs that invested in building expertise around virtualization technologies and effectively defined “best practices” for a number of software and infrastructure-based solutions need to once again climb that mountain.

In the last couple years, I’ve noticed a group of MSPs that are making a business out of effectively “migrating” their customer infrastructures indiscriminately to AWS. Many of these MSPs have come from more “outsourced IT” or reseller or even consulting/services practices. I’m sure some of them are really examining the economics to ensure the migrations or new workload deployments make economic sense for their customers to run persistently in the cloud. At the same time, I’ve also noticed that many MSPs and advisory/consulting partners are not paying attention to the underlying economics for migrating or provisioning new workloads in AWS, and their attempts to implement even those best-suited use cases like DR are falling short of the success one would suspect. To be fair, this should be expected as part of the learning curve. Just because AWS presents a tremendous opportunity, we are still very much in that “defining best practices” phase.

In the coming months and years, a new crop of best practices will be defined, and those innovations will once again come from a new set of technology vendors and leading-edge partners. At OneCloud Software, we have brought together considerable expertise from the virtualization and cloud fields to develop a purpose-built software solution for DR that leverages AWS as the recovery site in a simple to implement, scalable and cost-optimized manner. Our approach is to work with MSPs to develop what will become recognized as “best practices” in this new arena, yielding unrivaled implementation flexibility for customers at very attractive prices, while delivering strong margins to our MSP partners. It is a very exciting time for us, and it should also be viewed as a very exciting time for MSPs. An ecosystem is emerging, with other vendors like OneCloud taking on additional AWS use cases, and it’s time to buckle up and get to work shaping this new market opportunity.