Tuesday, June 30, 2009

Moving to the Cloud Part Two - Finances

In the First Installment I laid out our new line card for moving our MSP business to a Cloud-services-based company.

Today I want to explain the nitty gritty of the financial model behind this.

If you look at the old model (the one most VARs, VAPs, and MSPs use), it is something like this:

Year One:
- Sell Big Server
- Plus Server Licenses
- Big project labor here
- Plus Desktop Hardware
- Plus Desktop Software
- Sell Services monthly (MSP model)
- Sell occasional project labor

Year Two:
- Sell the odd add-on, monitor, new desktop
- Sell replacements for all desktops that are 3 years old (roughly 1/3 of all desktops)
- Sell Services monthly (MSP model)
- Sell occasional project labor

Year Three:
- Sell the odd add-on, monitor, new desktop
- Sell replacements for all desktops that are 3 years old (roughly 1/3 of all desktops)
- Sell Services monthly (MSP model)
- Sell occasional project labor

Year Four:
- Sell Big Server
- Plus Server Licenses
- Big project labor here
- Sell the odd add-on, monitor, new desktop
- Sell replacements for all desktops that are 3 years old (roughly 1/3 of all desktops)
- Sell Services monthly (MSP model)
- Sell occasional project labor

Repeat years 2-4 forever. Rinse, repeat.

If you take my advice, you get prepaid for all that, so there are no cash flow problems with Hardware and Software.

That old model leaves the client with three big negatives on his mind (whether real or imagined is not relevant):

1) Big outlay of cash every three years.

2) Worries about his server being out of date -- starting 20 minutes after the install is complete.

3) Client is focused on the stuff you sold him as if it were his business. It's not. It's simply an infrastructure on which he can operate his business.

Think about your own business. Have your tried Salesforce.com or Corelytics?

Monthly payments. Who cares what server it's on? Who cares what the operating system is, how much memory is allocated, or how many processors are working on "your stuff" right now.

Either it works or it doesn't.

In The Big Switch (Thanks, Erick Simpson, for turning me on to this book), Nicholas Carr gives the excellent example of Voice Mail.

You used to have an answering machine. Then the answering machine got built into the phone. Then the answering service was provided by the phone company. Now everyone has voicemail on everything.

And no one cares how voicemail got there, how many processors it uses, etc.

It either works or it doesn't. You either like this flavor or that flavor.

No one cares where their web site is housed, how their email gets onto their screen, or where the line of business application "exists." As long as it works, no one cares.

The New Financial Picture, in a Nutshell

If you looked through the services we'll be selling in the Cloud Model, you see a lot of similarities.

- The services are hosted somewhere else with few exceptions

- The services are hosted on premise when it's in the client's best interest

- The services are charged to the client on a monthly recurring basis whenever possible

- The services are paid for on a monthly basis with very few exceptions

The ideal services here are paid for each month as they occur. Clients (and resellers) can increase and decrease services as needed -- month to month. Add five mailboxes and pay for five more mailboxes. Take away five, pay for five fewer.

Other than "That's the way we've always done it," there isn't a big argument to be made in favor of installing old-school servers or workstations at client offices.

Think voice mail: What cares where the server is? Is your data secure? Is your business secure? If yes, why invest in a heavy piece of equipment that you have to maintain, but which becomes a boat anchor in three years?

    Side Note on Servers There will always be a place for "standard" servers on site for some clients. You have to evaluate this one client at a time. There will emerge a new class of appliance-like servers (see my Biz Server Nano discussions). These will exist onsite, but won't be serving up web sites, Exchange, CRM, and all those other services you now sell separately.

Managed Services Lives!

None of this precludes you from selling Managed Services. As I tell clients, a virtual server doesn't know it's a virtual server. It can still get infected. It can still have a bad configuration. It's databases can be corrupted. Virtual "stuff" still happens.

You will probably cut maintenance costs by always having the option to push a button and simply take the machine to the state it was in yesterday. And you will definitely cut maintenance costs because of the totally-remote nature of the services. You can't drive to the server and fix it, no matter how good your excuse is. So you'll have to fix it remotely.

Many people could already be doing this, but they're not.

So here's your new (revenue) chart of accounts:

- Goods
-- Hardware
-- Software
-- Materials

- Services
-- Hosted Servers
-- Hosted Workstations
-- Web services
-- Hosted Services (AV, spam, etc.)
-- Hosted Phone Services
-- On Premise Cloud Services
-- HaaS
-- Other

- Labor
-- Managed Services
-- Hourly Labor
-- Sub Contract Labor

Do you see how almost everything on that list is bought on a month-by-month basis. And while it's sold on a month-by-month basis, the result is ongoing (recurring) revenue.

Low Startup Costs

Look out! Heads up!

You can start reselling this stuff this afternoon. Almost NONE of this requires an up-front investment. So you're not out of pocket. And that means some start-up who doesn't know anything about your 20 years of experience could get into this business tomorrow.

And will.

And has.

(Reality Check: I counted sixteen vendors today on a Google search for "hosted desktop." You calculate that by look at the highest bidder for ads on the right (Leostream) and count the ads through the pages until that ad is repeated. This varies by time of day. But the point is people are already doing this.)

For your business, the news is very, very good.

You will be able to transition your clients one at a time. As your clients are ready for new servers, you can determine whether a cloud-based solution will work for them. If so, migrate them from their physical server to a virtual server. And away you go!

As a model for all of this, consider the classic phone system or Internet connectivity model. There are four basic pieces to this puzzle:

1) You'll have setup fees up front. If you choose to make these flexible, or give them to the sales person, you can do that.

2) There's a commitment. It could be as little as four months (we've determined this is the break-even point for us with new clients), or it could be three or more years.

3) There's a monthly payment. If the payment is to a hosting provider, you'll receive a percentage. If the payment is to you, you'll also make a monthly payment for services.

4) There's always some kind of equipment on premise. It might only be Thin Clients/Fat Clients and monitors. But people will still need printers, switches, laptops, etc.

In this model, cash flow should be very manageable. You're only paying for what you use. Payments go up and down with usage. Everything's due every month. And since there's some margin built in, you're guaranteed that margin every month.

Note, also, that this model is extremely scalable.

Point. Click. "New server created."

If the servers and workstations are in the cloud, and you've picked the right providers, then you have essentially unlimited capacity. Of course, if you're still providing support services, then you still have limits on how many servers and workstations you can support before you hire someone else.

But with services like Zenith Infotech, MSPSN, Dove Help Desk, and Third Tier, you also have an essentially unlimited labor force to help support your clients -- and you pay for them on a monthly basis, just like everything else.

The Bottom Line on Finances is Recurring Revenue

- You're providing the client's infrastructure as a service for a monthly fee

- You're totally on the line for making this work
    You could Gerry-rig some crap, but you'll eventually get caught. Or you could do it the right way and find a quality partner. Believe or not, we recommend doing it the right way.

And what can you charge? Well, I've been asking around in Sacramento, Ca (about the 20th largest metro area in the U.S.) and finding zero resistance to $99/month per desktop -- before we add maintenance.

In some sense, the margin doesn't matter because

1) You have unlimited capacity

2) You're paid every month

3) You pay out for services every month

4) And the difference is profit.

Let's say you pay 80 and collect 100. That's 20 you get to keep. Multiply and multiply and multiply. Because it's all paid for as you go along, there's no monster outlay to expand.

And the more you rely on known solutions rather than cutting edge technology, the bigger your margin will be.

- - - - -

Next up: How Do I Move To The Cloud?


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