MANAGED SERVICE PROVIDERS ARE DEAD. LONG LIVE HYBRID VARS!

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1 MANAGED SERVICE PROVIDERS ARE DEAD. LONG LIVE HYBRID VARS! EVOLUTION OF CHANNEL VENDOR PARTNERSHIP VEMBU TECHNOLOGIES TRUSTED BY OVER 25,000 BUSINESSES

2 Copyright Information Information in this document is subject to change without notice. The entire risk of the use or the results of the use of this document remains with the user. No part of this document may be reproduced or transmitted in any form or by any means (electronic, mechanical, photocopying, recording, or otherwise), or for any purpose, without the express written permission of Vembu Technologies. A formal Non Disclosure Agreement may additionally govern usage of the information in this document. Vembu Technologies may have patents, patent applications, trademarks, copyrights, or other intellectual property rights covering subject matter in this document. Except as expressly provided in any written license agreement from Vembu Technologies, the furnishing of this document does not give you any license to these patents, trademarks, copyrights, or other intellectual property 2

3 Executive Summary This white paper is intended to be a crisp, concise, informative & insightful thought leadership article by Vembu to address the MSP segment directly and highlight our point of view about the rapidly changing and evolving Channel Vendor partnership. EVOLUTION OF CHANNEL PARTNERS In a sense, this whitepaper is initiated by the sea of changes brought about by the viral cloud phenomenon that has strongly influenced the positioning of product vendors whose choice is to either adapt quickly or wither in its wake. This compilation, based on our strategic focus of the cloud paradigm, combines facts with opinions to present the direction that needs to be adopted by every channel stakeholder for mutually beneficial purposes. Specifically, this paper will explain the changes in the business model necessitated by the cloud paradigm that will impact MSPs. It will also address what MSPs need to do in order to stay relevant and how they can align with a trustworthy brand like Vembu to define the course of their future. Service Providers are not Channel Managed Service Providers are not channel. Some service providers are trying to own the customers by hiding the vendor. This model cannot survive because of the more open and transparent business models made possible by the Internet and the cloud. Managed Service Providers have to reinvent their business model and embrace the new cloud shift in order to make themselves more relevant in the market. Box pushers and break fix service providers Early days of Channel Partners involved pure resellers who sold both hardware and software products for a fixed commission. Service Providers / Resellers were also making money by fixing / Troubleshooting IT on-demand Managed Service Providers Revenue from break fix IT services was sporadic. Hence resellers and service providers had to adopt Managed Services model to generate constant stream of monthly revenue. This is also the stage where MSPs put-together their own datacenter and offered rebranded services. Hybrid Valued Added Resellers Revenue from Managed Services is now threatened due to new wave of Cloud era. New SaaS products based on Cloud are now available at affordable price points for businesses. Hence the New Age Channel Partners transform themselves as consultants and make revenue from Value Added Services 3

4 Big changes on the horizon for Service Providers MSPs primarily earn their reputation and build their businesses on the foundation of delivering high quality customer support and value added services. They market their IT skills within a constricted geography or specific vertical, for ex. Compliance governed industry sectors. Though MSPs catered to their customer base on the choice and strength of product offerings in RMM, team collaboration or backup & disaster recovery, traditionally they had no role to play in the creation, enhancement or maintenance of such product offerings. MSPs would typically leverage the product suite of a particular vendor after careful deliberation on pricing and/or features and then rebrand it with a private label. This was done to reinforce their own brand and identity with the customers and so they could own the process of first level support for such products in fear of exposing customers directly to the product vendor. With the Internet and proliferation of social media, we have effectively transitioned into an era of transparency for businesses and consumers alike. In this new world order of hyper connected reality overseen by powerful search algorithms and innumerable social networking forums, the outmoded practices of keeping the vendors behind the white label curtain cannot be obscured or hidden by simply rebranding their products to create an illusion of ownership. Even worse is the negative image that would accrue when the customers peel past the branding and figure out that they could have directly purchased the products at a lower price instead of paying a markup of 10% or even more by their trusted advisors. Not to belabor the point, but the only real branding that MSPs should deal with is that of their own value added offerings. They should try to captivate customers with the marketing collateral and brand identity of the product vendor. Cloud computing has touched and transformed every segment of the IT industry. Many organizations are accessing public cloud services or implementing private/hybrid clouds for their users. Independent software vendors reacted to this worldwide viral phenomenon by transitioning from delivering packaged software to showcasing their software in the cloud. The clouds of change are indeed both accelerating and impacting the MSP segment deeply and broadly. Earlier, the subscription based pay per use model of the cloud rapidly displaced per server and per desktop pricing model of MSPs and shook the foundation of their business models. The current need lies in the ability for MSPs to adapt and reposition themselves in order to stay on the forefront of the market. Service Provider s don t own Intellectual Property MSPs are trying to build their own cloud by licensing technology and renting a co-location facility. This is not profitable because MSPs do not own any core technology or IP. So it is impossible to build a profitable business for a small MSP by trying to compete with larger public cloud vendors like Amazon, Microsoft and offer the same level of redundancy and compliancy. Cloud Services & Storage is commodity Every big vendor are jumping into the cloud businesses and driving down the storage cost to almost zero. Big companies can afford to lose money in cloud business in the vision to acquire large number of customers with a long-term plan. It s not advisable for small scale MSPs to replicate that model, as their business is not built to take long-term losses. 4

5 Future roles and relevance of Managed Service Providers How can the MSPs navigate through this challenging landscape and grow a stable and profitable business model? First, we ll take a look into history before we step into the next phase of the evolution for MSPs. Initially, there was a need for augmenting the role of the traditional IT departments for small and mid-sized companies who were placed in charge of providing internal system support. Due to the diversity of the systems in place and the fire-fighting mode of internal operations, external and qualified IT staff were brought on board to manage break fix support and professional services as part of system and application maintenance contracts. Due to the heavy labor expenses involved, a more efficient and sustainable model called managed services emerged whereby an IT service provider would partner with the customer to become an outsourced extension to their operations division. The IT service provider would manage the full or defined subset of the customer s IT infrastructure, platforms and applications including key services like data protection, business continuity and disaster recovery. With proven technical expertise, proactive relationship management and leverage of mature RMM tools, the MSP business burgeoned and thrived with a strong customer foothold. Service Providers should understand that they behave like a customer when they plan to rebrand a vendor s product similar to an OEM (Original Equipment Manufacturer). If MSPs need to thrive in the market place, they have to position themselves alongside vendor s strategy and be a Channel Partner. Now, all this is past because of the revolutionary and disruptive cloud computing paradigm that presents a very attractive proposition for the cash sensitive SMB in this evolutionary march. Basically, it dramatically lowers both CAPEX (a huge drubbing for on premise) and OPEX (lower staff and overhead expenses), presenting a doomsday for the MSPs by questioning their relevance since their business is built by hosting or implementing client infrastructure. The fact is, even in its current form, there is not a single vendor who has done anywhere close to $100M revenues by exclusively focusing on the MSP segment. This clearly indicates that the current MSP segment is both highly fragmented and not scalable. So, to return back to the question, what should the MSPs do to adapt to the new world order? Let s touch upon our recommendation on what they ought not to do, aside from the head in the sand approach. MSPs should shelve any plans to leverage their existing infrastructure to create cloud provider services because they simply do not have the wherewithal or expertise to compete with the behemoths in the IaaS space like Microsoft, Amazon, Google & IBM. This is a Wal-Mart style Always Lower Prices cut throat market environment, which is impossible for MSPs to cope with in the race to the bottom. Moreover, there are also complex compliance stipulations like HIPAA for which they need to ensure strict adherence and any violations could result in million dollar lawsuits. So, tread carefully, if you want to be a CSP (Cloud Service Provider) then Service Providers also need to change to the pay-as-you-go pricing model leading to an unpredictable revenue stream. 5

6 Some MSPs may turn to commission based structures associated with the reselling of cloud based products or solutions, but that will at best only create a trickle of revenues since product discovery can be easily and directly done by the SMBs. However, they can certainly throw their weight around as the trusted advisor for the customer for the vendor selection process. MSPs can evaluate and recommend vendors, say in online backup and disaster recovery, subject to analysis aligned with specific customer needs in terms of the desired breadth of offerings, product characteristics, cost effectiveness and service level of customer support, marketing collateral and training support. We foresee the future role of the MSPs evolving in the following direction. They should transition toward IT consulting or rather, cloud consulting, and provide a cohesive set of services that combines their in house expertise with the customer environment and assist them in terms of migrating, deploying, configuring, integrating and monitoring cloud service offerings. Vendor and the Channel Let s get one thing straight. Product vendors have to be channel friendly and it s in their business genes to support and coexist with the channel. But a reforming channel culture necessitates us to correct this misconception that MSP is synonymous with the channel. It is only appropriate to say that the MSP should be aligned with the channel and not the other way around. Fundamentally, the channel refers to a supportive and supplementary marketing and sales team for product vendors by connecting customers to a vendor s product. They are different entities (VARs, MSPs, Distributors, IT consultants, etc.) with access to a target customer base. In the old model, they provided the product vendor with a broad customer reach for which they could earn revenue from the partnership for opening up new channels. It should be clear that the current responsibilities of channel partners are not the same as what they used to be when they were involved in the distribution of packaged software products. The logistics of software delivery is now accomplished through cloud services provisioning and the discovery can be made directly by the SMBs as well. This is not the pie for the taking, although reselling opportunities can be explored by MSPs. In the cloud era, IT admins look to channel partners not just to help them decide on what to buy and how much to spend on a solution, but more critically lend technical expertise to assist with value added services like migration, implementation and customization. 6

7 How Service Providers can future proof their Business? ü PARTNER WITH THE RIGHT VENDOR WHO IS OFFERING GOOD QUALITY PRODUCTS AT REASONABLE PRICE POINT ü DRIVE BUSINESS REVENUES AND RETAIN CUSTOMERS THROUGH VALUE ADDED SERVICES ü GENERATE YOUR COMPANY S PROFIT MAINLY THROUGH VALUE ADDED SERVICES ü BE TRANSPARENT ABOUT THE VENDOR S PRODUCT WITH THE CUSTOMER ü GET THE REBRANDING MONKEY OFF YOUR BACK AND EMBRANCE THE NATURAL PROGRESSION OF CHANNEL ü LEVERAGE ALL PARTNER PROGRAM RESOURCES LIKE MARKETING COLLATERALS, TRAINING SESSIONS AND DEMOS. ü ASSESS YOUR SUPPORT ORGANIZATION AND PREPARE THEM FOR OFFERING L1 SUPPORT FOR VENDOR S PRODUCTS. Conclusion We have shared our thoughts based on our experiences with what is happening in the channel market, where it is likely headed, the future value added proposition of MSPs and why old model is dying. We foresee a new bright role with tremendous opportunities shaping up for the MSPs in the channel of the future. We urge MSPs to embrace this change and become a true channel provider. The best vendor to partner with for an MSP is a vendor who provides good quality products at the lowest price and helps them to carve out better profit margins with their own value added services. That is where Vembu comes in as a very friendly channel vendor because we have good products at the lowest price point and that will help the channel make greater margins on their value added services. This is Vembu s vision of a partnership for the future and we invite all of you to join us in this exciting journey ahead. About Vembu Vembu is a leading provider of affordable software and cloud services with an array of innovative, flexible and reliable solutions for data protection, disaster recovery, file sharing and CRM. Vembu s flagship offering is its Backup & Disaster Recovery (BDR) product targeted at IT- Administrators in small and medium businesses to protect their Physical, VMware and Hyper-V environments. Vembu Cloud Services comprises of multiple offerings OnlineBackup to protect files, , databases and applications on servers and desktops, FileShare for syncing, sharing & collaboration and CRM for help desk, sales force automation & social inbox. TRUSTED BY OVER 25,000 BUSINESSES 7