A Managed Services Business Owners Lament: A talk with Joe D.

by Kevin L. Jackson

A few days ago I received a call from a small business owner asking if I would meet him for coffee. He wanted to run some ideas past me on how he could enhance his current business with cloud computing. This is the sort of request that I can never turn down so we quickly made an appointment for the next day. After exchanging pleasantries and settling down with our lattes, he started to give me an overview of his current business.

Joe D. had been a fairly successful manage service provider for about 10 years but for about the last three, his customers all seem to be wondering about “this cloud computing thing”. He was actually selling a “cloud computing offering” by hosting some of his customer’s legacy applications and selling access back to them as “Software-as-a-Service” through a subscription. Most of the customers really liked the idea of exchanging unpredictable maintenance and personnel cost for his consistent monthly charge. They didn’t even have issues with the three-year minimum term on the contracts. Joe liked it as well because the long-term lock-in gave him a pretty stable business with decent margins. Everything seemed to be going well until some of his first contracts came up for renewal. That was when cloud computing seemed to change for some reason.

As I stated earlier, cloud computing wasn’t new for Joe D., but he had always looked at it as just another marketing term for IT hosting or managed services. His company had a single datacenter, but he was always able to meet his customer’s operational requirements by having appropriate hot and cold back-ups in place. Service Level Agreement were never an issue either. His strategy was to basically replicate the customer’s architecture and operational processes. Even if they weren’t the best, he was always able to explicitly meet the RFP requirements and deliver service better than the client could themselves. Recently, however, the cloud computing RFPs have been requiring at least two geographically separated datacenter and an ability to elastically scale based on demand. The worst part, however, was that the customers all seem to want these improved services without signing the usual multi-year contract. He had actually lost some of his long-term customer to some of the regional Cloud Service Providers. With many of his most lucrative contracts coming up for renewal in 2015, Joe D. felt that he was now forced to become a “Cloud Service Provider” himself, and wanted me to help him develop and launch an appropriate rebranding and marketing campaign.

To start off, I really had to set Joe D. straight regarding his view on cloud computing as just another marketing term. As a business solution, cloud computing is radically different that hosting or traditional managed services in some very fundamental ways:

True Cloud Service Providers build and offer scalable, redundant and elastic resources to the marketplace. In other words, you build it before they come;
Cloud services aren’t built to specification based on a RFP. A CSP provides standardized offerings with standardized SLA built on an infrastructure the CSP designs;
The cloud computing economic model is built on over-subscription of the CSP’s available services across a large marketplace, not on individual long-term contracts.

I explained the differences by introducing him to the essential characteristics of cloud, namely:

On-demand self-service: A consumer can unilaterally provision computing capabilities, such as server time and network storage, as needed automatically without requiring human interaction with each service provider.
Broad network access: Capabilities are available over the network and accessed through standard mechanisms that promote use by heterogeneous thin or thick client platforms (e.g., mobile phones, tablets, laptops and workstations).
Resource pooling: The provider's computing resources are pooled to serve multiple consumers using a multi-tenant model, with different physical and virtual resources dynamically assigned and reassigned according to consumer demand. There is a sense of location independence in that the customer generally has no control or knowledge over the exact location of the provided resources but may be able to specify location at a higher level of abstraction (e.g., country, state or datacenter). Examples of resources include storage, processing, memory and network bandwidth.
Rapid elasticity: Capabilities can be elastically provisioned and released, in some cases automatically, to scale rapidly outward and inward commensurate with demand. To the consumer, the capabilities available for provisioning often appear to be unlimited and can be appropriated in any quantity at any time.
Measured service: Cloud systems automatically control and optimize resource use by leveraging a metering capability at some level of abstraction appropriate to the type of service (e.g., storage, processing, bandwidth and active user accounts). Resource usage can be monitored, controlled and reported, providing transparency for the provider and consumer.

And finally I broke the bad news that unless Joe D. was in the position to make a significant capital investment in multiple geographically separated datacenters and a multi-year transition plan to an entirely new business model, he would never be able to become a cloud service provider.

So now let me come clean with you. I actually didn’t have coffee with Joe Datacenter (Joe D.) and the entire story is fictitious. What is real, however, is that many traditional managed services and hosting companies are having similar conversations internally, looking for a way forward in this cloud computing marketplace. Unless you already have a significant number of geographically distributed datacenters and a large established customer set using it, you will probably never become an independent cloud service provider. There is, however, an excellent way out of this dilemma. Major cloud service providers like Dell, Amazon, and Cloud Forge have built cloud service marketplaces. These marketplaces not only provide an opportunity to resell new services, but they also represent great partnering opportunities for traditional hosting or managed services companies. So if you are a Joe D. or know of one don’t suffer in despair. Take heed of my advice and seek out a marketplace partner and be an active participant in the rapidly expanding cloud computing market!

(This post was written as part of the Dell Insight Partners program, which provides news and analysis about the evolving world of tech. To learn more about tech news and analysis visit Tech Page One. Dell sponsored this article, but the opinions are our own and don’t necessarily represent Dell’s positions or strategies.)