By Marilyn Carr, sponsored by Ingram Micro and Microsoft
The Evolution of IT Services
IT consulting and integration services and custom application development are core revenue components for most solution providers. Unless they were born in the cloud, IT consultants usually add cloud-related technology and services to their portfolios rather than do a wholesale replacement of their traditional services. This is also in line with the reality that most cloud implementations live in an environment where there is a mix of on-premise, hosted, and IaaS, PaaS, or SaaS technologies.
This IDC Market Spotlight provides some key insights based on IDC's discussions with solution providers that have built successful cloud revenue streams and have IT services as an important part of their business model. These insights are not intended to be silver bullets but rather points to ponder as you consider the cloud strategy that will work best for your unique business and circumstances.
Strategies for IT Services in the Cloud
There are several ways in which IT consulting and managed services can adapt to take advantage of cloud business opportunities, and there is no doubt that opportunity abounds. In the sections that follow, we describe some of the approaches that solution providers report have been successful.
Be a Cloud Adviser
The cloud has reached a level of maturity where more and more business applications and functions can be comfortably transitioned. But not every aspect of a customer's computing environment is necessarily ready for an optimal deployment in the cloud. For many customers, simply keeping up with the number and nature of cloud options available to them is overwhelming. Solution providers are in a unique position to help customers understand how they may benefit from transitioning their applications or infrastructure to the cloud as well as take advantage of net-new functionality that only the cloud can provide.
Solution providers can play a key role in explaining cloud opportunities and challenges, and translating the technology industry's jargon and buzzwords into business terms that customers understand, perhaps in the form of an initial consulting engagement to develop a strategy for the cloud based on the customer's existing infrastructure and capabilities. One approach is to focus on the near-term ROI and savings benefit of the cloud while also helping map out a long-term strategy to transform and modernize a customer's overall technology position. As one solution provider explained:
"Clients rely on us not only to position the cloud architecture but to validate that it's going to work as described. We have a lot of due diligence to do in making sure that all the failover mechanisms are there and that we account for every possible scenario."
Whether or not you can charge for these initial types of cloud advisory engagements is a key question. Some solution providers can charge a fee, while others assign the cost to the presales effort, knowing the potential value of a long-term recurring revenue customer.
Focus on Iterative Consulting
IDC believes the days of the large, monolithic IT consulting and integration project are numbered, if not already gone. The emergence of cloud and other rapid deployment technologies, coupled with the economic downturn that permanently squeezed budgets, means that most organizations do not have the capacity for or interest in taking on enormous projects. Also consider that line-of-business managers are playing a much larger role in IT investments, and their return-on-technology lens is measured in weeks and not months or years.
Many solution providers are adapting to this changing reality by designing their integrations to be more agile and iterative, delivering smaller "modules" of consulting, which show immediate results, and then moving on to the next logical steps. This gives customers control over project timing and costs and allows them to see the benefit of the first phase before committing to the next phase. IDC has found that in the long term, solution providers can make the same amount of revenue over the lifetime of a customer while defining and executing consulting projects in smaller chunks.
In many cases, cloud solutions serve as the perfect door opener for these deeper engagements because of the ability to start small and build out from there. The ongoing nature of this process, resulting in a number of smaller successful implementations along the way, can lead to a tighter, higher-satisfaction relationship with the customer and uncover a continuous string of opportunities.
Shift the Needle Toward Integration
The very nature of cloud-based and SaaS applications means they are up and running very rapidly and solution providers typically do not need to spend as much time modifying and configuring them. This gives IT consultants an opportunity to focus on higher-value services that ensure a customer's applications work together and communicate efficiently and places integrators in a very favorable position.
Ensuring good communications, and seamless data management, among disparate applications is a top priority for most businesses, and this includes integrations between existing on-premise applications, legacy on-premise applications that are being moved to the cloud, and new cloud-based applications that are introduced into the environment. IDC sees the role of integrating applications, and deciding which applications make sense in which delivery models, taking on greater prominence for many IT consultants and integrators. The requirement for integration also elevates the importance of technical architecture because combining cloud with on-premise solutions may involve heterogeneous technologies.
Be Your Customer's IT Department
While one approach to the cloud is to differentiate yourself by focusing on an industry or a specific business process, another is to stick to providing exceptional IT-focused solutions with a high service level for the right price. Some partners nickname their approach "IT department as a service."
There is a wide continuum of IT support services a solution provider can offer, from fielding ad hoc help desk calls to proactive maintenance and everything in between. Although it has always been a good business model, providing a comprehensive outsourced IT management and support service makes even more sense with the cloud. That's because cloud-based outsourcing involves much less capital investment from and lower operating costs for solution providers than on-premise outsourcing. Solution providers that adopt a cloud-based approach can replace declining or disappearing installation and configuration revenue with SaaS and IaaS solutions.
Many solution providers are already recognizing the potential in building out managed services capabilities. However, that doesn't mean it is too late and that the field will be too crowded to make an impact. There are a number of different approaches and tactics that provide lots of room for differentiation, from providing remote monitoring and management of the client's environment to providing outsourced help desk support, including the configuration and ongoing maintenance (moves, adds, changes, etc.) of applications. As two solution providers noted:
"First, it was cost beneficial to move the customer's business continuity services to the cloud. It is sort of a precursor. Now we're in the process of moving their phone systems to the cloud. This year and next, a lot of our focus is trying to move infrastructure."
"Managed services for us is managing all aspects of an organization's IT infrastructure, whether it be their help desk, their email, their servers, or anything else related to IT. We also offer a service where our president or our vice president becomes their virtual CIO. We help with the customer's vendors and contract relations. We don't make the decisions for them, but we're their adviser if they have any questions."
Managed correctly, this type of relationship can be greatly beneficial in terms of the ability to build long-term relationships with customers that can be continually expanded into new dimensions. In the words of one solution provider:
"One thing about being the IT department is it's a lot easier to go to the customer and say, 'You have to do this project.' In the old model, we had to sell them on it. Now, they know what's going on. They understand. We're a main department in the company. We're telling the other departments, 'If you want to keep growing, you have to do this project.'"
Leverage Remote Delivery
More and more solution providers are figuring out how to execute remote delivery of their IT services, because the less they have to be onsite with the customer, the less expensive it is to deliver the service. Senior engineers can provide oversight for several projects simultaneously rather than being tied up for months on end at a single client. This promotes scalability and also provides a training opportunity for new staff. As two solution providers said:
"The cloud reduces our support costs — which is our No.1 cost — while giving our clients better technology. We can be more remote and mobile while we're providing a higher level of service to our clients. That's from our business perspective. The customer also wins because they get better uptime, scalability, and mobility."
"It's shifted our business model quite dramatically in how our engineers are able to support our clients because we are able to do far more remotely."
For one, staff costs can go down by spreading out the higher-paid technical architects across more clients and using more cost-effective resources to execute on the bulk of the work. In addition, solution providers that are effectively using automation to increase their efficiency can improve their gross profit margins.
A center of excellence "remote delivery center" can be used to cover many different geographies without incurring travel costs. Cloud helps enable highly repeatable engagements, which is key to profitability. Many solution providers are using Microsoft Intune as a key tool in the transition to managed services and remote delivery. The virtually centralized approach also makes it possible to optimize staffing levels and train younger talent on specific repeatable tasks. Plan remote delivery methods with lots of leverage in mind, and plan for exactly how staff will be mentored to perform well in the high-leverage model.
Standardize Your Offerings and Pricing
Many solution providers are becoming proficient at creating and selling ongoing services that fit the recurring revenue model. These services were often previously sold on a one-off or transaction basis. The most obvious examples are around support relationships where a solution provider offers a bundle of support hours for a particular customer for a discounted rate every month. A prepurchase of a bank of monthly hours establishes a commitment to spend a certain amount as well as gives the customer peace of mind that someone will be available when it has a need. A similar scenario that's growing in popularity is for ad hoc professional services or even application development services. These services could help with security or Microsoft SharePoint administration or with workflow design and development. The customer benefits by securing its favorite systems engineer or developer, while the solution provider benefits from a profitable, ongoing revenue stream.
Successful solution providers report that one key to success is the ability to offer a menu of prepackaged offerings that can adapt to various client needs, from a basic level that allows metered consumption of support to a "gold plated," all-encompassing outsourcing and support service. Solution providers pursuing this model engage customers on a subscription or retainer basis to provide both proactive and responsive support for the client's entire IT infrastructure.
Fixed-price services are a great way to go as customers feel better about signing up to a scope and a price that are set. You just have to make sure the scope is clear and all of your underlying costs are known and stable. You also have to prepare for some customers that may not be a good fit for your offering and even politely decline their business and move on to those that are a better fit.
If a customer is going to say "no" in the end, it's better to get to that realization sooner than later. As one solution provider explained:
"We are now doing more and more fixed-price engagements all around SharePoint. Much more off the shelf, much more 'cloud' in its kind of style — its sales style and provisioning. What we do is what we do. We do it really well. And if that doesn't suit you, that's fine."
There is still lots of room for time and materials project work within the context of a cloud/recurring revenue business model. That's because customers will often need strategy advice, process redesign, or migration planning and mitigation. However, if you want to stay true to the business model, you might have to walk away from one-off project work for companies that are not currently annuity customers to avoid reverting to "peak and valley" revenue.
A change as significant as cloud always brings a need for readjustment or even reinvention of the way you do business. In terms of IT services, many things can change.
Cloud is prompting a move from extremely customized services to packaged IT service offerings. But don't confuse this with undifferentiated services. It is important to design the services "menu" with a view toward how it will provide both customer value and competitive advantage.
Consultant roles and staffing will need to evolve. In many cases, senior staff will need to interact more with line-of-business staff and have more true "consultative" conversations in the course of delivering services. They will also need to spend more time managing and mentoring highly leveraged delivery resources.
The nature of managed services will change with cloud, but traditional activities are quite compatible with cloud and may in fact be a catalyst. Managed service providers (MSPs) understand ongoing support and recurring revenue, so they will fit into cloud more easily than other types of companies.
However, MSPs should embrace cloud and not worry about how it may cannibalize existing services.