The Business Case for Next-Generation AWS Managed Service Providers (MSPs)
By Barbara Kessler, Global MSP Programs Lead at AWS
The managed service provider (MSP) methodology has been around for a long time. Managed services have historically been tied to infrastructure, but next-generation MSPs are involved at a much deeper level on the Amazon Web Services (AWS) Cloud.
It’s not just about managing the infrastructure anymore. It’s about managing the full lifecycle of services—from planning and designing to building and optimizing workloads for AWS Customers.
The AWS Managed Service Provider Partner Program recognizes leading APN Consulting Partners that are highly skilled at providing full lifecycle solutions to AWS Customers. Our next-gen AWS MSPs focus on business outcomes that go beyond the health of individual resources, focusing on four key areas to help customers succeed:
- Plan and design
- Build and migrate
- Run and operate
AWS commissioned Forrester Consulting to conduct a Total Economic Impact (TEI) study to examine and demonstrate the business opportunity and return on investment (ROI) that AWS Partner Network (APN) Partners may realize by developing or expanding their practice areas to include next-gen professional and managed services across the customer engagement lifecycle.
In this post, we’ll discuss findings from the TEI study and walk through key points you need to know about building a next-gen AWS MSP practice.
About the Forrester Study
The purpose of the Forrester study was to provide APN Partners with a framework to evaluate the potential business opportunity of building a next-generation practice by delivering a diverse range of AWS managed services, cloud strategy and migration services, proprietary value-add software solutions, and complementary third-party applications.
To better understand the revenues, margins, expenses, and risks associated with a next-gen AWS MSP, Forrester conducted eight interviews with existing APN Partners with experience developing, selling, and delivering next-gen AWS services and solutions. Forrester interviewed founders, CEOs, presidents, executives, general managers, and directors at APN Partner organizations.
A Rapidly Changing Business Model
The traditional MSP business model is rapidly evolving. Customers are demanding comprehensive cloud-native solutions that reduce costs, improve business agility, increase security, and empower organizations to focus on their goal of delivering unparalleled customer experiences that drive growth.
As customers pursue best-of-breed cloud strategies, IT service providers are quickly realizing they need a new set of skills, capabilities, processes, and services to help customers design, migrate, run, manage, and optimize their infrastructure and applications on the AWS Cloud.
As a result, traditional MSPs, whose legacy business was focused primarily on managing hardware and delivering on-premises solutions, are rapidly shifting their business models and acquiring new skill sets and proficiencies to meet customers’ sophisticated business requirements.
As AWS MSP Partners, these next-gen MSPs have developed a unique set of skills and capabilities that enable them to design, build, migrate, run, and optimize cloud and digital solutions that increase business agility, drive innovation, and improve performance.
APN Partner Revenue and Margin Opportunities
The table in Figure 1 shows the present value (PV) risk-adjusted gross margins available to MSPs at Year 3 of the analysis. This revenue opportunity analysis can be used as a framework for APN Partners to understand the total business potential associated with building a comprehensive next-gen AWS practice.
Forrester’s interviews with eight current APN Partners and subsequent financial analysis found that a composite MSP Partner based on these interviews experienced total risk- and present value-adjusted gross profits of $37.9 million over three years versus risk- and present value-adjusted investment and overhead expenses of $15.5 million, adding up to a net present value (NPV) of $22.4 million and an ROI of 144 percent.
As seen in Figure 2, by Year 3 of the analysis, the composite MSP Partner saw practice-wide gross margins of 51 percent and operating margins of 36 percent.
Keys to Building a Next-Gen AWS MSP Practice
MSP relationships work because if one company plans and designs a customer’s workloads, while another company builds it, and a third company operates it, you lose that synergy and ability to make connections from one phase to another.
Everything the MSP Partner learns about the customer during the early phases of engagement, all of that deep knowledge, carries through their entire relationship. The MSP is capable of owning that work holistically and provides expertise across the full lifecycle of services.
Because AWS MSP Partners have such a deep understanding of their customer’s environment, they are able to predict things before problems arise. Next-gen MSPs are able to be even more proactive than traditional MSPs and are capable of owning services and customer experiences further up the stack.
Forrester’s interviews found that successful next-next MSPs delivered a combination of professional and managed services, including resale and business support services, as well as complementary third-party application sales and value-add IP sales.
Professional Services: Plan, Design, Build, and Migrate
As customers embark on their cloud journey, APN Consulting Partners have several interrelated professional service opportunities where they can leverage their unique next-generation skill sets, proficiencies, systems, and intellectual property (IP) to build long-lasting relationships.
Customer cloud initiatives generally began with an upfront strategic consulting engagement focused on understanding customers’ desired business outcomes, assessing their existing infrastructure and operations, and building best-of-breed cloud strategies, including DevOps transformations. Successful strategy engagements ideally positioned APN Consulting Partners for subsequent design, build, and migrate engagements, many of which spanned multiple years and had multimillion-dollar price tags.
Over the three-year analysis, comprehensive next-gen professional services made up 64 percent of the composite MSP Partner’s total gross profit.
In these early stages, MSP Partners dive deep with customers and explore how AWS can help them innovate and become more agile. This can include conversations about what, how, and when they want to move to the AWS Cloud. From there, MSP Partners set to work designing those solutions for customers and turning ideas into action.
Managed Services: Run, Operate, and Optimize
This is the traditional purview of an MSP, taking workloads that have been built and migrated to AWS and making sure they function just as well on Day 365 as they did on Day One. It’s all about staying right there with the customers and maintaining their solutions over time. This can include continuous compliance, security functionality and patching, monitoring the entirety of a customer’s environment, and mitigating unhealthy things in that environment.
Optimization is a critical element of the AWS MSP Partner Program. Next-gen MSP Partners also help customers with cost and technical optimization over the long term. Strategically, AWS MSPs manage cost and buying strategies and ensure customers are paying for the right type of services. On the technical side, MSP Partners help customers stay abreast of new AWS services and incorporating products and features into their workloads.
Forrester found that APN Consulting Partners built, packaged, and sold robust portfolios of next-gen AWS managed services at a variety of price points and service levels to meet the diverse and sophisticated workload management and optimization needs of today’s technology buyers. Forrester’s analysis found that APN Partners had success selling next-gen managed services following successful migration engagements, with several APN Consulting Partners indicating they saw attach rates as high as 60 to 80 percent across their entire managed services portfolio.
Furthermore, these managed services offerings provided APN Consulting Partners with sticky, high-margin annuity revenue streams. Over the three-year analysis, next-gen managed services accounted for 22 percent of the composite APN Partner’s total gross profit.
AWS Consumption Resale and Business Support Services
To truly provide end-to-end services to cloud customers, the majority of APN Partners interviewed for this study resold AWS consumption and provided billing aggregation, reserved and spot instance services, and business support to their AWS customer base.
Over the three-year analysis, AWS consumption resale and business support accounted for 7 percent of the composite MSP Partner’s total gross profit.
Complementary Third-Party Applications Sales
APN Partners can resell third-party applications and solutions that complement and augment customers’ AWS and business environments. While APN Partners varied significantly in the specific third-party software brands they resold, Forrester’s interviews revealed that next-gen MSPs could attach several common solutions to AWS deals, including security monitoring, alerting, and management; cloud cost management; and data management, analytics, and data visualization applications.
Notably, several APN Partners wrapped third-party applications into their managed services offerings instead of reselling them, enabling them to adopt a premium pricing model.
Value-Add IP Sales
In addition to reselling third-party applications, many APN Partners leveraged their existing software development and engineering skills to build and deliver a variety of proprietary horizontal and vertical-specific software applications on AWS.
While attach rates were modest at around 30 percent of migrated customers, value-add IP sales brought 80 percent gross margins and accounted for 6 percent of the composite MSP Partner’s total gross profit over the three-year analysis.
MSP Partner Best Practices and Success Factors
Here are a few things Forrester found APN Partners have done to improve their business model and profitability:
- Invest in the development of tools, scripts, reusable frameworks, and assets.
- Differentiate and drive competitive advantage through deep, diversified technical expertise.Offer a diverse set of next-gen services across the customer engagement lifecycle.
- Engage in partner-to-partner collaboration and joint go-to-market initiatives to expand the value proposition.
- Implement new incentive programs to drive sales outcomes and the development of technical staff.
- Explore emerging pricing models to drive revenue growth and build long-lasting business partnerships.
- Form long-lasting customer relationships that drive repeat business and annuity revenue streams.
Download the full TEI study to learn how next-gen AWS MSPs have built successful consulting practices by investing in areas such as staffing, marketing, research and development, and training expenses. The full study also explores common MSP business challenges facing APN Partners.
What is the AWS MSP Partner Program?
The AWS MSP Partner Program was developed in response to AWS customers’ requests to identify APN Partners who could help them migrate, run, and optimize their AWS workloads. The program aligns customers with a set of validated next-gen APN Partners who can deliver the full experience of plan/design >> build/migrate >> run/operate >> optimize.
We give MSP Partners a detailed framework of best practices for succeeding as a next-gen MSP, and APN Partners that have embraced these best practices have been able to build profitable, sustainable businesses. Our best practices evolve as AWS evolves, and we offer MSP Partners exclusive access to AWS subject matter experts in a variety of ways. This includes information and training on shared responsibility models, security best practices, service desk operations and customer support and more.
Lastly, the MSP audit process is designed to be a consultative engagement for the benefit of the MSP Partner. If an audit item is missed or an auditor identifies an opportunity to improve, this information is shared openly during the audit process, along with recommendations and best practices to support further growth and development. We’re not just raising the bar for next-gen MSP Partners—we’re helping them get there.