If you are like most IT Solutions Providers, you have been reading the press and hearing from industry luminaries about the variations of cloud business models. They include the Managed Services Provider, Cloud Solutions Provider, Cloud Services Broker and my most recent favorite - the Modern MSP. No matter which title you give your cloud business any can serve as an intermediary between the hundreds of possible cloud services and the dozens of customer segments who can potentially use them. So now you are ready to get started building your business...right?
Well, before you start putting that sales presentation together, you might want to have a financial plan that will show what your future business will look like in terms of revenue, gross margin and net profitability. I call that a Business Growth Model versus a revenue plan, because it should reflect all of your assumptions about the key drivers for you business. I am talking about assumptions like:
- The average One Time Revenue (OTR) value on a per-user or a per-deal basis
- The average Monthly Recurring Revenue (MRR) value on a per-user or per-deal basis
- The average deal acquisition rate (for OTR deals, MRR deals or a combination)
- The average cost of acquisition for each deal (total sales and marketing expenses)
- The blended gross margin that you will realize for an average deal
I suggest you do this as a two-step process. First create a baseline of your current business by capturing the values for these key drivers as they exist today. Then model your business over the next 3 years. What will your business look like if you make no changes to your current cost structure, deal values and deal acquisition rate?
As the second step, formulate some new assumptions that represent where you plan to take your business next. If you are migrating to the cloud, how will your future portfolio of cloud services affect your average deal size? Well, if all you plan to do is replace on-premise file server management with a virtual storage solution, your deal value is likely to decrease. However, if you plan to assemble a full suite of cloud services and wrap your own consulting services around them to form integrated solutions, then your deal value is likely to increase.
Additionally, you may decide to target larger customers and invest more in sales and marketing to accelerate your deal flow. How will these changes affect your business growth over the same 3-year timeline? With the right modeling tool, you can easily test these scenarios to better understand their business impact over the long-term so that you can establish the right performance targets in the short-term.
I have created a 3-tab spreadsheet that enables this kind of business planning and financial modeling. It's called the CSP Business Growth Model and here is what it looks like:
The first tab is for capturing your assumptions about your existing business and your future (ideal) business.
The second tab is a pair of 3-year projections for revenue, gross margin, cost of acquisition and net profitability (color coded with red ink for negative margin and green ink for positive margin). The 3-year projection for the existing business has a deep blue border and the 3-year projection for the ideal business as a deep green border providing you with a detailed (monthly) "before and after" view.
The third tab is a quarterly summary that is a bit easier on the eyes and a graphical plot of the revenue trajectory for the exiting (blue) business versus the ideal (green) business. The dotted lines show top line revenue and the columns show gross and net margins (also color coded blue and green respectively).
A copy of the CSP Business Growth Model is complimentary - you can download the model here. This kind of side-by-side comparison can be done for any number of business transformations. Here are some examples:
- MSP business to CSP business
- VAR (OTR-based) to MSP or CSP (MRR-based)
- Telecom Agent (commissions) to CSP (service revenues)
- Conservative Growth Plan vs. Aggressive Growth Plan
Give the model a test drive and let me know how it comes out - or if you have any questions or comments.
