6 Ways MSPs Can Increase Profit Margins as Public Cloud Competition Spikes

As managed service providers know all too well, profit margins are narrower than ever thanks to competition from the public cloud. On top of that, MSPs are feeling added pressure from original equipment manufacturers (OEMs), whose margins also are shrinking. OEMs are accounting for these smaller profits in their service contracts with MSPs. The result is that MSPs can ultimately take the biggest financial hit.

Thus, MSPs are having to choose between charging too much and potentially losing the customer, or charging too little and not profiting from their products and services.

Rob Coenen, vice president of InterOptic, helps MSPs implement IT networking strategies that aid them in becoming more profitable, without sacrificing performance. He sat down with us this week to provide six solutions to help you gain back some of your lost profit margin, along with the benefits that each can provide for your customers.

InterOptic’s Robert Coenen

1. Consider dark fiber. Dark fiber links cost more upfront for the installation and investment, but in as little as six months, your customer could be saving money because they’re not paying expensive monthly fees for leased lines from telecom companies. There are additional long-term savings too. When their network needs a bandwidth upgrade, with a fixed cost you can just add wavelengths or upgrade the routers rather than pay more per month for additional dedicated bandwidth.

2. Maintain the legacy fiber network. Many companies move away from MSPs to the public cloud because they need more network bandwidth and think it will save money. But moving to the cloud can be expensive and highly disruptive. It’s typically better suited for cost control than cost savings. Companies that don’t understand this are often surprised when they get an exorbitant bill from their cloud service provider. So they hire consultants to help them manage their cloud workloads — another pricey venture.

Instead of moving everything to the cloud, here are two solutions for upgrading your customers’ network bandwidth without upgrading the legacy multi-mode fibers:

3. Use non-OEM hardware vendors. OEM vendors can make it difficult to make any money from brokering their hardware, offering little or no additional discount to registered partners, so it becomes a race to the bottom in terms of margin.

Consider third-party hardware like optical transceivers. These devices can save the customer money, improve your margins and even get you better technical support. But be cautious, because lowest-cost, third-party hardware vendors usually sell low-quality equipment that stops working after just a few months, hampering your customers’ guaranteed uptime.

This eats at your margins in a couple ways: You’ll end up paying for hardware replacements, you’ll have to pay the overhead of an onsite technician to replace the dead transceivers, and you can lose the customer’s trust.

Partner with a third-party hardware vendor that can provide cost savings, has equipment that performs the same as OEMs — and is reliable. Your customer will be pleased with the uptime, and you’ll be able to gain back some of your margins, thanks to the lower hardware cost.

4. Lease data center equipment. If you sell equipment to your customers, you’re losing out on …

… any future value that equipment could provide. Instead, MSPs should consider leasing equipment so they can use it as a source of recurring revenue. Customers like this model because the investment becomes an operating expense instead of a capital expense, which can benefit both you and your customer.

5. Keep an eye on cost per bit. You and your customers should keep this metric in mind when evaluating which transceivers are best for the needs of their data centers.

Cost per bit measures the cost of each gigabit of data running through your data center. To calculate it, divide the total cost that the customer would pay for the transceiver by the number of gigabits being used. For example, the cost per bit for a 10GB transceiver that costs $200 is $20 per gigabit. But if you’re only using five gigabits of that, the cost per gigabit is $40.

How do you convince your customer that they should go with the $400 40GB transceiver? As their company grows, they’ll need more bandwidth. While a $200 10GB transceiver at $10 per gigabit might work for their bandwidth needs today, six months down the road they may need to upgrade.

6. Outsource maintenance services to non-OEM partners, or do it yourself. Just as there are third-party transceiver manufacturers, there are third-party maintenance support providers, often offering significant savings over OEM contracts. There are many to choose from, but, like third-party hardware, MSPs need to be careful of low-quality, third-party service partners, which can leave you in a lurch with your customers. With the right partner, though, you can regain some margin without sacrificing service.

If you are willing to commit the resources, setting up your own maintenance group is also an option that some MSPs have gone with. But make sure you know what you are getting into before you take the plunge.