6 Managed Services Profitability Challenges (and How to Overcome Them)

In an expanding but crowded market, managed service providers (MSPs), resellers, and distributors are constantly seeking ways to attract new customers and retain their existing ones through innovative, value-add cloud services that drive revenue growth. 

But it takes more than revenue alone to ensure a healthy, profitable business. MSPs, resellers, and distributors need to look at their operating costs and internal processes to figure out where there are opportunities to optimize in ways that won’t negatively impact their bottom line. 

Key MSP challenges to growing a profitable business revolve around reducing cloud costs and optimizing billing processes. Read on to learn about six major obstacles and the potential solutions can help you optimize business and amplify margins. 

MSP challenges around reducing cloud costs

To reduce operating costs and improve profit margins, MSPs must get the lowest possible price on cloud services. Optimizing cloud unit economics is one of the biggest opportunities you have to achieve greater margins as you scale your business. Therefore, you need to drive down how much you pay for cloud — not just with a single customer but across the entire portfolio.  

MSP challenges around cloud cost reduction include:

1. Aggregating customer cloud costs

You don’t always need to spend more to save more. But you do need to aggregate what you spend across your portfolio, rather than seeking discounts on a customer-by-customer basis. Doing so will give you a higher level of discount over the list price and on-demand pricing that cloud providers offer. Oftentimes, this can’t be done with native cloud platform tools alone, as costs are often split among different accounts.

2. Choosing the right cloud purchase commitments

With cloud costs, you need to know not only how much you can commit to spending but what you should spend it on. For example, Amazon Web Services (AWS) offers options such as Reserved Instances (RIs), Spot Instances, and Savings Plans. But you’ll need a clear-cut understanding of the savings and risks that come with balancing these options. Advanced cloud cost management solutions can automatically analyze, recommend, and optimize RIs and Savings Plans throughout their lifecycle to help you achieve deeper cost savings.

3. Avoiding absorbing unnecessary cloud provider costs

You might chalk certain expenses up to “the cost of doing business.” However, cloud-related charges can add up quickly. And if you’re not careful, you could wind up undercharging for costs related to support, upfront charges, or cloud tools that customers have access to. Amortizing cloud costs, either on your own or through a cloud billing tool, can help you to distribute these charges evenly and account for the value you deliver to customers. 

The solution: Automating your commitment portfolio

CloudCheckr, from Spot by NetApp, is a robust cloud management platform, purpose-built for partners. Using CloudCheckr, you can drive top-line growth by delivering differentiated cloud services and drive bottom-line growth by cutting cloud costs, optimizing billing processes, and automating your cloud operations.  

The new Spot Eco integration within CloudCheckr removes the complexity, manual effort, and expertise needed to create and manage an optimized commitment portfolio and reduce your cloud costs. CloudCheckr with Eco, operating within your budget and strategies, uniquely combines automation with market intelligence to create and dynamically — and continuously — optimize a diverse commitment portfolio of RIs and Savings Plans for you. With Eco, you will pay the optimal price for cloud resources based on maximum utilization, the greatest flexibility, with minimal financial lock-in and risk. Learn more about CloudCheckr with Spot Eco. 

MSP challenges around optimizing billing processes

Profitability is also predicated on pricing models. You need to craft a methodical approach to pricing for services and bill customers effectively. From there, you must be able to accurately and efficiently invoice their customers based on a defined pricing approach.  

The MSP challenges around billing and pricing strategies include: 

4. Determining pricing packages and a strategy for premiums and discounts

As a service provider, you need to strike a balance between profitability and customer satisfaction. Undercharging for services might keep customers happy but make your business less profitable. However, charging too much means that customers may seek out more cost-effective competitors. 

You’ll also need to determine an approach to applying markups or markdowns for cloud infrastructure in a way that won’t affect your existing relationship with customers. Sharing some discounts with customers is a good way to get a foot in the door. However, you’ll need to evaluate the proportion of value sharing as the relationship evolves.

5. Accounting for the correct rates

Not only do you need to develop your pricing strategy, but you also need to have the tools in place to bill for it. Traditional tools — like spreadsheets, calendar reminders, and even some cloud native tools — are often inadequate for implementing sophisticated billing at scale.

Technology can help enforce policies and increase the flexibility in billing processes, so that you don’t have to spend time manually calculating rates. A cloud management platform should enable you to re-rate pricing and provide contractually appropriate charges to your customers, rather than the blended costs a cloud provider supplies via its typical billing file. 

6. Automating cost allocation

Attributing individual customers to their granular cloud costs is difficult. However, when you do the work to set up the cloud environment correctly, you can easily track a customer’s exact usage and resource costs in even the most complex multi-cloud estates. 

This begins with tagging. A tag is a label assigned to a cloud resource. Some are automatically assigned by Amazon Web Services or Microsoft Azure, such as instance IDs, whereas others are user-defined and can be customized. Tagging resources appropriately enables you to perform accurate chargebacks to the right cost centers for the customer. It also makes it easier to compile reports based on tagging data and helps the client gain clarity around their cloud costs, usage, and resource management. 

The solution: Automatically assigning custom billing charges

Just as CloudCheckr can help you save money on your cloud costs, it also helps see those costs all in one place in order to streamline billing and invoicing. Once the policies and margin enhancement parameters have been configured within CloudCheckr, CloudCheckr can automatically translate cloud provider raw usage costs into the correct custom costs. CloudCheckr then accurately assigns them to the correct payee account, as if it were a standalone account. CloudCheckr can also add in any additional charges for professional services, support, and other offerings. 

Automating services for greater profitability

There’s more to running a managed services business effectively than billing and invoicing. In addition to optimizing cloud costs and billing, you also need to be strategic about how your teams approach everyday problems and deliver support to customers each day. Automation is a key factor in improving the efficiency and scalability of your operations. Read the Optimize Your Business white paper to learn how automation can reduce manual tasks and improve service delivery for your cloud services business.

MSPs face many challenges, but they are not without solutions. A robust cloud management platform with multi-cloud billing, cost optimization, and resource utilization capabilities can go a long way in helping MSPs automate their businesses and optimize for profitability.  

CloudCheckr, now part of Spot by NetApp, is trusted by MSPs to solve their most complex business challenges. Learn more about what we can do for your managed services business.