So, You Wanna Be a Cloud Service Provider? Are You Sure?
One question to ask yourself...TRULY sit in a room with a mirror on the wall with no distractions, and contemplate what one of my favorite philosophers said about building and reselling Cloud services:
"Und wenn du lange in einen Abgrund blickst, blickt der Abgrund auch in dich hinein."
OOPS! I gotta run that through Google Translate...give me a second:
"And if you gaze long into an abyss, the abyss also gazes into you."
- Friedrich Nietzsche
Seriously - building a SUCCESSFUL and PROFITABLE CSP is not for the faint of heart. Mountains of money will be spent, tears will be shed, and maybe a little blood will even spill - all in the name of capturing razor thin profit margins dribbling in from multi-year, painfully drafted contracts.
Still with me? Wow...OK. Let's take a look at the financial construct and boundaries that set the stage for success.
Poorman's CSP Rule of 30 | 30 | 30
The Poorman Rule of 30 | 30 | 30 for CSPs states:
For any product in a CSP service catalog to be successfully sold and delivered, a monetary distribution burden for that service must be established:
- 30% for hardware and software licensing
- 30% for ping, power, pipe, and people
- 30% for profit margin
Hardware and Software Licensing. This is probably the easiest to calculate of all three elements. To provide consumable services to end users, you need hardware and software. And, as a shard of the Poorman Rule of 30 | 30 | 30 - your economic choices will ALWAYS drive a balance point that will affect where your money is spent:
Leaning towards commercial off the shelf solutions (COTS) will require a higher CAPEX number for licensing and a lower OPEX cost for people needed for its care and feeding. Conversely, using open source because it's FREE (!!!) may carry a lower CAPEX outlay, but a higher OPEX for all of the speciality people you will need in the mix to keep things running. Don't believe me? Just ask anybody who has tried to implement this :-).
Ping, Power, Pipe, People, Place (P5). This part of my rule that is the most precarious of the financial modeling - mainly because slicing and parsing the various P5 elements to a granular level can be challenging. How much does a network port cost? How much does a rack U of space from a real estate perspective cost? How much power does a server draw? All of these elements may require some fuzzy math to calculate, but you'll need to do the best you can. And always...ALWAYS...assume nothing and calculate on the high side; the last thing you want to have happen is underestimate a P5 element after customers have started to consume your services and you need to make heavy pricing adjustments that will have a direct bearing on the last 30 | 30 | 30 element...
Profit Margin. This is why we do all of this CSP stuff in the first place - to make money. And, without properly planning the above variables, margins could be greatly affected. Why 30%? Because the offerings are services, which are judged on quality versus quantity like a commoditized product. Plus, 30% gives ample maneuvering space for a CSP to allow channel partners to scale and leverage its salesforce, and even distributors to get involved...if they really need to (a VERY debatable point for another time).
And there you have it - the big secret none pf the FAT CAT CSPs want you to know. Armed with this and a few million dollars' worth of capital investments from friends and well wishers, even YOU could be the next Jeff Bezos! Good luck!