By Jim Lippie 1

A few weeks ago, Microsoft (MSFT) and Dropbox announced integration between Office 365 and Dropbox. This is the final nail in the coffin for service providers who are still making money on companies with 5-10 employees whose requirements are Microsoft Office, Exchange and a file server. It is just a matter of time before small businesses realize that the partnership between Office 365 and Dropbox can give them the functionality they need while dramatically reducing their costs.

Speaking of time, it wasn’t long ago that a service provider could make money on a 10-person business whose requirements were Office/Exchange/file server. It started with $12-$15K on the project to set up Small Business Server (SBS), then $300 per month to monitor and maintain that server, plus $85 per user per month for end user support. So, after you make some money on the project you were charging this 10-person business $1,150 per month in recurring revenue to maintain their infrastructure. At 50 percent gross margin, the service provider was pulling down $575 per month in profit. A managed services provider (MSP) with 10 to 15 of these accounts to augment a couple dozen larger clients and the service provider has a nice little business for themselves (good times!). But when Microsoft killed SBS in favor of Office 365, the writing was on the wall. Now with the combination of Office 365 and Dropbox (Dropbox effectively replacing a less elegant and intuitive OneDrive solution), there is very little reason for a 5-10 person business to use a service provider.

The same 10-person business can now get what they need for about $300 per month ($20 per user per month for Office 365 and $10 per month for Dropbox). I know what you’re thinking; they still need end user support. Yes, the service provider can charge per user per month for helpdesk services, but I know from experience that end user issues for these types of businesses will be trending down as well (more businesses using MACs, Chromebooks and Thin clients).

Some providers might find a few clients they can make a profit on that just require Office, Exchange and file sync and share capabilities, but the bottom line is that service providers should not expect to make nearly the margins they have become accustomed to in the past from these types of clients.

Looking forward MSPs should focus client acquisition efforts on companies that require third party business line applications. Choose a private label solution that you can host and administer your client’s third party business apps and offer clients a fixed fee bundle that includes all of their infrastructure needs, hosted exchange and end user support. When you control access to a client’s third party applications you provide more value and are more likely to maintain the client relationship for the long haul.

P.S. I would be shocked if Microsoft doesn’t acquire Dropbox within the next 12 months. It’s a match made in the cloud!

Have any questions on my comments above? What about any criticisms? Email me at [email protected].