Until recently, managed services provider Aldridge drew roughly one-quarter of its revenue and its highest margins from hosting clients in its virtual infrastructure.

But over the past two years, the Houston-based company's Infrastructure-as-a-Service business has been slashed in half, with clients moving over to public cloud offerings and Aldridge providing support around Microsoft Azure and Office 365.

"For some of the smaller, simpler businesses, the level of overhead and expense [associated with hosted cloud] just doesn't make sense," said Patrick Wiley, CEO of the 100-person MSP. "It's becoming commoditized, and bigger companies can provide the commoditized service better."

But Aldridge's transition from providing IaaS to supporting Software-as-a-Service [SaaS] has meant that the MSP is moving clients from its most profitable service to one that is less profitable, Wiley said, with the company taking a 40 percent hit to its margins in the process.

Aldridge's experience offers MSPs a lesson in not being complacent with a high-performing part of your business and keeping an eye on who your competitors are.

Wiley only expects the shift to continue – Aldridge today is pretty evenly split between delivering IaaS and SaaS. Two years from now, though, Wiley expects Aldridge's cloud business to be 80 percent SaaS and just 20 percent IaaS. 

"Software-as-a-Service is generally right for most of our clients," Wiley said. "It doesn't fit every application, but it fits most."

The decline of Aldridge's high-margin IaaS business has forced the MSP to tighten its belt and get more efficient, Wiley said.

Specifically, Wiley said the change has forced Aldridge to adjust the makeup of its workforce from leaning heavily toward high-level engineers that were responsible for managing Aldridge's own cloud ecosystem to vendor managers focused on supporting Aldridge's relationship with Microsoft. 

"You manage that simply by making sure you're staffed right and have the right people in the right seats," he said.

The vendor management role still requires some technical background to support SaaS applications, Wiley said, but it's primarily more of a customer-service position. These vendor management employees need to have experience in the industry, Wiley said, but can be at a more junior level than the engineers and paid less.