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Techaisle Blog

Insightful research, flexible data, and deep analysis by a global SMB IT Market Research and Industry Analyst organization dedicated to tracking the Future of SMBs and Channels.

COVID-19 Impact - Time to revisit pure-play MSP recurring revenue model

Consider these statistics from Techaisle’s recent worldwide channel sizing and channel trends studies. 62% of MSPs have less than 25 employees, 92% of MSPs have less than US$5 million in annual revenue. A large majority of these MSPs sell to smaller SMBs who are currently experiencing gut-wrenching disruptions to their businesses. MSPs are not immune to the COVID-19 crisis. 15% of MSPs either want to sell their business or wind down and 52% of MSPs need external capital to grow and remain viable or are seeking M&A opportunities. While MSP business model success is predicated on recurring revenue, profitable MSPs drive more than 40% of revenue from non-recurring sources. Pursuit of recurring revenue is not a bad idea as it provides a foundation for future revenue and it is important to business valuations. But data shows that recurring revenue is not the sole indicator of business success.

Recurring revenue can predict earnings thereby reducing risk, however, selling licenses or seats alone does not create a high margin business. MSPs who have moved to predominantly recurring revenue model are more likely to run out of operating capital than they are to reap the benefit of enhanced business valuations or the ability to manage cash flows during an episodic global crisis. Techaisle’s survey data clearly shows that channels with high percent of recurring revenues have been consistently unsuccessful in managing uncertainties in business climate. MSPs that lack margin also lack the ability to invest in improving their capacity to innovate and compete in the long-term and for weathering business interruptions. MSPs that do have meaningful margins, on the other hand, have the ability to invest in capabilities that enable them to expand into new market areas or overcome periods of economic crisis.

A typical pure-play MSP’s 84% to 90% of recurring revenue is spent on human capital, RMM/PSA solutions and other overheads, leaving between 10% to 16% for margins.

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Cloud continuing to challenge SMB MSPs and frustrating VARs but helping CSPs

In a word, the most significant potential disruption factor for the managed services market and channel partners is still cloud. Techaisle data shows that 68% of VARs are offering managed services to their SMB customers but only 46%, that is, less than one-third (31%) of all SMB-focused VARs have been very successful in achieving consistent growth and profitability within managed services. On the flip-side, 83% SMB-focused MSPs have become very successful in their managed services business model. But the MSPs have not achieved the same success in cloud. Only 63% of MSPs are currently offering cloud and although 72% of them have achieved cloud success, it is still, only 45% of all SMB-focused MSPs, slightly less than half of the managed services success. In fact, when extended, data shows that VARs are still caught in a spaghetti junction, they are neither achieving great success in cloud nor in managed services. In the case of MSPs, the overwhelming vendor forces are proverbially narrowing the banks of the river with over capacity.

The success in SMB mobility-focused business model is even lower than cloud and managed services.

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The connection between managed services and SMB business and IT challenges

The subject of “IT/business alignment” has been a hot topic of debate for many years. Yet despite this interest, business and IT interests and objectives frequently diverge. To some extent, this is inevitable: the business is concerned with issues that extend beyond IT, and IT needs to manage issues that are (at least, as long as they are working) beneath the notice of most business professionals. However, today’s business environment is increasingly dependent on IT support, and IT products and services that improve productivity and efficiency or which expand market reach and potential. IT initiatives that can be linked meaningfully to broader business objectives are best positioned to attract corporate support – meaning that products and services that address key business priorities have the greatest potential for growth.

The Techaisle SMB survey, which captured the perspectives of both business decision makers (BDMs) and IT decision makers (ITDMs) in US SMBs ranging from 1-999 employees, looked at key business issues and in particular IT challenges. The list of the most important IT challenges faced by SMBs such as budget constraints and the need to control IT costs and improve justification for new IT investments are both tied to the goal of reducing operational cost, and effective maintenance of current IT infrastructure contributes to reduction in operational uncertainty, and thereby get linked to managed services.

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Indicators of managed services channel (MSP) success

Where is the SMB managed services channel today, as we enter 2016? Since 2013, managed services has taken deep root within the channel, and at the same time, some of the firms that were only casually involved with managed services have pulled back in order to focus in other areas. In the report, The SMB Channel & Managed Services: Success Metrics, Techaisle uses findings from 808 in-depth surveys with US-based channel firms to illuminate conditions within the US SMB managed services channel, and to develop perspectives that suppliers (and the channel itself) can use to construct successful managed services channel strategies. The survey identified a set of issues that is highly correlated with very successful managed services channel businesses, another that can be used to identify partners that are likely to be unsuccessful in managed services, and a third which lacks predictive value.

Results from three annual Techaisle channel surveys, shown in figure below, show that the trend towards specialization – in which channel members commit more strongly to managed services, or move away in order to focus on other areas – is well underway. 64 percent of the channel is ‘very successful’ in selling managed services, meaning that the population of very successful managed services channel members has increased by nearly 70 percent since 2013. A much smaller but growing proportion (currently 11 percent, more than double the 5 percent logged in 2013) acknowledges that it is not having success with managed services. MSPs and SPs report the highest level of success in selling managed services, while SIs, consultants and (especially) VARs are see less success.

techaisle channel msp resized

A view of these findings organized by core business model provides additional insight into the partner communities where managed services are – and are not – gaining traction. As would be expected, managed service providers themselves are most likely to report success in managed services sales. Beyond this group, there are several interesting observations contained within the data:

  • Nearly three-quarters of service providers state that they are “very successful” at selling managed services. This is an important issue within this community: SPs increasingly rely on managed services to differentiate their core hosting or connectivity services, which are (in many cases) relatively low-margin, and which offer limited prospects for future growth. Perhaps the most interesting finding for SPs is that 18 percent consider themselves to be unsuccessful in selling managed services. This group will be at risk as they compete with firms that augment core service presence with expanded, high-margin service portfolios that lock in an increased share of ‘customer wallet’.
  • SIs are not especially aggressive in this space. At a high level, this data makes intuitive sense: SIs tend to have engagements that have a fixed duration and deliverable and managed services involve longer-term relationships tied to SLAs rather than functional specifications. However, it might be expected that SIs facing a shrinking product delivery market (due to increased use of cloud) might look to solidify customer relationships via managed services. The data shows that some SIs are following this path, they are either not committed to this strategy or are actively pursuing other options.
  • Consultants and (especially) VARs are tepid in their pursuit of managed services business. Corresponding 2016 channel reports from Techaisle (see details below) show that VARs are finding great success in cloud, while consultants report that they are experiencing high levels of mobility sales success. Neither group seems particularly enthralled with managed services

It’s clear to all of us that today’s IT industry is comprised of many ‘moving pieces’. This is especially true in the SMB segment: with cloud, mobility and managed services, the buyer’s options have expanded; with the increased involvement of non-IT managers (in both ‘real’ and shadow IT), the buyer community has expanded; and with the channel’s struggle to understand and act on the new cloud-driven demands of a post-transactional IT market, the supply chain itself is undergoing tremendous change.

Techaisle is committed to working with the IT industry to ensure that these changes result in increased opportunity. Techaisle has recently completed two large-scale surveys – one of channel partners (VARs, SIs, MSPs, SPs and IT consultants) and another of SMBs (firms with 1-999 employees). We have also created a thought leadership piece, “Channel Imperatives for 2020: The Changing Channel for a Post-transactional IT market” which examines how 12 tenets of ‘conventional wisdom’ in the channel – mantras like the need to add value, or to increase service revenue, or to focus sales people on retiring quota, or to assemble and deliver best-of-breed solutions – are giving way to new management imperatives. We believe that this research is essential for suppliers looking to plot a channel-centric strategy for SMB market development by capitalizing on the insights contained in our analysis.

The series of three channel focused reports are The SMB Channel and Cloud: Success Metrics, The SMB Channel and Mobility: Success Metrics and The SMB Channel and Managed Services: Success Metrics. Each contains charts and analysis that can be used to identify high-value ‘very successful’ partners and avoid low-value ‘unsuccessful’ channel organizations. They are designed to connect with channel marketing, recruitment and management strategy.

techaisle channel success reports resized

 

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