Managed services in the digital wave
The digital transformation wave has hit the managed services as is the case with all the other industries. As the digital revolution is picking up pace, customer demands and expectations too, have changed. This change has led companies to digitize their processes, products, and services.
As per TSIA, trends show that Managed Service Providers (MSPs) are also digitizing all processes across the business. The ongoing digital transformation has classified MSPs as 1.0 MSP and 2.0 MSP, as per the report.
1.0 MSPs are those that provide highly customized solutions that inhibit scaling, leading to reduced growth and profitability.
2.0 MSPs have standard delivery operations models and employ software-driven, digital delivery capabilities which enable them to increase market space and revenue.
To become a 2.0 MSP and to continue to remain as one, managed services providers should overcome three basic challenges.
Growth: As per TSIA, new MSPs show an average growth rate of 20%. Though the average growth rate is good, most managed services perform under 20%.
Revenue retention: Recurring revenue creates a dependable and predictive revenue model for the company. Research by TSIA indicates that the revenue retention rate of MSPs ranges from 70% to 100% with the average retention rate being 90%.
Profit: Operating income helps analyze the profitability of a company. It can be calculated by subtracting the direct and indirect costs from the total revenue. Based on the TSIA report, the lowest operating income of MSPs was -17% and a maximum of 31%, with an average profitability of 10%.
Conquering digital transformation
MSPs are working towards overcoming these challenges by investing substantially in a digital delivery platform focused on scaling operations.
Managed services are continuously growing as a proportion of overall company revenues. As a result, leaders across the industry are focusing on the following areas to overcome challenges and increase growth.
- Standardizing delivery operations and building standard services catalogs.
- Investing in a digital delivery platform focused on scaling operations.
- Focusing on a formal services R&D budget to invest heavily in next-generation service automation capabilities.
By adopting the above measures, MSPs can drive improvements in growth, retention, and profitability. These will help underperforming MSPs to achieve pacesetter status and improve their performance.
Source: Managed Services Trends in 2022