CHAMPION MINDSET
The Profitability Crisis In The Managed Services Industry
The managed services industry , despite its massive financial potential , struggles with profitability . Is driving down costs the answer ?
BY COLLEEN FRYE
Money is flowing in the managed services industry , to the tune of half-a-trillion worldwide — that ’ s trillion with a T — according to industry analysts at Canalys . Yet MSPs have a profitability problem .
What gives ?
“ The industry is not good at articulating the value and the complexity of what they do ,” says Kaseya CEO Fred Voccola , even though “ one can argue the MSP industry is probably the biggest enabler of the Western world ’ s economic boom that we ’ ve had for the last 10 years .”
So Many Dollars , So Little In MSPs ’ Pockets
The numbers don ’ t lie . There are 335,000 companies around the world that have at least one managed contract , with “ one out of every 10 technology dollars now — hardware , software , services dollars — spent on managed contracts ,” says Canalys senior analyst Jay McBain .
And there are the 86,000 MSPs with 30 % or more recurring revenue , McBain says , “ but 30 % of them don ’ t make money consistently .”
As he explains , “ The average MSP has eight employees . And given the cost of goods sold , given the fact that you have to run the entire company — sales , marketing , operations , finance , HR — usually with one person , with seven being technicians , it ’ s very difficult to drive an EBITDA north of 15 %– 17 %.”
Paul Cissel , CEO of Growth Caddie and a TMT Expert in Residence , says only about 25 % of MSPs are best in class , which means achieving service gross margins over 50 %, total blended gross margins of over 42 %, and subscription recurring revenue of 50 %– 60 %.
On top of that , “ an average MSP has 20 to 25 different vendors that they work with ,” says Angus Robertson , chief marketing officer at ConnectWise . “ So the time it takes to onboard those different products , work with support for all those different products , train employees on those different products , build the integrations and the scripts across those different products , and provide automation and an efficient experience to their clients — there ’ s a lot of overhead in that .”
Costs per technician are high too . “ Their engineers are not leveraging automation in a full way . So the number of clients or endpoints that a technician or engineer can manage is 15 %– 20 % lower than what it should be ,” Voccola says .
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