MSP Survey Reveals Competitive Challenges in Cloud Era

The last year has obviously had a profound impact on managed service providers (MSPs), who have seen almost every aspect of their business transformed.

A global survey of 1,884 MSPs conducted by Strategy Analytics on behalf of Datto Holding Corp, a provider of data protection and cybersecurity tools widely used by MSPs, finds half of MSPs reporting their clients now have 50% to 75% of workloads in the cloud. Another nearly 20% report clients have 25% to 50% of their workload running in the cloud.

At the same time, 99% of respondents report they also offer managed security services. Those services are being provided by hiring dedicated cybersecurity personnel in addition to reselling services provided by other MSPs or services provided by security vendors.

Remote Work, Cyber Attacks Boost Competitions

Not surprisingly, the shift of workloads to the cloud has been accelerated by the COVID-19 pandemic, as organizations looked to make applications more accessible to end users generally working from home. Simultaneously, a wave of security attacks has driven more organizations to rely more on external expertise to secure their IT environment.

Given those macro trends, MSPs should be doing reasonably well as demand for services increased. And yet the survey finds MSPs only saw a modest increase in revenue during the pandemic, while more than a third (36%) saw no change. Nearly 20% saw revenues decline. Many MSPs also saw costs rise, with more than a quarter (27%) increasing headcount.

The survey suggests the source of that revenue growth is competition between MSPs. The survey finds the biggest challenge for MSPs was competition (34%), followed by revenue growth (27%), profitability (24%), and acquiring new customers (23%). As more channel partners add managed services to their portfolio the number of MSPs has grown, the barrier for entry to becoming an MSP is also falling as more channel partners resell services provided by either another MSP or an IT vendor.

Despite those issues, however, nearly all MSPs (96%) said that they expect revenue growth in the next three years and that now is a good time to be an MSP (93%). The hope is that demand for managed services will increase faster even as competition continues to adversely impact profit margins. That pressure will require MSPs to focus more on making the IT platforms as efficient as possible by, for example, automating processes, says Rob Rae, senior vice president for business development at Datto. “They need to better leverage their IT stack to become more profitable,” he says.

MSP Market Stats

Much of that increased competition is being driven by relatively new players. Just over half of respondents said they have been in business between six and 11 years. However, nearly a quarter reported that they’ve been in business for less than five years. Nearly 40% reported annual revenues between $1 to $5 million, while 32% said they had annual revenue of less than $1 million. Another 15% of respondents had annual revenue of over $10M, while 6% were over $20M. More than two-thirds of respondents (67%) said they generate revenue from recurring services.

The majority of MSPs reported serving businesses with 20 to 200 employees. The 50 to 100 employee-range was most common (24%), followed closely by 25 to 50 (20%) and then 100 to 150 (16%). Very few respondents serve clients with fewer than 10 employees (3%) or more than 300 employees (1%).

On average, the business spent $13,000 per year on managed services, with 27% falling between the $5,000 to $10,000 range. Another 28% spent $10,000 to $15,000. A total of 18% spent between $15,000 and $20,000, while 8% spent between $20K and $30K. Telecom (46%), High Tech (45%), and Healthcare (44%) were the top industries consuming managed services.

It’s clear the bulk of the MSP community is made up of relatively small companies. It remains to be seen to what degree MSPs may be rolled up to create larger entities in the years ahead. In the meantime, MSPs should assume that customers will continue to pit them against each other, as the fight for new business continues to become that much more bruising in the months ahead.

Further reading:

Best Endpoint Security and EDR Tools for MSPs

Starting an MSP Backup and Recovery Service: IT Partner Options

MSPs with Data Protection Expertise Are in Demand

Data Protection Business Model Requires Nuanced Approach for MSPs

Michael Vizard
Michael Vizard is a seasoned IT journalist, with nearly 30 years of experience writing and editing about enterprise IT issues. He is a contributor to publications including Programmableweb, IT Business Edge, CIOinsight, Channel Insider and UBM Tech. He formerly was editorial director for Ziff-Davis Enterprise, where he launched the company’s custom content division, and has also served as editor in chief for CRN and InfoWorld. He also has held editorial positions at PC Week, Computerworld and Digital Review.

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