Despite the coronavirus pandemic, savvy MSPs can find and pursue revenue and profit growth drivers, according to Datto's Global State of the MSP Report for 2020.
1. MSP Revenue Growth Forecasts: Prior to the COVID-19 pandemic, MSPs were expected to grow by 17%. After the start of the pandemic, 40% of MSPs expect to reduce their growth projection by at least 10%. Revenue at many MSPs will be flat this year, but there are still growth opportunities in the market, Datto says.
ChannelE2E Perspectives: We were a bit less optimistic in our initial growth forecast for 2020, originally expecting MSPs to grow about 8 to 9 percent, and MSSPs to grow 12 to 18 percent. Note: During previous recessions, VARs typically saw their product revenues drop about 45%, and MSPs saw their monthly recurring revenue (MRR) fall 20%, Service Leadership estimates. Still, Service Leadership notes that future MSP performance may not necessarily parallel previous recession-era data.
2. MSP Revenue Size: Nearly 40% of MSPs reported annual revenue of $2.5 million, Datto's research says.
ChannelE2E Perspectives: That mirrors anecdotal evidence we've heard in the market. The best-performing MSPs at the $2.5 million revenue mark typically generate about $450,000 to $500,000 in profit -- assuming those MSP perform in. the top-quartile category identified by Service Leadership Inc.
3. MSP Revenue Growth: Over the past three years, 22% of MSPs reported that their total revenue per year grew by up to 5%, and 24% of MSPs reported growth of up to 10%. The takeaway: SMB customers increasingly depend on MSPs for their IT services, Datto says.
ChannelE2E Perspectives: We'll reinforce that view. We believe MSPs are the de-facto route to market for small business hardware, software, cloud and IT services.
4. Managed Services Revenue Mix: The two most consistent drivers of MSP growth include generating a higher portion of total revenue from managed services, and setting specific revenue and growth goals, Datto says. Combined, those two activities enable MSPs to roughly double their rate of growth. In fact, for every 10% of total revenue derived from managed services, MSPs grow their businesses by between 0.25% to 0.75% on an annual basis. Further, the survey suggests that larger MSPs and also upstart MSPs located in North America are growing at the fastest rate, Datto says.
ChannelE2E Perspectives: Read that last line again very closely. Larger MSPs and upstart MSPs in North America are growing most quickly. In our view, that essentially means MSPs with scale and MSPs that innovate are pulling away from mass market, general-purpose MSPs. ChannelE2E believes the top 20 percent of MSPs will command 80 percent of the market revenue gains during and after the pandemic.
5. Cloud Migrations Accelerate: The survey found that 57% of MSPs expect the use of on-premises servers for critical applications to decline over the next three years. Worldwide stay-at-home orders have dramatically increased demand for cloud and IT for many businesses, Datto asserts.
ChannelE2E Perspectives: The figure sounds conservative to us. Do the other 43% of MSPs truly expect the use of on-premises servers to hold steady or increase over the next three years?
6. MSP Cybersecurity Challenges, Opportunities: Cybersecurity continues to be a pain point, with 34% of MSPs citing this as a top concern (compared to 30% in 2019). However, rising concerns around cybersecurity could indicate a higher demand for security services from clients, as SMBs increase their awareness about IT security, Datto says.
ChannelE2E Perspectives: Before MSPs articulate a cybersecurity strategy to end-customers, MSPs must document and mitigate risk in their own businesses. These 10 cybersecurity tips for MSP businesses may assist your risk mitigation strategy.
7. Emerging Technologies: Given the reliance on remote management technology, MSPs are most excited about the promise of 5G technology as it will enable new opportunities for their clients through the use of faster wireless networks, Datto asserts.
ChannelE2E Perspectives: In addition to 5G, we're advising MSPs to keep a close eye on Robotic Process Automation (RPA), which may revolutionize IT service management (ITSM), help desk and customer support over the next few years. RPA is mostly an enterprise trend right now. But we expect it to extend down into the midmarket and SMB sectors over the next couple of years.
8. Bonus: Co-Managed Services: During a ChannelE2E conversation with Rob Rae, senior VP of business development, we both zeroed in on co-managed IT services as a major MSP opportunity. Stay tuned for ChannelE2E to explain that point more fully in the next day or so.
