IPED: Performance Gap Between Best, Average MSPs Widens

The top 20 percent of most profitable MSPs are projected to see average gross margins of 65 percent for 2009, up from 61 percent last year, according to IPED. In addition, their operating profits will be 24 percent of net income, nearly double that of the average MSP.

In other research about the most profitable MSPs, IPED finds that the most profitable MSPs are targeting larger customers. One third of their customers have more than $50 million in annual revenue. Also, the most profitable MSPs have fewer customers (75, compared to 100 for average MSPs), but more revenue per customer ($43,900 compared to $17,600).

Managed services will account for about 15 percent of the total North American IT channel market, or about $56 billion, this year, according to IPED.

"The MSP market will continue its growth path in 2009 to emerge as one of the bright spots in an otherwise challenging economic environment. The appeal of the model is clear: Managed services addresses customers' desires to trim their in-house technology infrastructure investments and cut administration costs," according to Ryan Morris, practice director, education and consulting, for IPED.

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Managed services is growing faster than security, networking hardware and outsourcing, but not as fast as storage or virtualization solutions, according to IPED.

In order to accommodate increased demand for managed services by solution providers and their customers, IPED recommends that vendors make managed services a larger piece of their channel programs, support and field sales efforts.

In addition, the managed services business model differs significantly from that of a traditional time-and-materials-based organization and often channel partners have a hard time with the transition, according to IPED.

"They require retraining to learn how to sell intangible services and long-term contracts, craft workable service-level agreements and benefit from access to newly created vendor programs and incentives," Morris wrote in the April edition of The IPED Edge newsletter. "Many will also need access to larger amounts of vendor financing and credit to shore up cash flow needed to sustain their efforts during the transition period while they build a pipeline of managed services customers."

The growth and profit opportunities in services is dragging more solution providers into the managed services market. IPED projects that 85 percent of solution providers will deliver managed services in some form this year.

"Those solution providers not moving in the managed services direction are putting their business model at risk as the industry is clearly shifting to more of a utility model for delivering, managing and paying for technology, " Morris wrote in the newsletter.

An IPED survey found that building more recurring revenue streams was the most important reason why solution providers offer managed services.

About 72 percent of respondents said recurring revenue was an important facet of their managed services business, according to IPED. Improved customer service and improved profit margins were each named by 69 percent of the respondents, while the ability to provide higher value-added services was fourth with 66 percent. New customer acquisition and improved competitive advantage were selected by 65 percent of respondents.