Nearly 100% of the 1600 global managed service providers (MSPs) that Datto surveyed say that now is a good time to be in their industry.
The prognosis certainly is good for the MSP market. It’s estimated that global managed services will grow from a healthy US$180 billion in 2018 to an even healthier US$282 billion in 2023. That’s a compound annual growth rate of 9.3%.
While optimism may be high, so is the competition, however. The barriers to enter the managed IT services market are low, leaving the door open to an abundant supply of contenders jostling for top position.
We spoke with Toby Wakelin, Chief Customer Officer at Virtual IT, a fast-growing IT services company in London to get his views on the current state of play, as well as his predictions of what lies ahead for many MSPs.
The Commoditization of the IT Market is Still a Challenge
“The commoditization of IT still comes top of the list as a concern for MSPs,” says Wakelin when asked to define the main challenges that businesses like his are dealing with currently.
“We are moving out of an era where MSPs say, ‘I’ll architect that for you, and we’ll deliver it on site,’ to out-of-the-box solutions, SaaS marketplaces and brokerages, and web hosted services. Everything is moving to the cloud, but to some extent this devalues the entire concept of IT.”
While 10 years ago, MSPs could easily market their in-depth IT expertise, Wakelin explains that this is no longer the case. “You no longer need to know a lot about the customer’s IT and subsequently this erodes margins.Margins today are smaller than ever.”
Margins have dropped approximately 30% since 2016. However, net-new revenue for MSP services has grown 42%. This is because providers are expanding their product portfolios to deliver a wider variety of solutions, including cloud services in an effort to counterbalance margin squeeze.
Low Churn Reveals SME Market Inertia
“Customers aren’t churning, and this is another challenge,” says Wakelin. While a low churn rate is usually coveted, it currently reflects a degree of inertia across the SME market.
“When we started out at the turn of the century, there was constant churn because people were saying; ‘Our IT doesn’t work. We need to find an MSP who knows exactly what they’re doing – someone who can build a system that facilitates what we do.’ Virtual IT, for example, is not losing customers because the company still provides the service it always has, but the problem is that we’re not able to prise customers from their existing incumbents either.”
Traditional Telcos are Disrupting the MSP Market
Traditional Telcos have been on the sidelines observing the steady growth of the managed services market. A number of them have stepped in to offer their own managed services, causing ripples across the MSP market. “The issue is that many of the Telco deals are too good to be true,” says Wakelin. “Their methodology is ‘stack it high and sell it cheap’, however there isn’t a big enough focus on customer service in most cases.”
This Telco manoeuvre may only be a short-to-intermediate term trend, Wakelin suggests. “At the price point the Telcos are going in at, and with their previous experience of being a much simpler and completely different industry, they’re going to be challenged to retain customers. We are currently re-onboarding a customer originally lost to a Telco deal, in main because their expectations weren’t met,” he says.
Security and Compliance Remain a Strong Focus for MSPs
Security continues to be the key differentiator for MSPs, explains Wakelin. “The whole industry is obsessed with security, and deservedly so. It’s no longer viruses and malware so much, but phishing scams and social engineering. Companies are losing tens, if not hundreds of thousands of pounds to someone infiltrating their systems. These companies increasingly rely on MSPs for guidance and advice – on what third party applications to use, GDPR compliance, cyber essentials certification and so on.”
SMBs are currently struggling to address their compliance and security needs in-house. Only half of the 800 global MSPs IT software company, Kaseya, surveyed reported managing their customers’ compliance obligations, leaving the door open for more providers to step in to fill this gap.
Exciting Opportunities: Device-as-a-Service
When asked about some of the newer opportunities MSPs have at their disposal, Wakelin brings up DaaS, or ‘device-as-a-service’. “DaaS moves all of your IT spend on hardware out of capital expenditure into operational expenditure, which means that customers no longer have to pay large upfront fees. It’s a subscription model that we’re complementing with products such as Office 365, Mimecast, and all of your other IT. It’s essentially the Netflix of computers,” he explains.
Virtual IT is working with HP to deliver DaaS. Customers commit to three years. They receive a kit which comes with next day support warranty and hardware warranties. After three years customers exchange their old hardware for a new and upgraded kit.
“It’s a win-win. The manufacturer keeps selling their products, the MSP provides a service that enables the customers to be agile, and the customer gets a really competitive price.”
Wakelin expects the adoption of DaaS to get driven by corporate, high end institutions. “We’ll then see a trickle down into the SME sector,” he says.
To Stay on Top MSPs Must Automate and Consolidate Business Processes
Virtual IT is in the top 12% of MSPs with a turnover that exceeds US$7.5 million a year. To maintain this annual revenue and to keep growing, Wakelin explains that it was necessary to automate and consolidate the company’s internal systems; “If there isn’t a degree of automation or consolidation, MSPs won’t be able to break a certain ceiling of support and still be economically viable.”
Virtual IT streamlined workflows and practices across sales, customer relations, human resources, through to the IT support desk. “The automation of Office 365, the acquisition of it for customers, to the billing of it was part of that project. Cloudmore, for example, took away a huge burden as we scaled up that part of the business,” says Wakelin.
Virtual IT also owes an important part of its growth to MSP acquisitions. Wakelin explains that by centralizing the company’s systems, Virtual IT could buy other businesses and integrate them very quickly. “If the company we’ve acquired sells Office 365, we can move all of their customers into the Cloudmore platform. For ticketing, we move them to Autotask, and so on. This means that we only have to worry about our people and the customers because we’ve built a scalable back end that manages our core business processes.”
Discussing the future, Wakelin explains that there are challenges ahead; “By 2020, you’re going to see some MSPs really struggling. If they’re not diversifying, if they’re not centralizing their systems, they’re going to be at pains to succeed. But, if MSPs are lean and agile, constantly looking at new market trends, and importantly new solutions and tools that enable customers, they can do well.”
Wakelin explains that margins are going to continue to get squeezed. “As always, it’s really about trying to work out how to deliver the best service with the amount of money available.” he says.