Managed services continue to drive profitability for IT service providers

A new report from software company SolarWinds highlights the opportunities that managed services can bring for IT service providers

Managed services continue to drive profitability for IT service providers

The average channel partner in Europe receives 24% of gross revenue through managed services. This is according to “2018 Trends in Managed Services”, a report created by SolarWinds and The 2112 Group.

Managed services making strides

Among managed service providers, competition is fierce. “To develop—or keep—an edge, it helps to compare yourself against the competition,” John Pagliuca, senior vice president, SolarWinds MSP stated.

As the report outlines, many see Europe as a “conservative, tradition-focused channel landscape.” However, managed IT services are continuing to make steady progress in this market.

Traditional resellers and systems integrators still hold a “fair share” of transactional hardware and software business. Nevertheless, “the managed service model is steadily winning new converts—helping make recurring-revenue businesses a European market cornerstone.”

Today, the managed service model is now “pre-eminent” among the European channel’s most successful and fastest-growing companies. In fact, businesses that identity as primarily managed service providers (MSPs), the average growth revenue from managed services tops 34%.

Opportunities for providers

As the report observes, Mordor Intelligence predicts that global managed service spending will reach over $296 billion by 2023. From $155 billion last year, this equates to a CAGR of around 11%.

At present, the average profit margin on a typical managed service contract in Europe is just under 23%. Next year, more than 62% of channel partners say they will also add more managed service offerings.

On average, around 95% of respondents have a service offering that’s earning money, leaving just 5% of partners on the “outside of the managed service evolution.” As the report states, “the data demonstrates how fundamental managed services are becoming to the channel.”

Services not only make up a solid portion of revenue, but also fuel a steady increase in profitability for recurring revenue-focused practitioners. Overall, companies surveyed saw 22.5% profit margins on managed services while those that self-identify as MSPs reported an average profit on their service engagements of 38%.

Want to learn more? Take a look at our Top 10 managed services providers