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How to grow your service revenue….Datto’s Global State of the MSP Report..

…… reveals the secrets of success for managed service providers

With a COVID-19 vaccination programme now underway in the UK, it is at last possible to talk about ‘the beginning of the end’ of the coronavirus pandemic that has so dominated 2020 and which will continue to cast a shadow for years to come.

While the pandemic has been difficult for some managed service providers (MSPs), notably those operating in specific verticals badly affected by social distancing, lockdowns and travel bans, analysis by Datto, a provider of software and technology purpose-built for delivery by MSPs, shows that many have weathered the disruption it has caused better than they might have expected to.

In Datto’s Global State of the MSP Report over 1,800 MSPs were surveyed to find out who they are, how they run their businesses and what challenges they continue to face. In light of the global pandemic, respondents were surveyed both before and after COVID 19 took a hold over businesses. Prior to the pandemic, most MSPs said they were anticipating an average annual growth of 17% over the next three years. However, in Datto’s follow up survey, 11% of MSPs said they expected to revise growth projections upwards as a result of the pandemic; 23% expected to remain on plan or see a reduction of less than 10%; and 40% expected to reduce their growth projection by 10-20%.

New opportunities
The IT industry has fared better than some sectors during the pandemic largely because technology is an enabler of remote working and essential for socially distant communication, collaboration and commerce.

For many MSPs and IT solutions providers, loss of revenue from business disruption and delayed IT projects caused by coronavirus was partially offset by emergency purchases undertaken to support Work From Home initiatives, notably VPNs, laptops, monitors, webcams and other computer accessories.

In addition to that sugar rush, there has been an acceleration of digital transformation, with Covid-19 highlighting the importance of modern cloud-based infrastructures that enable employees to work from their homes and any other location, securely and productively.

“This represents an ongoing opportunity for MSPs,” explains Justine Harris, Sales Director UK/I. “As trusted advisors, many will now be working with clients to turn stop-gap measures into more long-term, strategic initiatives, with a particular focus on remote access solutions, cloud migrations and security.”

Strong growth
Demand for such solutions should maintain the strong growth MSPs have enjoyed over the last three years, with two thirds of those surveyed for Datto’s Global State of the MSP Report seeing a rise in annual revenues in each of the last three years.

The largest percentage (42%) of respondents experienced medium growth, with average revenue increases of between 6% and 20% per year. However, as many as one in five has enjoyed average annual growth of more than 20% per year over each of the last three years.

Of course, not all MSPs are growing; a small minority (12%) has seen revenue flatlining and 3% have seen annual revenue declines of more than 5%. So, what are the traits that separate high growth MSPs from less successful counterparts?

The keys to success
Based on analysis of more than 800,000 data points from 1,800 MSPs, the Global State of the MSP Report identifies two consistent qualities/actions shared by high growth MSPs:

1. Prioritise managed services. There’s no better way of growing an IT practice than to make managed services a bigger proportion of total revenue. Every 10% of total revenue derived from managed services, adds 0.25 to 0.75 points of annual growth to an MSP’s business. So, increasing the percentage of managed services revenue from 20% to 70% can increase annual growth by 1-4 points.

A higher proportion of revenue from managed services also improves business resiliency by maintaining steady cash flow and revenue during economic downturns. Over half of MSPs surveyed by Datto said that more than 50% of their total turnover already comes from recurring services. For 26% of MSPs, managed services generate more than 75%.

2. Set specific growth goals. MSPs that set specific growth goals for their business, on average, experience an additional 2 percentage points of annual growth.

Secondary growth factors
Other growth factors identified in the report over which MSPs have less control are:
*Business size: Larger MSPs, measured by both employee and client count, generally grow faster than smaller ones. They benefit from increased efficiencies of scale; they typically have PSA and RMM systems in place to support their growth; they are more likely to have managed security and cloud management offerings; and they enjoy larger client and contract sizes than smaller MSPs.
*Years in business: The number of years an MSP has been in business is negatively correlated with growth, meaning small, upstart MSPs generally grow faster than older MSPs. However, this is offset by the number of clients and employees an MSP has, so larger MSPs that have been growing consistently do not see a commensurate drag on growth.
*Geography:MSPs based in the Americas are growing fastest, followed by Europe and, lastly, APAC, where the managed services model is less established.

Growing opportunities
As MSPs prepare for 2021, setting growth targets and increasing their managed services offerings should be priorities. So, what areas should they be focusing on?

Harris highlights data security, which has been given greater urgency by the risky combination of a dispersed workforce and expanding cyber threat; and greater adoption of cloud services, in part to support hybrid working, where workers split their working week between home and office.

“Our Global State of the MSP Report identifies an opportunity to elevate clients from traditional backup to full business continuity & disaster recovery (BCDR) protection. This shows that while 70% of the servers of MSP clients are protected by a backup solution, only 55% are protected by a full business continuity solution,” she says.

“In addition, the fact that just 38% of endpoints are currently protected suggests that there are significant opportunities in increasing endpoint protection, especially for clients that work from home or on the road.”

The second big growth area is in cloud services, including Microsoft 365/Google Workspace and server and desktop virtualisation. Adoption levels have continued to grow during the pandemic, but Datto’s analysis suggests there is still plenty of growth potential (see table top right).

Partnering for profit
In order to capitalise on these opportunities, many MSPs choose to partner with organisations that specialise in particular areas.

For example, while 75% of MSPs currently have a managed security offering, typically including antivirus (70%), backup and disaster recovery (69%) and email security (64%), 43% offer such solutions in partnership with an organisation that has specialist knowledge in those areas.

“This,” explains Harris, “could be a managed security services provider (MSSP) or a vendor, like Datto. For, just as SME clients rely on MSPs as trusted partners to manage their IT, so a growing number of MSPs depend on Datto to provide the solutions and tools needed to run their businesses and meet their clients’ needs.”

How can Datto help?
With a product portfolio covering security and business continuity, networking and MSP operations, including PSA and RMM tools, Datto helps MSPs of all sizes deliver a broad range of managed services efficiently and profitably.

Datto solutions have applications across a broad range of managed services, including cloud productivity services, such as Microsoft 365/Google Workspace (offered by 75% of MSPs surveyed), technical support/helpdesk (73%), networking (73%), business continuity and disaster recovery (70%) and many more.

The last 12 months have been challenging on many fronts, but technology has not been one of them. Thanks to modern IT solutions and the capabilities of MSPs (and the tools they use), businesses of all sizes have continued to operate and provide services to their clients often in the most extraordinary circumstances. In doing so, many have discovered a new, better way of doing business.

With a new year beckoning, MSPs, supported by companies like Datto, have the opportunity to accelerate the digital transformation started by clients, expand their service offerings and continue to grow their recurring revenue. No wonder 84% of respondents told the Global State of the MSP Report that now is a good time to be an MSP.

To find out how Datto can help grow your business. please speak to a representative.

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