Managed Services Tops Profitable Models

Dollar SignsManaged services was always billed as a gold mine. If a solution provider could adopt managed services as a core business model, it could write its own ticket to sustained and predictable profitability.

The 2112 Group’s Quarterly Channel Review “Profitability in the Channel” finds managed services isn’t just the biggest profit driver for solution providers — it’s likely to remain at the top despite the continued adoption of cloud computing.

The report, now available for download, finds more than two-thirds of solution providers are engaged in managed services. On average, a managed services offering has a gross margin of 60 percent and net margin between 31 and 50 percent. By comparison, margins for hardware and software are less than 10 percent and 20 percent, respectively.

Expectations for managed services sustainability have been low in recent years. Solution providers’ fear hosted resources and cloud computing services will obliterate the need for support of on-premises equipment and resources. In reality, cloud computing and managed services are converging, and businesses are looking to solution providers to conduct expert management of cloud systems.

This convergence trend accounts for the continued investment by solution providers in managed services, adding increased capabilities to the delivery of virtual desktop, security, storage, backup and hosted-server operations. In coming years, MSPs will take on a greater role in business application administration and operations.

While cloud computing is seen as a large part of the channel’s future, the current revenues and profitability aren’t that great for solution providers. On average, solution providers earn less than one-sixth of their revenue and profit from cloud services. Moreover, cloud computing margins are variable; some services are already commoditized.

The variable margins of cloud services bode well for managed services because they give solution providers a value proposition for entanglement in IT design, implementation and ongoing delivery.

For more insights into channel profitability, download the “Profitability in the Channel” report.

  2 comments for “Managed Services Tops Profitable Models

  1. May 30, 2013 at 10:57 am

    Larry – thanks for this article. This is great news for MSPs. However, let me share a perspective when it comes to cloud communications. While many MSPs in carrier agent programs are forced to accept lower margins – often in the neighborhood of 15% – it doesn’t need to be that way. The cloud rewards agility and innovation, and at our company, CoreDial, we’ve come up with a way to deliver margins as high as 65% for our MSP Partners. We’re channel service enablers who’ve created a Platform that makes it easy for MSPs to sell, deliver, manage and invoice for Hosted PBX and unified communications; our packages are structured to help them get to profitability as quickly as possible – usually within six months.

  2. secondstartechnologies
    June 4, 2013 at 7:40 pm

    I think that core application delivery for cloud services still has quite a ways to go before it can start to oust to the increasing SMB onsite market. For new comers and start ups, cloud from the ground up is much simpler than taking a 25+ user network that has operated for years under the client/server model and migrating financial accounting, intensive geology, or process demanding design applications to a cloud based service that doesn’t offer any advantage to performance, and in many cases seems to adversely affect performance.

    The rise of tablets and cloud services has wiped out reseller margins for entry and mid-level PCs, so attaching a managed agreement to the system is the only real way for the MSP to make a profit. This has provided a very unique paradigm whereby PCs and entry, even mid-level servers, are less costly over a 5 year period and more likely to support proprietary applications, or applications with a very high demand on processing resources.

    Looking towards the future, we have developed a liaison, or man in the middle, approach and integrated that into our offerings. We prefer white-label or co-branded partners to present a seamless front to the client. We function as a go between for the client and the vendors managed agreement with us and focus on more profitable verticals.

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