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.

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