Service Leadership released the findings of its Service Leadership Index 2022 Annual IT Solution Provider Industry Profitability Report.
Examining the performance of TSPs over the past 12 months, the report reveals a financially impressive year as TSPs continued to rise to the challenge of enabling their clients to work from home and increasing security measures. This was accomplished while TSPs were going through the same challenges themselves.
“Despite the pandemic and supply chain issues that ran rampant last year, TSPs did remarkably well financially in 2021,” said Peter Kujawa, VP, Service Leadership. “We are seeing this trend continue across TSPs, especially Managed Service Providers (MSPs). MSPs are extremely optimistic in their projections for 2022, budgeting 19% revenue growth in 2022, a 64% increase over budgets in 2021.”
In all Predominant Business Models (PBMs, also known as business models such as MSP and VAR), 2021 was a year of profitability growth even exceeding strong revenue growth. Revenue grew 8.8% from 2020 while Adjusted EBITDA grew 13.5%. Unsurprisingly, best-in-class firms grew the fastest.
The report also showed 2021 was a record-setting year for TSP Mergers and Acquisitions (M&A), driven significantly by TSP owners looking at an exit strategy. Private Equity-funded TSPs also impacted M&A and moderately accelerated the growth in the average size of TSPs, particularly MSPs. While the average MSP has increased in size largely due to organic growth and M&A activity, the industry remains dominated by smaller companies, with 82% of TSPs under $10mm in revenue and about 69% still under $5mm in 2021. Although the average TSP revenue keeps gradually increasing, the average MSP size is influenced by the fact that there continues to be new (small) TSPs entering the market.
Interestingly, government financial aid programs made only a minor contribution to TSP profitability. The report showed many TSPs ultimately did not need the aid programs to survive, though many of their customers did. This was largely due to cost control measures taken by TSPs in mid-2020 and the sharp rebound in the economy that persisted through 2021. In addition, continued work from home and security issues fueled increased demand for IT outsourcing, making a significant positive impact.
The Service Leadership Index is the largest scale, longest running and most accurate benchmark of TSP financial performance, operational maturity, and value creation worldwide. This year marks the 17th year of benchmarking to objectively identify best practices and “set the bar” for TSP owners and executives, including in 102 countries.
The report is the leading source of empirical data about the performance of TSP businesses, providing a wealth of information about the health and viability of TSPs by PBMs.