A recent PwC report shows that organizations with strategic relationships with managed service providers (MSPs) are far more profitable than those that simply employ them to reduce costs or plug capabilities gaps. According to a survey of 2,000 business leaders, the top 20 percent of the organizations identified as best performers are 4.2 times more likely to rely on MSPs to help, for example, improve customer experience or to keep pace with technological change.
Overall, the survey finds that only 16 percent of survey respondents have a strategic relationship with their MSPs, but among those respondents, more than two-thirds (67 percent) are top-performing organizations. In contrast, 40 percent said they do not rely on MSPs at all, with only 14 percent of those organizations being identified as top performers.
A total of 41 percent said they rely on MSPs only for cost savings, with 16 percent of those organizations among top performers. Meanwhile, 19 percent are also using them to fill capability gaps, with 70 percent of those organizations among top performers.
Investing in new skills leads to differentiation
Of course, an observed association between two variables does not necessarily indicate a cause-and-effect relationship. However, where there is smoke, there is generally fire. Top-performing organizations typically focus on the factors that set them apart from their rivals. The PwC report makes it clear that those types of organizations are now expanding the scope of the managed services they consume beyond, for example, network monitoring. Many of those services are essentially consulting engagements that may require a different approach to billing.
The issue is MSPs need to invest more in developing the expertise required to provide those capabilities. Each time an MSP decides to invest in a new skill, they are essentially betting there will be a return on that investment. Unfortunately, when it comes to IT, there is no sure thing. Even when MSPs invest in the right skillsets, it might be several years before they see a return on that investment. Artificial intelligence (AI) is a perfect example. While interest in all things AI is extremely high, the pace at which organizations are identifying specific use cases for AI remains uneven.
Adding higher-margin services can drive profitability
Each MSP will need to decide where and when to invest in new capabilities, but one thing that is certain is the longer any given service is provided, the more pressure there will be on pricing. It’s possible to leverage advances in automation to continue to deliver those services profitably, but as a rule, margins are always difficult to maintain. If MSPs don’t consistently add higher margin services, they will eventually find it challenging to generate the level of revenue needed to retain the talent their business needs to succeed.
Ultimately, no MSP can afford to be complacent. The challenge is to ensure that the business consistently generates enough profits to invest in the future instead of overly focusing on short-term goals just to keep the doors open.
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Mike, the PwC report confirms what many of us in the MSP space have been advocating for a long time: strategic relationships with your clients matter. We make it a cornerstone of the managed services pitch, emphasizing that we are not a vendor, we are a strategic partner that is committed to the success of our clients. If they aren’t successful, we aren’t doing our jobs.
We also understand that kind of partnership isn’t what every company is looking for, and that’s fine. We don’t work with that type of organization.