How to Measure Managed Services Revenue Growth

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Managed Services Growth.pngManaged services is a key growth engine in the tech industry, and as explained in Technology-as-a-Service Playbook: How to Grow a Profitable Subscription Business, can play a major role in the profitable transition to a XaaS business model. More and more cloud companies are recognizing the importance of managed services, but are also finding that managed services requires measurement on a variety of growth metrics in order to fully understand its impact. In this post, I'm going to share which metrics your managed services business can use to track growth so you can be sure to put the right practices in place that will significantly influence your company's success in achieving profitable growth.

Where We Get Our Data: Managed Services Benchmarking

At TSIA, we just recently hit a major milestone in our Managed Services discipline: we've performed over 60 unique managed services benchmark reviews for various tech companies, which has provided us with some deep data-driven and very objective insight into the performance of the managed services industry as a whole. Our managed services community is also incredibly diverse, allowing us to analyze data on overall industry performance segmented by peer group, which are divided as:

  • 32% hardware manufacturers
  • 35% software companies
  • 33% non-OEM (service providers, value-added resources, IT outsourcers, and “other”)

We've recently begun to have so many non-OEM companies benchmark with us that we're now starting to segment that group out into smaller sub peer groups just to see what the data looks like.

Managed XaaS is a Growing Source of All Managed Services Revenue

Under the umbrella of managed services is managed XaaS, which is where product is the service and service is the product. As of recently, 26% of all managed services revenue is coming from managed XaaS, which is pretty substantial. In fact, 91% of the managed services providers (MSPs) we benchmarked offer some kind of managed XaaS solution, whether it's a standard quotable offering or custom.

26% of all managed services revenue is coming from managed XaaS - Tweet this!

If we look back at 2014, managed XaaS was only 6% of all managed services revenue. This number doubled in 2015, and doubled again in 2016 with a significant amount of revenue being derived from managed XaaS solutions.  

4 Metrics for Measuring Managed Services Revenue Growth

The number one service business challenge (SBC) TSIA has tracked that is facing our Managed Services members relates to knowing which metrics to use to track the revenue growth rate in managed services, as well as understanding the variety of different types of revenue growth that needs to be measured. Here are the 4 metrics every managed services provider should be measuring to track growth and profits.

  1. Net-New MS Revenue Growth: How much is new this year vs. how much new stuff you sold last year.
    How to Calculate: Most current full year new revenue minus previous year new revenue. Divide the difference by the previous year's net-new revenue. Convert to percentage.
  2. Total Recurring MS Revenue Growth: This is Net-New recurring combined with base revenue growth. This is what really tells you your overall growth health for your managed services business.
    How to Calculate: Total current year's recurring MS revenue minus previous year's total recurring MS revenue. Divide the difference by the previous year's total recurring MS revenue. Convert to percentage.
  3. Total MS Bookings Growth: Bookings is your total contract value that was committed or signed, but not yet realized in your managed services business. This is a great predictor of the future health of your managed services business.
    How to Calculate: Total value of previous year's contracts. Divide the difference by the previous year's total contract value. Convert to percentage.
  4. Net-New Unique Customer Growth Rate: This is how many new customers you added under contract last year vs. ones you added this year.
    How to Calculate: Most current full year number of customers under contract minus previous year number of customers under contract. Divide the difference by the previous year's number of customers under contract. Convert to percentage.

Quick Tip: Why it's Better to Look at the Median Rather Than the Average for Managed Services Revenue Growth Data

While it's tempting to want to calculate the average revenue growth rate, I recommend using the median number instead to identify a realistic growth rate. The reason for this is because the world of managed services tends to include a lot of young, high-growth companies, and these outliers will skew the numbers in an average, while the median provides a better target to aim for.

Median Net New Managed Services Revenue Growth.png

(Click image to enlarge.)
Source: "Managed Services Pulse Session: The State of Managed Services 2017"

For example, if we look at the results from TSIA's Managed Services Benchmark study in the graphic above, the average Net-New MS Revenue was 35%, which gives a range of a -6% to 100% growth rate. This average includes a lot of younger MSPs that are growing at 100% or more per year skewing that number, while the median is a lot lower, providing what we call the “trend range” (the gray box), which is what you'll want to focus your performance on. If you're in a grouping of 50% of the data that we've collected, this is a much more realistic goal for most MSPs of all ages. Now the question is, what can you do to drive that growth?

Knowing What Good Looks Like in Managed Services

When it comes to improving where you lie on the spectrum (in that 50% grouping), the biggest influencing practices are:

  • The age of the managed services practice (ex: the longer you've been at it, the lower the revenue growth but the higher the profitability)
  • Sales organization structure
  • Compensation model
  • Offer structure (ex: standard vs. custom)

To show you an example of what good numbers look like for the sales organizational structure practice, here is a snapshot of the data collected from the TSIA Managed Services Benchmark including both the average and median numbers reported by MSPs.

Managed Services Sales Org Structure.png

(Click image to enlarge.)
Source: "Managed Services Pulse Session: The State of Managed Services 2017"

If you look at the net-new managed services revenue growth rate, the average is 35% and the median is 10%. For companies that use their general sales team to sell managed services, their net-new growth rate is 22%. For companies that use a dedicated managed services business development set of resources to sell their managed services offerings, their growth rate is 30%. So, that's an 8% improvement just by changing the type of resources that you use focus on the primary engagement of quantifying and closing these managed services deals. This is the kind of data that can help you make the case for investing in a dedicated managed services sales team.

As you begin the process of collecting these metrics, it's always a good idea to make sure you fully understand these numbers so that when you talk to your finance partner and leadership, you can have a fact-based discussion of what your metrics should really look like, how you establish them, and how you can improve them.

Get a Better Understanding of How to Apply these Metrics in my On-Demand Webinar

Since this is just a small peek into the world of managed services metrics, I encourage you to watch my free On-Demand TSIA Pulse webinar where I walk you through what these metrics mean, how to read them, and how they can point you in the right direction to making the right investments for your company's managed services business for the future. I also go over some of the recent developments in managed services that are included in my paper, "The State of Managed Services 2017." Thanks for reading!

About the Author

George_Humphrey-headshot.jpgGeorge Humphrey, is the vice president of research, Managed Services, for TSIA. He is a networking and communications industry veteran of over 25 years with extensive experience in managed infrastructure and application services. Throughout his career, he has held several leadership positions in managed services, including global strategy, product line management, marketing, operations, and client management.

Read more from George on these topics:
Managed Services | Successful Managed Services Providers | Managed Services Mistakes | Organizational Structure

 The State of Managed Services 2017 Report
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Topics: managed services, managed services providers, managed services sales, managed XaaS

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