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Today, businesses have truly begun to accept the idea that Watts S. Humphrey proposed decades ago – “every business is a software business”. The last 10 years have seen scaled, and several, digital transformations across industries, largely driven by innovation in IT solutions, spawned by the evolving role of technology in various institutions. From back office to retail desk, businesses are going digital as they strive to improve customer experience and enhance operational efficiencies.
However, in the race to embrace newer and forward looking technologies, businesses are devoting significant resources towards developing and sustaining IT infrastructure, which is built on multiple platforms, products and services. This is where managed service providers (MSPs) have become an integral part of businesses today. MSPs offer increased convenience at lower costs as businesses migrate from private to public cloud services and increase the adoption of multi-tenant ‘Everything-as-a-Service’.
Today, businesses rely on MSPs to avoid the cost prohibitive burden of maintaining their own IT infrastructure, IT workforce, and keeping up with constant technological changes. MSPs can help businesses reduce costs nearly by a third, leveraging standardized offerings, improving service quality, and lowering lead time.
According to research, the global managed services market is projected to reach USD 296 billion by CY2023. While worldwide growth in IT spend is about 3% CAGR, the IT managed services segment is predicted to grow at a CAGR of more than 11% between CY2018-23. Companies are allocating a higher portion of their IT budget for managed services than before.
The value in MSPs
The rationale behind hiring MSPs is compelling as they’re able to do more than just help reduce costs for their clients. MSPs provide businesses access to a high quality specialized workforce that can be scaled up or down according to client needs. MSPs also offer their clients continuous support, ensure timely systems maintenance, provide customized solutions, assure predictable pricing, and offer access to the latest technology. In general, this host of benefits ensures that MSPs help clients reduce recurring in-house costs nearly by a third, increase efficiency by ~50%, ensure nearly 100% uptime connectivity, and help businesses get the most out of their IT budgets.
MSPs have proven themselves critical to business operations as they provide sophisticated cybersecurity tools that can predict and mitigate cyber threats. And as emerging technologies like artificial intelligence and machine learning reach greater maturity, businesses will turn to specialized MSPs to stay at the forefront of innovation.
Consolidating a Fragmented World
Due to the immense variety and versatility of technology solutions, the MSP market is highly differentiated and fragmented. It has players of varied scale spread across several areas such as security, data, network management, cloud, IT administration, and analytics. What makes MSPs attractive to buyers is their high visibility of revenue, deep client penetration, and the ability to scale. A highly recurring revenue model offers predictable cash flows and can result in high return on investment for investors, which can be compounded by offshore and outsourced labor and financial leverage. With very few MSPs of scale and no single firm occupying more than 1-2% market share in any geography, the MSP segment remains ripe for consolidation.
Valuation of MSPs is driven by factors such as the nature of services offered, number of highly recurring and multi-year contracts, nature of client base, owned intellectual property assets, and gross/EBITDA margins.
Recently, the managed services space has witnessed an increase in M&A activity as strategic players continue to acquire new capabilities/clients and expand globally. By enhancing and augmenting their suite of services, synergies become meaningful and the targets become more attractive. Mid-sized MSPs are ideal investments for private equity firms, who subsequently execute multiple roll-ups of small to mid-sized players to strengthen the scale and reach of the aggregated businesses entities.
This trend of consolidation represents new opportunities for investors and IT services players alike, who can ride a new wave of growth in this space.
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