The IT supply chain has undergone a profound transformation. The everything-as-a-service (XaaS) subscription model is now the core source of revenue for IT businesses, generating 77% of gains from existing customers, according to data from CloudBlue. And as more IT service providers seek to transform from software suppliers to service providers, the XaaS customer experience is moving closer to the "one-click" shopping experience of Amazon.
To claim their share of what Gartner anticipated to be a $1.3 trillion IT industry in 2022, companies selling software or hardware are now building broader catalogs, selling integrated solutions, and acquiring and/or seeking to become managed service providers (MSPs) themselves. With the unprecedented popularity of XaaS across IT distributors, ISVs, telcos, and MSPs, the lines between those segments are slowly blurring. Amid this consolidation, next-generation MSPs will be at the forefront of overcoming industry-specific hurdles and innovation. The most forward-looking and ultimately successful MSPs will be those that fully embrace digital transformation.
Challenges MSPs Must Overcome
Today, companies worldwide want to be leaner and reduce operating costs. As a result, many are digitizing. However, since negotiating with multiple vendors is complex and time-consuming, businesses usually prefer the simplicity of a single vendor to handle their operations from start to finish.
This shift is transforming the digital supply chain as we know it. In response, partners ranging from tech manufacturers, ISVs, and telcos are pushed to find new business alliances or form their own MSP. For example, telecommunications provider Telefonica established a subsidiary called Telefonica Tech, and Orange recently acquired several cloud-based infrastructure and cybersecurity providers like Enovacom and SecureData.
These companies are finding inherent benefits in selling and integrating end-to-end business solutions rather than just selling products. This is because—as an MSP—it’s possible to capture higher margins on software and services. In our analysis, we found that companies like Xerox (40%) and Cisco (70%) enjoy significantly higher margins selling XaaS business solutions than those mainly selling hardware, such as HP (19%) or Lenovo (17%). At the same time, solution selling does not require as much additional personnel, enhancing scalability.
So, as more companies commit to digital transformation, MSPs are there to help. But keep in mind that growth as a provider is not assured. Rather, in today’s accelerated context, MSPs often encounter three challenges when trying to expand:
Stiff competition. Most IT vendors active in the XaaS market are now adding consulting, implementation, and management to their portfolio, making it more difficult and costly for MSPs to attract new customers. Thus, providers need to think about how they can sell more services per customer to create growth.
Growing pains. When adding new customers, MSPs must often staff up. In addition, both service delivery and billing become more complex, and overall costs increase. This means providers need to reinvent their traditional operations and develop a scalable business model.
High procurement costs. A Salesforce report from 2021 shows that more than 80% of SMBs conduct at least part of their business online—and the trend is growing. MSPs have great potential to penetrate vertical segments and increase revenue growth if they find ways to offer lower-value contracts.
5 Ways to Fuel Growth
So, how can MSPs tap into new customer segments, increase efficiency, and achieve long-term revenue growth? Here are five ways.
1. Catalog expansion
MSPs need to increase their service offering, and thus their bottom line, by expanding their solution portfolio. For example, companies that manage their remote workstations through MSPs may also consider cybersecurity and productivity offerings. Adding more solutions from different vendors can deepen existing segments or open the door to entirely new segments.
However, expanding the catalog requires the appropriate technical infrastructure so that automation of procurement and fulfilment from multiple vendors doesn't turn into a burden. MSPs need automation platforms with native preintegration, thereby allowing instant transactions with vendors to create huge cross-selling and bundling opportunities.