Finance services

Client demand for managed services remains strong, but valuations fall – Finance – Services

Two different deep dives into the global MSP world paint a picture of robust health, but with some emerging warning signs around valuations.

On the one hand, a Barracuda survey suggests there remains a huge global appetite for managed services, with global services-related MSP revenues expected to grow by more than a third in 2022 compared to 2021.

These figures are based on a survey of 500 decision makers and knowledge workers from managed service provider (MSP) organizations in countries across North America, EMEA and ANZ, with between five and 250 employees.

But one separate analysis by ChannelE2E suggests that the global drop in tech valuations is starting to impact the MSP market, with the site suggesting that valuations may have peaked in the first quarter of this year.

While valuations of smaller MSPs up to US$1 million in size still trade at earnings multiples of up to 5, ChannelE2E suggests that larger ones of US$2 million or more have experienced a sharp decline from 10-14x Ebitda to just 7-9x gains puts them closer to their smaller peers.

With tech markets retreating and a likely liquidity crunch looming, pressure on valuations is likely to persist.

According to a analysis by investment bankers Singapore-based Northridge Partners, “The recent Fed-fueled tech stock mega growth cycle, the impact of global digitalization and the growing Chinese economy has resulted in a sustained bull run. COVID-inspired need to do everything online, and you had a recipe for a massive spike in all things tech, so when the pandemic hit, a lot of second- and third-tier tech stocks took off .

But now they say the story today is very different. “It seems the laws of economic gravity remain. From their pandemic peak until today, stock price drops of 70-80% are not just common, they are the norm. Even Big Tech stocks establishments like Alphabet, Meta, Microsoft and Amazon are down 30% on average from their highs.”

According to NPR, while in the aftermath of a price correction the data initially suggests that liquidity is increasing, this may simply reflect investors heading for the door.

“After this initial burst of liquidity, there is likely to be an extended period where funding is hard to come by or only available on tight terms. Simply put, after a massive surge, the balance of power shifts. is moved founder to investor.

Demand remains strong

On the positive side, Barracuda’s survey suggests that customer demand is holding up.

MSP’s views on opportunities and challenges are consistent throughout the survey across different regions with respect to service delivery and similar pressures of customer expectations.

Among the key findings of the report;

  • Managed services are growing as a proportion of overall revenue. While managed services aren’t the only source of revenue for many survey respondents, service delivery is on a growth trajectory. In 2021, 53% of respondents’ income came from services, but this figure is expected to increase to 63% in 2022.
  • The number of services offered to customers should also increase. On average in 2021, survey respondents’ service offerings grew by four services, but in 2022, 94% of respondents expect their service portfolio to grow by an average of six services.
  • Security is always at the top of the list of must-have services. 92% of respondents felt they needed to focus on security more than ever, with the biggest opportunities being network security (38% of votes), endpoint security (33%) and monitoring and management of the network (33%).
  • Post-pandemic customer expectations need to be managed. Rising stress levels within MSPs are caused by a number of factors, but increasingly demanding customers scored high with 45% of votes, and many expect stress levels to service they have received and the pace of transformation they have witnessed during the pandemic continues. Managing customer expectations will be absolutely crucial in the future.

Based on MSP feedback, the survey predicts managed services revenue growth will remain strong through 2022.

This aligns with the experience of Matt Fabri, founder of Adelaide-based MSP Opsys, who told CRN: “I honestly believe that the next 12 months will be an explosive year for Opsys. We have prepared on the basis because of our R&D and the strengthening of our internal capacities.”

“We’ve built a fully sovereign cyber capability that we’ve built into our IT department. So I think a lot of our growth will come from that middle of their market that really understands that cyber is a big issue. Their administrators and the board are worried and concerned about this.”

According to Craig Stuart, principal consultant at Arinco, the fastest growing company in the CRN Fast 50, the pandemic has certainly been a big driver of growth over the past two years, but he points to the talent war as a driver. key for the future.

“The sheer number of organizations we work with and technologies in the workplace are a key differentiator, enabling them to attract and retain people.”

Have a great work experience – remote work and that great collaboration experience – but also new talent [helping with] a stable infrastructure or good user experiences like self-service and all automation capabilities. It’s what really differentiates an organization and enables it to attract and retain.”

“That’s definitely been a driver with the obvious impact of remote working,” he told CRN Australia.

Revenue increase

Meanwhile, according to the Barracuda Report, MSPs expect revenue to grow by more than a third in 2022, with average revenue forecast at $12.12 million this year, up from $8.93 million. dollars in 2021.

And while managed services aren’t the only source of revenue for many respondents, service delivery is on a growth trajectory, according to the report’s authors.

“In 2021, 53% of respondents’ revenue came from services, and this figure is expected to rise to 63% in 2022. On average in 2021, respondents’ service offerings increased by four services, but in 2022, 94% expect their service portfolio to increase by an average of six services.”

The massive and accelerated transition to digitized companies is also having a detrimental effect on the well-being of some employees.

“Employee burnout is a growing concern with rising fears of cyberattacks. MSPs will need to focus more on employee wellbeing to stay successful.”

Almost one in six respondents said the average employee is very stressed, while 56% described stress levels as moderate.

Growing customer concerns about cybercrime only create even more pressure on the MSP to act.”

And, the report suggests there are growing concerns about regulations and compliance with just a third of MSPs, suggesting they are confident they are fully up-to-date and compliant with these regulations.

“An additional 36% think there are too many cybersecurity regulations to follow. It’s no surprise that 89% felt their organizations needed additional support and training around these regulations. service issues further down the line, according to a Barracuda spokesperson.

Raise your game, seller!

Universally, MSPs say they need more vendor support. “A whopping 98% of respondents admitted that they had at least one area where they needed additional support from the vendor. This included security incident response planning (44% of respondents), help with hybrid working best practices (50 percent), and marketing assistance (44 percent).”

Writing in the report, Neal Bradbury, SVP Barracuda notes, “For many businesses, a key challenge is knowing what strategy to implement to enable the business to grow. This is indeed the case for Managed Service Providers (MSPs) as well, with such an array of potential services they could offer, it can sometimes be difficult to decide which paths to take.

But, at this point, he suggests the decision was partially made for them.

“Cloud-based offerings – whether used in isolation or as part of a hybrid setup – are all the rage and could continue to be for many years to come. When the pandemic hit, customers were forced to rely on cloud-based services to ensure they could stay operational, and it looks like the benefits of cloud technology will also continue to be leveraged in the aftermath of the pandemic.”