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Service Leadership’s Mid-Year IT Service Provider Report Card. How are we doing?

Service Leadership released their IT Service Provider Mid-Year Report Card.     Let’s review some of the findings.

  • Service providers in the top quartile are doing well – in fact, profitability is up. Revenue is down about 4%, but Cost of Goods Sold dropped 8% and SG&A down almost 10%, improving gross margin.
  • Those in the bottom quartile are not doing so well. Revenue is down about 15%, but COGS only down 7.7%, Profitability is thus significantly down – 30%.
  • For the first time, the group’s data reveals that there are regional differences, with ANZ revenue up and the EU and North America down.
  • Best in Class MSPs pushed more users to the cloud, widening the gap with the median and bottom quartile. This is new.  Those BIC grew cloud revenue by 18.2%, while the median and bottom saw no change.
  • Best in class providers saw their managed services revenue hold steady, while the median and bottom quartile dropped 3.6% and 5.4% respectively.
  • And, those BIC are even better at collecting on invoices… and those least profitable, it’s getting worse.
  • The analysis from Service Leadership indicates that Q2 was below budget, but not as badly as expected – about 10% down in revenue and in profit dollars
  • In August, forecasts for Q3 and Q4 are slightly worse than in April, but not much – and most are counting on a Q4 recovery.

Why do we care?

Look, I’ve been gloom and doom, and one of the problems with warnings is that if they don’t come true,  it potentially clouds the idea that the warnings… worked.       I would posit that the warnings worked.     Enough providers managed, and those at the top are doing quite well.      Those at the bottom, a lot less so, and that’s clearly unsustainable.  You can’t lose money multiple quarters and survive.

And let’s not assume that the warnings didn’t come true – early projections were looking at 20% drops in revenue, and at the bottom, it’s 15%… which I would argue isn’t too far off.    Best in class adjusted more aggressively than they saw a drop, but clearly were anticipating a big drop.      Again, not necessarily wrong.     As I have said all along, I’d rather be wrong in over estimating the drop than under estimating.

Service leadership believes that government relief programs helped balance sheets.  That’s good news too, as the programs were leveraged.  If they are extended, take advantage of them fast – -and if you need them, you need to make sure your representatives know that.

Those high performing Service Providers also cut costs faster than recurring revenue dropped.    That’s good management, and it’s the key message.  

I also have no idea why providers are guessing for a Q4 recovery.  There’s no data I’m seeing that says that is what will happen.  Blind optimism does not pay the bills.

Takeaways:

  • Management of the crisis matters, and those who are taking control of that are doing better.
  • Region does matter, and industry will too. Get your local AND relevant data.
  • Cash remains king. Manage that closely
  • Be overly pessimistic. It will help you survive.  

Source: ChannelE2E