Service Leadership’s 2022 Profitability report – how is the market doing?

Service Leadership has released its 2022 Annual IT Solution Provider Industry Profitability Report.

Highlights:

For all business models, 2021 was a year of profitability growth, even exceeding strong revenue growth. Revenue grew 8.8% from 2020, while Adjusted EBITDA increased 13.5%. Not surprisingly, BIC firms grew the fastest.

For MSPs specifically, overall revenue growth was a remarkable 16%, with a 15.5% growth in EBITDA.

After budgeting 12% revenue growth and achieving it with 12.4% revenue growth in 2021, MSPs are budgeting 19% revenue growth in 2022, a 64% increase over 2021. Additionally, they are budgeting around a 40% growth in their overall net operating income. This optimism should be tempered because, in 2021, they had budgeted 27.7% net operating income growth while achieving only 12.6%.

As of 2021, 31% of TSPs were founded 30 or more years ago, while about 50% were founded 25 years ago or more.    Thus, many “first generation” IT company owners are in their late 50s to 70s and are actively planning the succession of leadership and ownership needed to extract the required value for the next phase of their lives.

While the average MSP has increased in size, smaller companies still dominate the industry—82% of TSPs are under $10 million in revenue, and about 69% are under $5 million.

When looking across the last 14 years of results across all PBMs, the BIC consistently achieved anywhere on average 17% to 22% EBITDA compared to the Median of 4% to 10%. The Bottom 1⁄4 always lost money, which continued in 2021, -10% to -1%. The Bottom 1⁄4 does not have a sustainable business model. This group is the most transitory, with members either improving Median performance, being acquired at a discount, or ceasing operations.

I have to start with the headline that remains true – one in four providers are unsustainable businesses.   Remember that for every commentator and poster on IT Services.      Also, remember that this market is generally sub $10 million in revenue.   And mostly sub $5.   

I have to note how … old… these companies are.    There’s some real opportunity here for disruption, even if that means disruptive leadership.   Plus, there are many possibilities for younger employees or entrepreneurs to pick up those assets.   Of course, there is also the angle for new thinking to disrupt those organizations.

Revenue growth of 16% is excellent for services.  Put that in context – services.     If you’re a product business, not so much.    Not good or bad, just comparatively different.    I say this as a fan of services businesses, just recognizing their growth looks different from product ones.  Know this detail when you’re comparing, particularly if you’re considering the valuation of your org.