I’ve spent some time on the Service Leadership Profitability Report for 2023.
I want to highlight some of the insights from the report. For example, if one had started a business 14 years ago, would it have made more sense to build an MSP or a product-centric one? Common wisdom says MSP — and it’s proven out. Since 2009, the average MSP has driven 11.7% in Compound Annual Growth Rate in total revenue, 17.2% CAGR in recurring revenue, and 25.8% CAGR in Approximate Company Valuation. In 2009, the average owner had 0.1mm of EBIDTA left over after paying themselves, and by 2022, it had grown to 1.6mm in EBDIA profit, for an approximate value of $12.1mm. The average MSP’s approximate stock value increased from about $3.0mm to about $7.5mm over the five years, a CAGR of 25.5%.
The report suggests that the advent of cloud technology did not lead to profit erosion for MSPs. In fact, median profitability grew in 2022, even for the bottom quartile of MSPs. This counters the worry that clients would rely less on good IT operations with the advent of cloud technology. The median grew profitability in 2022, as did the bottom quartile. But, there has been an infrastructure Services Gross Margin Decline: Over eight quarters, the gross margin for infrastructure services declined. This is a concern for the long-term viability of the MSP business model, as infrastructure services are the core business of MSPs.
The average MSP firm grew revenue by 16.7% annually, and the average MSP grew EBITDA from $381k to $950k over five years, a CAGR of 25.6%.
The report indicates that the fastest-growing firms in 2022 were those in the top quartile of EBITDA %. This challenges the common wisdom that firms must sacrifice profits to grow. The report suggests that fast growth typically drives higher utilization, leading to increased profit if priced right and managed correctly.
Why do we care?
This is among my favorite reports of the year to get insights into the market. I often talk about the challenges of being a provider.. and with this, I want to acknowledge and celebrate that those who focus on doing it well are real value creators. There is value to be had here.
And, despite all the noise about clouds over the years, margins are not going down. Hindsight is twenty-twenty… yet remember that complexity didn’t go down.. and will continue to increase. That bodes well. Now, specific lines of business are diminishing, notably infrastructure services. If that’s all you do, you should worry.