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Age is nothing but a number. Maturity, on the other hand, is the difference between the most successful Managed Services organizations and the rest of the field. Use TSIA’s Managed Services Maturity Model to determine if your organization is positioned for success.
Over the past eight years, TSIA has benchmarked over 135 Managed Services organizations in detail, collecting data on the organizational capabilities – people, processes, and technologies – that really move the needle on improving financial performance and operational excellence.
The data has told us that success leaves clues. No matter the size, age, or geographic location of the business, we’ve seen time and again that focused, “better-run” businesses produce better results. But just what does a “better-run” business look like? What are the capabilities that have the biggest impact on performance? How do you stack up against your peers in terms of capabilities and results?
To help you frame and then address these urgent questions, TSIA has taken a summary view of all of our Managed Services Benchmark Survey results and developed a maturity model framework that describes the performance of the organizations we’ve benchmarked in the industry.
We’ve found some surprising and some unsurprising results that we are going to discuss in detail below. One of the main findings was that when it comes to “maturity,” age doesn’t matter. How long a Managed Services practice has been in place is not a statistically relevant factor in determining the maturity of organizational capabilities or financial performance.
As Managed Services overall have matured in the marketplace, the technologies (e.g. ITSM platforms like ServiceNow), the practices (e.g. ITIL-defined process frameworks), and staff (Managed Services specialized practitioners with double-digit years of experience) have matured, specialized, and solidified as well, to the point that it is far easier now to march down this well-trodden road than it was even just five years ago.
In our Managed Services Benchmark, we ask 131 questions covering the practices (people, processes, technologies, and organizational models) and performance metrics (financial and non-financial) that describe the business across all its moving parts. These include Offer and Strategy, Sales and Go-to-Market, Services Delivery and Technologies, Customer Success, and Business Operations.
In the roll-up view of all those responses, we are able to create aggregate scores of the performance of these companies along two axes – practices and metrics. Higher practice scores come with a higher volume of capabilities and better metric performance than peer results in higher metric scores. The summary view of all benchmarked performance is shown below and is broken into four equally populated quadrants:
By comparing the detailed practices and metrics across these four quadrants, we can then focus on the statistically significant variations from one to the other to help describe what “better-run” businesses look like. We can also identify some of the key capabilities that organizations can implement that have proven to be associated with better outcomes.
Let’s start by naming each of these quadrants according to their characteristics and then explore the firmographic elements that differentiate them from one another.
Mediocre practice development and poor metric results characterize this quadrant of the Managed Services Maturity Model. Age is NOT a differentiator when it comes to differences across all these groups – the median age of each category is within +/- two years of each other.
This group is characterized by smaller organizations within larger technology businesses, with average Managed Services revenues of only 5% of company revenue, categorizing them into what we call “Art Project Managed Services” rather than critical, focused, expert businesses that could be viewed by the larger organization as pivotal and transformational.
They have a median size of only around 100 Managed Services Full-Time Equivalents (FTEs) and median annual revenues of around $15M. Practice adoption averages in the 50% range, while the average metric score languishes in the 30% range. Overall Managed Services growth rates continue on in double digits and Recurring Revenue Growth (RRG) rates for this group is slightly better than the overall median (14% for this group vs. 11% overall), but other financial metric performance lags.
Having worked very closely with all of these businesses, we know that one of the fundamental challenges they all face is the lack of organizational buy-in to viewing Managed Services as a change agent for moving the business out of traditional transactional product mode and into the more outcome-based and customer-centric businesses that are thriving as we move to heavier subscription-based revenues across the technology sector.
Even though the market is growing apace, and these businesses are growing in the double digits, the biggest challenge they face is getting the attention and resources needed to develop mature, scalable practices that can help drive meaningful growth, not only as an Managed Services P&L, but also in pull-through revenue that benefits the larger business.
Great metric results but lagging practice development characterizes this quadrant of the Managed Services Maturity Model. How long can they keep up this performance on the back of best-effort processes? Well, probably not for much longer, given that many of the fundamental structures that drive scalability and stability are not in place here, thus classifying them as “Overheated MS.”
Growth may outpace their ability to execute long-term without improvement. These organizations also tend to be smaller in size (average of $16M annual revenue and 120 FTEs) but represent over twice as much revenue contribution (12% of company revenues) to the overall business than Art Project MS.
We’ve often seen the 10% of revenue threshold as pivotal for gaining traction with Managed Services businesses. Once Managed Services business units start representing double-digit revenue percentages of the entire company, we start grabbing the attention that comes with big wins for big customers. This, combined with the outstanding growth rates (RRG median of 25%!), start to garner more strategic attention from the overall business with discussions about how to better mine this newfound seam of riches.
So with lower overall practice adoption and high metric scores, the biggest challenge for this group is sustaining growth while at the same time getting the investment and attention needed to shore-up critical practices across the business – including fundamentals in offer, sales, delivery, customer success, and business operations. If you’ve seen or been a part of these organizations, you’ve heard the phrase, “building the plane as we’re flying it” dozens of times.
Characterized by mature and stable practices but severely lagging metric performance, life in this Managed Services Maturity Model group is extremely frustrating, especially as the overall Managed Services market continues to grow explosively. While peers and the market grow in double digits, this group languishes with near 0% growth rates from new and existing clients.
With mature capabilities and an average of 19% of company revenues, this group seems to have all of the conditions necessary for success, but have stalled in their growth trajectories. They tend to be much larger businesses than the previous two categories, with median annual revenues and FTEs of $62M and 450, respectively.
Compared to the next two groups of higher performers, Stalled MS organizations are less likely to have dedicated Managed Services offer teams, dedicated Managed Services sales or renewals teams, have far lower customer satisfaction scores, and lower use of 3+ year contracts.
While there are definitely some missing pieces in key functions that we know drive better results, one of the other big challenges for this group is to rekindle the fire that propelled them to these heights in the first place. For example, while we know that Managed XaaS offers are the growth engine that is propelling overall Managed Services growth in double digits, this type of revenue is over 40% lower for this group than the average for the Rockstar Managed Services cohort.
Thus, these mature orgs are often in need of an offer pivot that bundles in product, focusing more on customer outcomes and further reducing complexity and confusion for their customer base.
The businesses in this Managed Services Maturity Model group are solid, mature, growing, and profitable, which are the goals of every other quadrant. On average, these are comparatively sizable businesses (average of $40M annual revenue and 200 FTEs) that represent an average of around 23% of company revenues. They are generally seen as lucrative, essential, and even pivotal to the strategies of most of these companies.
Metric performance for this group is outstanding across the board, including in revenue growth, profitability, retention, and customer satisfaction.
Again, even with about the same average age as the other cohorts, this group has excelled not just in financial results, but also in developing Managed Services-specific competencies that not only positively impact performance, but also crucially, do not disappear when one or more key players transition out of the organization. Robust organizational capabilities can be defined as ingrained practices with supporting technologies and practitioners, versus having heroic individuals whose competencies can disappear with a better job offer.
The challenge for these businesses is to maintain their balance of competency, growth, and agility. As described in the previous section, what made a business successful in the past is not necessarily the same recipe for the future.
Some of the upcoming challenges for these businesses include continued development of advanced delivery capabilities (like incorporating AIOPs), continued deepening relationships with customers via vertical expertise and outcome-based solutions, and maturing the Customer Success function in order to define, measure, and deliver on the value of the offers – as the customers define them, not as one-size-fits-all solutions.
As was said about Ginger Rogers, she did everything that Fred Astaire did, but backwards and in heels. Similarly, Rockstars are doing everything that the Optimized group is doing, but with twice the growth and at a larger scale.
The businesses in this Managed Services Maturity Model category are about twice as large as the Optimized group on average ($85M revenue, 560 FTEs), and are growing about twice as fast in both net new business and in growing existing accounts. They have the most mature processes across the board of all companies we’ve benchmarked and have the highest profitability of all the cohorts at the same time.
Just like the Optimized group, the Rockstars’ challenge is maintaining this high-wire act and not letting the past define their future as tectonic shifts in the industry (cloud, subscription, outcome-focus) continue to play out.
If you’ve read this far into this blog, congratulations, you are a Managed Services geek. I mean that in the best sense of the word, as you are invested in the dynamics of this market segment and are always looking for ways to improve. Along those lines, we have an accompanying on-demand webinar that reviews this model further: Professional and Managed Services Maturity Models: What to Expect When You’re Expecting to Grow. In the webinar, we compare and contrast maturity models with our sister practice, Professional Services.
For members of our Managed Services practice, we take these insights to the next level through our Managed Services Benchmarking program, which provides deep insights and line by line recommendations on how to drive improvements across all functional areas of your Managed Services practice.
If you’d like to learn more or have any questions, please do not hesitate to reach out.
Post Date: February 4, 2021
Jeff Connolly is the senior director of managed services research for TSIA. He is a video and telecommunications industry veteran, with over 20 years of experience in managed services and Cloud delivery models. In his role at TSIA, Jeff provides members with fact-based education and insight into the performance and operations of managed services providers of all sizes.
The Technology & Services Industry Association (TSIA) is dedicated to helping technology and services organizations large and small grow and advance in the technology industry. Find out how you can achieve success, too. Call us at (858) 674-5491 or we can call you.