The Global Pandemic of 2020 changed the world forever. In some ways, for the better. That is certainly the case for companies offering managed services. According to TSIA’s Managed Services Benchmark Data, the growth of managed services is outpacing even the growth of the TSIA Cloud 40 Index, which identifies and tracks 40 of the largest providers of cloud computing services.
Managed Services Growth Rates
According to the latest TSIA Managed Services benchmark data, Managed Services is growing at an average growth rate of 24%! This is 6x faster than the Technology & Services 50
and 1.6x faster than the TSIA Cloud 40
Where Is This Growth Coming From?
One of the questions we often receive from our members is, “where is that growth coming from?. Is it coming from new customers? Is it coming from existing customers? Is it cannibalizing our other revenue streams?" The short answer is, “Yes”. Yes to all of the above. One of the most significant contributors to this growth is Managed XaaS.
In May 2015 I conducted a conference presentation at our spring TSW event called, “Mega-Trends in Managed Services”. During that session I indicated that we were seeing substantial growth in an offer segment of managed services that we called, “Managed XaaS”. Here is the definition we outlined:
"A solution comprised of product (hardware and/or software), professional services, support, and operations elements bundled into a single per unit per month price governed by a managed services agreement. Services are delivered from a remote network operations center. Delivery resources are typically shared across multiple clients. Product elements may be hosted and/or on premises. Product may be single tenant or multi-tenant."
From 2014 to 2015, Managed XaaS had grown from 6% of managed services revenue to 13% of managed services revenue - more than double the overall percentage of total MS revenue. Fast forward to 2021 and that number has grown to roughly 31% of managed services revenue.
Managed XaaS solutions are absolutely unlocking new opportunities for companies to increase overall revenue. By introducing Managed XaaS offers, technology suppliers are able to reach customers that would only procure their solutions through an OpEx model. Companies that don’t offer these solutions to their customers are willfully turning away opportunities for growth. For companies that are used to primarily offering CapEx-based solutions, these XaaS offers will eat away at your product revenues. That’s a good thing! You’re converting one-time transactions into highly-predictable recurring revenue streams!
Product revenues aren’t the only revenue streams that managed services will eat. The modern managed services offer is not something you add on top of a support service. It actually consumes support services. Support is reactive. Managed services must be proactive, predictive, and preventative. When the offer is properly created, a managed service replaces the need for support services. There is no support, only an “operate” service. To add to the cannibalization, professional services are also replaced by a holistic managed service offer that includes service strategy, service design, and service transition. These activities may be performed by people from your professional services team but they are part of the managed services offer.
We’re seeing this play out as revenue streams shift within the services organization. If we wind the clock back to 2013 and compare that data to our most recent benchmark data in Q1 2021, an interesting picture takes shape. Support services revenues have shrunken from 63% of services revenue to only 33% of revenue. Professional services revenues have shrunken from 24% of services revenue to 21%. Managed services has grown from 6% of services revenue to 35% of services revenue!
When I first joined TSIA in December 2012, we had a saying that went like this, “Software is eating hardware and services is eating software.” By 2015, we added to that saying, “... and managed services is eating everything!” As you can see from the historical data, managed services is indeed eating technology revenues, professional services revenues, and support services revenues. We call this a shift in economic engines. Thomas Lah wrote a paper on this called, “Emerging Economic Engines of Technology Providers
” back in 2018. It is playing out in real time and the companies that don’t understand that managed services is a critical component of their evolution will be left behind by their competitors that are leaning into and embracing this change.
After all, I guarantee Ray Noorda, the Chairman of Novell, didn’t realize how prophetic his own words were:
Cause change and lead; accept change and survive; resist change and die.
How Is Your Company Evolving Your Economic Engine?
Is managed services an “art project” or are you feeding it, nurturing it, and growing it? Are you rethinking your service portfolio or are you still in the “bundle and stack” offer model? We’d love to hear from you and help you navigate the sea of change. For more information about Managed Services and how membership can help you solve your most pressing business challenges, contact us today!