The State of Managed Services & XaaS 2019

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MANAGED SERVICES
Research Publication
The State of
Managed Services
and XaaS
2019
www.tsia.com
©2018 Technology Services Industry Association | 17065 Camino San Bernardo, Ste. 200 | San Diego, CA 92127 | Tel. 1.858.674.5491
George Humphrey, Vice President Research, Managed Services
2 Research Report
MANAGED SERVICES | Research Publication
TSIA-04616
March 11, 2019
The State of Managed

Services and XaaS 2019
By George Humphrey
Executive Overview
In our annual “State of” papers, we identify major trends in each TSIA service discipline, analyzing the
evolution of key metrics and the development of key service capabilities. If you have read any of our
previous “State of Managed Services” papers, you may have noticed something different in the title of
this year’s paper. Yes, XaaS is directly related to our research on the managed services segment of
the market. At TSIA, we are most definitely seeing a tectonic shift happening in the tech industry away
from transactional, product-centric relationships with customers, to contractual, service-centric
relationships. What many companies fail to understand is that the “S” in XaaS actually stands for
“service” and what services are required in an as-a-service model to drive profitable growth. We
recently developed an organizational assessment of capabilities required to be successful in XaaS,
and roughly 90% of those capabilities are shared with managed services capabilities. Another way of
saying this is that the key capabilities outlined in the TSIA managed services research are directly
applicable to your XaaS business—or your transformation to becoming a successful XaaS provider.
Market Performance
How fast is the managed services market growing?
In order to understand whether or not your business is healthy, you need to understand what metrics
to measure. The first set of metrics that we look at are revenue growth metrics. There are four specific
revenue growth metrics we test for when benchmarking a managed services business: Total Recurring
Revenue Growth, New Recurring Revenue Growth, Total Contract Value (TCV) Bookings Growth, and
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Base Revenue Growth. Each of these tells you something a little different about how the business is
growing. Figure 1 shows the current growth rates for TSIA benchmarked managed services providers
as of January 2019.
Figure 1: Growth Rates for Managed Services Providers, January 2019
How to Calculate These Metrics and Why They’re Important
New Recurring Revenue Growth
Why this metric is important
Top-line revenue growth is focused only on new recurring revenue that is signed in a given year. This
metric indicates the market’s current propensity to buy, the effectiveness of your sales team, and the
perceived value of your offering. A low growth rate or a major negative fluctuation in this metric year
over year indicates major problems, such as inadequate offers in the market or inadequate sales skills.
Lack of demand is fairly uncommon. Lack of the ability to identify demand by sales is more common,
especially if the business is using a “general” sales team that sells all products and services.
How to calculate
Most current full-year new recurring revenue, minus previous year new recurring revenue. Divide the
difference by the previous year’s net-new revenue. Convert to percentage.
Total Recurring Revenue Growth
The total recurring revenue growth rate is the best metric to tell you, overall, how fast your managed
services business is growing. This metric does not include one-time, project-based revenues, as those
can cause a misleading view of the recurring revenue growth trajectory of the business. For example,
a one-time transformation project may bring in substantial revenue for the business, but one-time,
project-based revenues are not “guaranteed” revenue. These revenues are more difficult to predict
and should be captured in a revenue line as “influenced” one-time revenues. The total recurring
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revenue growth rate includes new client recurring revenues as well as recurring revenue growth from
existing clients (combination of new recurring revenue growth and base revenue growth minus
erosion).
How to calculate
Total current year’s recurring MS revenue, minus previous year’s total recurring MS revenue. Divide
the difference by the previous year’s total recurring MS revenue. Convert to percentage.
TCV Bookings Growth

This metric looks at the value of all contracts, including recognized revenue and revenue still to be
recognized over the duration of all contracts with the managed service provider; in other words, the
total contract value (TCV) of all signed agreements. Bookings is arguably one of the biggest predictors
of the future financial health of the managed service provider because of the lagging revenue model
for managed services (or any subscription-based revenue stream). For example, a three-year
agreement that generates $10,000 per month in revenue has an actual total contract value of
$360,000. Ten deals that generate $10,000 per month in revenue have an actual total contract value
of $1.2 million. Providing the contracts don’t have clauses such as “termination for convenience,” this
is contractually guaranteed revenue that the business will receive—or “future value.”
How to calculate
Total value of existing contracts, minus the total value of the previous year’s contracts. Divide the
difference by the previous year’s total contract value. Convert to percentage.
Recurring Base Revenue Growth

This metric looks at the growth of your installed base of customers only. Not only should you be
closing new business, but your existing customers should be a substantial growth engine for the
company as well. Revenue erosion is a killer for subscription-based businesses such as managed
services and XaaS. Base revenue growth offsets losses from erosion.
How to calculate
Most current full-year recurring revenue from existing customers only (excluding revenue from new
customers), minus previous year base recurring revenue. Divide the difference by the previous year’s
base recurring revenue. Convert to percentage
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Due to the multiple types of revenue growth in managed and XaaS businesses, many CEOs and
CFOs of product-led organizations are starting to see the long-term material benefits of these
businesses to their P&L and overall company valuations.
How Profitable Is the Managed Services Market?

The health of a managed services business is determined by two major factors: growth and
profitability. There are two core metrics to measure to better understand margin contribution to the
business. The tech industry at large, especially product-centric organizations, tend to favor gross
margin as the key metric to measure profitability. While we do track gross margin, operating income is
the preferred metric to truly understand whether or not a managed service or XaaS business is
profitable. The reason being is that a substantial portion of the costs are operating expenses which are
“below the line” of gross margin. The second reason why TSIA prefers operating income for managed
and XaaS businesses is that calculating gross margin is highly subjective and typically determined by
how your CFO wants to measure gross margin. Out of the more than 100 companies we have
benchmarked in managed services, no two of them calculate gross margin the same way. Gross
margin is perfectly acceptable as an internal gauge against other product and service P&Ls, providing
the calculation methodologies are the same. However, the organization should also calculate
operating income for these businesses for a true, apples-to-apples, comparison. Figure 2 shows the
current margin metrics for managed services as of January 2019.
Figure 2: Margin Metrics for Managed Services, January 2019
Gross Margin
Gross margin is the de facto standard metric for tech executives to quickly gauge whether or not a
revenue line is profitable. It’s simple and easy to understand: revenue minus cost of goods. This is a
metric that is good for products, as the cost of goods is fairly straightforward. In a service-centric
world, this is the “cost of service.” However, many companies have substantial debate over labor costs
in a services business. For example, fixed costs or labor directly related to the service should hit gross
margin. Some CFOs prefer to consider shared delivery resources an operating expense and apply
those costs after gross margin, hence the subjective calculations. However, a company comparing
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their support services gross margin to their managed services gross margin, assuming methodologies
are the same, should be able to leverage gross margin as a general predictor of profitability.
How to calculate
Subtract all direct costs from the total managed services revenue. Divide that number by the total
managed services revenue. Convert to percentage.
Operating Income
Operating income, or net margin, is the most accurate indicator of profitability for a managed service
provider. The simplest explanation for net margin is all revenue minus all costs (direct cost, allocation,
etc.). Therefore, net margin is essentially calculated the same way by all members and is a strong
indicator of a company’s profitability compared to their peers and the industry overall.
How to calculate
Total managed services revenue, minus all costs, both direct and indirect. Examples of indirect cost
include company overhead, sales, real estate, officers’ salaries, administrative expenses, etc. These
are also often referred to as allocated costs. Subtract the total direct and indirect costs from the
managed services revenue. Divide that number by the total managed services revenue. Convert to
percentage.
TSIA recommends the leadership of the managed services or XaaS organization develop a dashboard
of these metrics to be reviewed at every quarterly business review. This dashboard should be
complimented by the TSIA industry and peer-group data for these metrics. Members can access this
data through the member resource center or by inquiring directly with the research team. TSIA also
has the ability to analyze these metrics through a number of different angles, such as size of business,
age of MS business, organization structure, level of automation in delivery, etc. It is critical to
understand the full context of these metrics and how various practices can impact the metric
performance.
Macro Market Forces

As we have seen in the previous five years we’ve been tracking managed services through benchmark
analysis, this past year the market continues to grow with strong, double-digit rates. The fundamental
reason for this is that customers are continuing to change the way they want to buy and consume
technology. The TSIA Technology & Services 50 (T&S 50) index is a perfect illustration of the major
tectonic shift occurring in tech. TSIA has been tracking 50 of the largest tech companies since 2008.
The revenue ratio between products and services for the T&S 50 has effectively flipped in just 10
years (Figure 3). Product revenues have diminished while services revenues have grown.
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Figure 3: Product and Services Revenue Ratio: 2008 versus 2018
The bottom line is that services are now more important than technology for the tech industry.
Most companies that either manufacture or supply technology to customers view services as “attach”
offers. You may have heard this question from your CEO or CFO before: “What is the attach rate for
this service?” That question makes sense for product support offers or professional services. But if all
services were “attach” services, shouldn’t services revenues be shrinking, not growing? This is
because the market has made a major shift toward services-led solutions. These are managed and
XaaS solutions—and there is a major overlap occurring between the two. Customers have voted with
their wallets. They want to subscribe to their technology, and they want you, the supplier, to operate it.
TSIA calls this the Managed XaaS model, and it is disrupting traditional P&Ls of tech companies.
Every year, TSIA publishes an organizational structures study. According to the 2018 study, 23% of
revenues of tech companies are now coming from XaaS models, as seen in Figure 4.
Figure 4: Percentage of Revenue from XaaS
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According to TSIA benchmark data of December 2018, managed XaaS has jumped to 35% of all
managed services revenue, shown in Figure 5.
Figure 5: Managed XaaS as a Percent of Revenue
This is having a material impact on the revenue mix within the portfolio of technology services, with
managed services now representing 28% of total services revenue—quickly approaching revenues in
support services (Figure 6).
Figure 6: Managed Services as a Percent of Revenue
As you can imagine, this is having a substantial impact on technology providers’ economic engines,
the way they are organized, and how they go to market with their solutions.
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Trends within the Managed Services Organization

Trend #1: CEO Reporting Relationship
Companies are beginning to realize that embracing managed services and XaaS solutions impacts
just about every organizational function they have and that they are typically not prepared to optimize
and scale these solutions. As a result, one of the key trends we’re seeing entering into 2019 is that
CEOs are incubating these organizations in order to build “two routes to resilience.”1 This allows them
to protect and fuel these new and fundamentally different business models.
It should then come as no surprise that 42% of all managed services executives report directly to the
C-suite of the company (Figure 7).
Figure 7: MS Executive Reporting Structure
Doing so allows the managed or XaaS organization to grow and evolve without the restrictions of the
day-to-day business. Leveling the same expectations on a “start-up” can often weigh down a growth
engine. For example, a tech company struggling with traditional revenues may decide to implement a
hiring freeze. Expecting a people-centric organization to grow revenue in double-digits without the
ability to acquire new talent is a guaranteed way to fail.
Interestingly enough, as seen in Figure 8, the companies that have the managed services executive
report into the global services leader are not growing as fast, nor are they as profitable as the
organizations where they report directly into the C-suite.
Figure 8: Reporting Structure Impact on Growth
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Trend #2: Standardization

Another major trend in managed services that we also identified in last year’s report is the continued
shift to standardization of managed services offers. As of January 2019, 74% of managed services
have a standard service catalog that is the foundation of all SOWs (scope of work), seen in Figure 9.
Figure 9: Percent of MS Organizations with a Standard Service Catalog
Standard service catalogs and offers are the foundation of scaling a managed services business.
Standardization makes it easier for customers to understand the offer, for sales to sell the offer, and
for the operations team to deliver the offer. As a result, the same two key metrics for growth and
profitability are also improved by standard solutions (Figure 10).
Figure 10: Impact of Standardized Solutions on Growth and Profitability
Trend #3: Leveraging Partners

The third major trend that we’re seeing this year in managed services is the importance of
partnerships in managed services: 48% of managed service providers offer their services through a
channel partner (Figure 11).
Figure 11: Percent of MS Organizations that Leverage Partners
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If 2000 to 2015 was the era of system integrators, the future belongs to service integrators. This allows
a technology service provider to integrate a variety of service offers from multiple cloud and managed
providers, tailoring a “best-fit” solution for the customer. Just like with the previously mentioned trends
within managed services, companies offering managed services through a partner are also seeing
revenue growth and margin improvements (Figure 12). Partners enable a greater reach, and therefore
more revenue opportunity. Many MSPs are also allowing partners to perform people-intensive
functions such as basic service desk or field services, which likely contributes to those margin
improvements.
Figure 12: Impact on Revenue and Growth When Offering Services through Partners
2019 Top Challenges for Managed Service Providers

To assist our members with embracing the trends and tackling the challenges ahead in managed and
XaaS solutions, TSIA conducts topical research studies and webinars, and publishes papers based on
the top business challenges identified by the membership community. TSIA identifies these challenges
through a collection of member questionnaires and from the analysis of research inquiries submitted
throughout the year.
Heading into 2019, the following list contains the top 10 challenges facing MSPs as ranked by
frequency and occurrence:
1. Understanding and Measuring KPIs for Managed Services

2. Optimal Delivery Structure
3. Defining Market-Focused Offers
4. Managed Services Pricing Methodologies
5. Creating an Executable and Measurable Managed Services Strategy
6. Managed Services Platforms and Tools
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7. Defining Managed Services Organization Structures

8. Benchmarking Managed Services Performance
9. Establishing SLAs
10. Creating Operational Processes
Understanding these challenges allows TSIA to create data-driven research materials that are
targeted specifically at helping our members tackle those issues. Based on the top challenges list
above, TSIA is planning to publish the research documents shown in Table 1 in 2019.
Table 1: 2019 Managed Services Research
Target
Report Title Abstract
Publication Date
TSIA Managed Services Highlights of key market changes in managed March 2019
Market Performance services utilizing trended data from the TSIA MS
Snapshot, H1 2019 Benchmark.
Optimizing Managed Data views and OPIs (observed performance April 2018
Services Delivery: What the improvements) for managed services delivery from
Data Tells Us the MS Benchmark showing key metrics,
practices, and correlations from managed services
businesses.
The State of Managed The first of what will be annual reports for our non- May 2019
Services for Non-OEM OEM services MS members, documenting major
Services: 2018 trends/disruptions in managed services over the
past year.
SLAs, SLOs, and KPIs: How In this report, we identify managed services June 2019
to Leverage Metrics for metrics from across the organization, and discuss
Managed Services how to classify, prioritize, and communicate them
internally and to your customers.
Managed Services and the Managed and cloud services are the two fastest July 2019
Cloud: What’s the growing areas in technology today. Often,
Difference? customers, and even providers, confuse one for
the other. This paper will discuss the lines of
demarcation between the two and how to leverage
both for optimal growth.
Optimizing Managed Data views and OPIs (observed performance August 2019
Services Sales: What the improvements) for managed services sales from
Data Tells Us the MS Benchmark showing key metrics,
practices, and correlations from managed services
businesses.
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Target
Report Title Abstract
Publication Date
How to Structure Your One of the top challenges facing today’s managed September 2019
Managed Services service providers is the shape and structure of
Organization their managed services organization. Whether
you’re starting or currently operating an MS
business, we provide guidance on ideal MS
organization structure and the functions of each of
the key roles.
Managed Services in Data views from the MS Benchmark showing key October 2019
Hardware Manufacturing metrics, practices, and correlations for managed
Organizations: What the services businesses within hardware
Data Tells Us manufacturing organizations.
Summary
Traditional CapEx models are giving way to recurring OpEx-driven, services-led models. As economic
engines continue to shift, more companies are looking at managed services to drive profitable revenue
growth. However, many companies are quickly learning these new business models are fundamentally
different and disruptive to the financial, organizational, and go-to-market models of the past. Mastering
managed services capabilities not only drives profitable growth, it deepens customer relationships and
protects the future financial viability of the business by contributing predictable, recurring revenue
streams.
The top trends in managed services for 2019 will be:
• Continued convergence of managed and XaaS solutions.

• Incubation of the managed and XaaS organization to protect the development of future
business models.
• Standardization and automation to drive scale.
• Embracing “changes in the channel.”
Is your company new to managed and XaaS models? Are they not new, but really more of an “art
project” than a critical tool to drive transformation of the business? If so, please reach out to us at TSIA
to discuss your business challenges and to find out how we can help.
Endnotes
1
Gilbert, Clark, Matthew Eyring, and Richard N. Foster. December 2012. “Two Routes to Resilience.” Harvard
Business Review. https://hbr.org/2012/12/two-routes-to-resilience
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MANAGED SERVICES | Research Publication

The State of Managed

Figure 1: Growth Rates for Managed Services Providers, January 2019

How to Calculate These Metrics and Why They’re Important

New Recurring Revenue Growth

Why this metric is important

Total Recurring Revenue Growth

Why this metric is important

TCV Bookings Growth

Recurring Base Revenue Growth

How Profitable Is the Managed Services Market?

Figure 2: Margin Metrics for Managed Services, January 2019

Why this metric is important

Why this metric is important

Macro Market Forces

Figure 3: Product and Services Revenue Ratio: 2008 versus 2018

Figure 4: Percentage of Revenue from XaaS

Figure 5: Managed XaaS as a Percent of Revenue

Figure 6: Managed Services as a Percent of Revenue

Trends within the Managed Services Organization

Figure 7: MS Executive Reporting Structure

Figure 8: Reporting Structure Impact on Growth

Trend #2: Standardization

Figure 9: Percent of MS Organizations with a Standard Service Catalog

Figure 10: Impact of Standardized Solutions on Growth and Profitability

Trend #3: Leveraging Partners

Figure 11: Percent of MS Organizations that Leverage Partners

2019 Top Challenges for Managed Service Providers

1. Understanding and Measuring KPIs for Managed Services

7. Defining Managed Services Organization Structures

Table 1: 2019 Managed Services Research

The top trends in managed services for 2019 will be:

• Continued convergence of managed and XaaS solutions.

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