TSP industry in 2022 sees third straight year of robust profitability and revenue growth

| By: Peter Kujawa

That was no mirage: 2022 was indeed another hot year for revenue and profitability growth for IT solution providers (TSPs), according to the Service Leadership Index® 2023 Annual IT Solution Provider Industry Profitability Report™.

Despite all the concern and noise about a potential recession, many businesses around the globe remained focused on prioritizing investments to modernize their IT and fortify cybersecurity. And they leaned heavily on TSPs to help them meet new challenges, such as continuing to support a hybrid work model and implementing technology to make them more agile.

So, what did top performance look like in the TSP industry in 2022—and how does the performance of your TSP business compare? The report provides data and insights that can help you benchmark your performance at a high level and understand the gross margin and profitability trends impacting your business.

One of the key takeaways from the report is that how you run your TSP business is the real difference-maker in financial performance. While there are some regional differences, it really doesn’t matter where your TSP business is located, what clients you serve, or the size of your business management skills; identifying and implementing with discipline the best practices appropriate to your specific TSP business model are what matter most. That starts with a strong focus on your value creation strategy. With that in mind, let’s take a peek at some of the key findings.

Impressive results across Predominant Business Models in the TSP industry—especially from best-in-class TSPs

The report, now in its 18th edition, provides unequaled insights and analysis into how the top-performing TSPs are growing, changing, and profiting. It looks at 10 Predominant Business Models (PBMs™), including managed service provider (MSP) and product-centric (also called value-added resellers or VARs). Service Leadership’s analysis of the TSP industry’s performance in 2022 found that:

  • All PBMs experienced strong revenue and profit growth. Revenue grew 19.7% from 2021, while adjusted EBITDA dollars increased at a similar pace at 18.0%.
  • Best-in-class (BIC) firms grew revenue and profit the fastest. Across all PBMs, the BIC showed strong EBITDA of 21.1%—falling just slightly below the 2020 record of 21.4%.
  • The average MSP saw remarkable revenue growth from 2021—23.1%, with 26.8% growth in EBITDA. (Note: This is continued evidence that high growth does not reduce profitability.)
  • While significantly underperforming the BIC, even median and bottom-quartile TSPs had their best performance, underscoring the strong demand for high-value IT support.

Smaller firms still dominate the TSP industry, despite a flurry of M&A activity

The profitability report notes that merger and acquisitions (M&A) activity started strong in 2022—a continuation of the trend seen in 2021. For the first few months of the year, it looked like deal volume and valuation multiples in 2022 might eclipse records set in 2021. However, rising interest rates resulted in a slight pullback in the year's second half.

The continued growth of private equity-funded TSPs also had an impact on M&A in 2022, according to the report. In particular, it accelerated growth in the average size of TSPs, particularly MSPs. But while the average TSP has increased in size, the industry is still dominated by smaller companies. In 2022, 81% of TSPs were under $10 million in revenue, and about 68% were under $5 million, compared with 87% and 79% in 2013, respectively.

Also, there is no shortage of new players in the industry: Service Leadership found that in 2022, the rate of formation of new TSPs continued its upward trend over the past seven years.

High-performing TSPs are laser-focused on creating value

Value creation is a motivation for many TSP owners to go into business in the first place. However, that motivation isn’t just rooted in creating value for themselves but also for their customers, vendors, and employees. And the highest-performing TSPs are diligent about keeping value creation in focus, no matter whether their exit date is planned for three or 30 years in the future. They know what they want to do and by what date, and measure their progress annually. Conversely, lower-performing TSPs typically have poorly defined value-creation strategies and tend to focus on just the current year.

The past year (2022) saw the highest average company approximate valuation on record since Service Leadership began tracking this data in 1999. The 23% increase in average approximate company valuations across all PBM from 2021 indicates that the TSP industry is strong, despite recessionary fears.

From 2018-2022, the average TSP’s approximate stock value (based on Service Leadership’s Solution Provider Value Creation Planner™) grew from about $3.7 million to roughly $8.4 million, a compound annual growth rate (CAGR) of 23.0%. The 2023 profitability report attributes this to higher revenue and adjusted EBITDA dollars, a larger percentage of recurring revenue dollars, and increasing valuation multiples in the market.

Reaching higher OML, not just revenue size, drives higher profitability

When it comes to driving higher financial performance, bigger doesn’t always mean better—or worse; there are small TSPs that operate at high Operational Maturity Level™ (OML™) and deliver great results, and there are larger TSPs that operate at lower OML and struggle to attain BIC results, and vice versa.

Service Leadership offers an online OML progression tool, called SLIQ™, enabling TSP owners and executives to assess their company’s OML across more than 35 traits and safely guide their management teams to higher OML methods. High-performing TSPs have mastered the OML traits in SLIQ’s five functional areas: Strategy, Sales, Service, Financial, and Compensation. While all OML traits (35+) are important to performance, the following five OML traits tend to influence profitability and growth for TSPs most significantly:

The correlation between profitability and OML traits is explored in the full report. For example, Service Leadership found that moving from OML 2 to OML 5 in technology standards almost doubled TSP profitability (11.2% to 20.7% adjusted EBITDA). It also increased services gross margin by over 40% (42% to 59.9%).

To see further highlights from the report, download the free executive summary or purchase the full report to dive deep into the data and insights and also explore TSP financial performance by geographic regions—Australia and New Zealand, Europe (Ireland and UK), and North America (Canada and US).