SAY ONE THING FOR 2020, it sure was filled with surprises.
Most channel pros entered the year with momentum at their back and high hopes for the future. Then came a global public health crisis, cascading stay-at-home orders, mounting small business closures, and an abrupt contraction in technology spending. Those were in turn followed by recovering GDP figures and the arrival of vaccines on the one hand, and political turmoil plus an agonizing year-end spike in coronavirus casualties on the other. As we sent this issue of ChannelPro to press, the future, while far brighter than last spring, remains hard to predict.
Welcome to a State of the Channel report unlike any before it, in which we compare data collected last summer and fall in what already feels like a different era to research conducted a year earlier in heady pre-pandemic times, as well as interim polling from last April when fear, uncertainty, and doubt were at their peak.
The analysis that follows very much reflects the last year’s ups and downs, but ultimately tells a tale worthy of relief and even gratitude: Though our readers suffered real damage when the virus arrived and the economy shut down, most of them came through the darkest days of 2020 less wounded than many once feared, and some even thrived. They entered 2021, as a result, with an understandably wary but nonetheless real sense of optimism.
Down but Coming Back
Not surprisingly, the arrival of lockdown orders last spring took an immediate toll on the channel’s expectations for the future. When we asked readers to forecast the year ahead going into 2020, 63% projected much or somewhat better conditions for channel pros, 65% predicted the same for the economy as a whole, and 71% prophesied the same for themselves. When we asked them again last April, those figures had plummeted to 22% predicting much or somewhat better conditions for channel pros, 16% saying the same for the economy, and 24% saying the same for themselves.
They were right to be concerned too. Fully 48% of respondents to this year’s survey say revenue was somewhat lower in 2020 due to the coronavirus and another 22% say it was much lower. Furthermore, 63% say revenue is still a little or well behind where it was before the pandemic.
The services our readers offer were less profitable in 2020 too, even in critical fields. For example, the portion of readers who called margins on BDR, security services, and networking average or low in last year’s survey stood at 56%, 56%, and 66%, respectively. In this year’s study, those numbers rose to 61%, 63%, and 74%.
Vital markets for remote work weren’t spared from profit erosion either. While 36% of readers called margins on videoconferencing average or low in last year’s survey, 50% say the same in the new one. And while global sales of desktops, notebooks, and workstations jumped 13.1% in 2020, according to IDC, as businesses rolled out new and improved hardware to home-based employees, fully 71% of respondents to this year’s study call PC margins average or low, versus 59% a year earlier.
More predictably, margins on services tied to office locations, most of which have been shuttered for months, suffered too. While 32% of readers said profits on video surveillance were average or low in last year’s survey, for example, 49% say the same this year. Similarly, 38% of readers now call profits on access control systems low or average, versus 24% in our previous study.
Yet as bad as all that is, matters could have been worse. Close to a third of our readers (30%) say their revenue was either unaffected by COVID-19 or actually grew, and 36% say sales are either back to pre-pandemic levels or higher. What’s more, profits held steady for 38% of poll respondents last year and increased for 37%.
Credit sober, hard-headed management for those encouraging numbers. For example, 48% of this year’s poll respondents canceled or delayed plans to hire new employees, and 19% made the painful but necessary decision to lay off staff. Meanwhile, just 28% of them surrendered to temptation by lowering rates or extending payment terms for their customers, and 15% actually fired unprofitable clients in the middle of a recession.
“”If you went back to the MSP community 10 years ago, you would not have found that business acumen,”” says Paul Dippell, CEO of managed services consultancy Service Leadership. “”That, to me, is really the silver lining here.””
The best news of all, though, is that the outlook among readers for 2021 is generally upbeat, with 51% believing both revenue and profits will be up this year versus 2020. That’s sharply down from the 64% forecasting higher revenue and 62% anticipating higher profits 12 months earlier, but way, way up from the measly 17-18% projecting revenue and profit growth last April.
Even so, with so much about the world still uncertain, channel pros are steering a cautious course for 2021. Fifty-three percent expect headcount to hold steady, for instance, and 7% expect it to shrink. In addition, 56% plan to keep technician wages and their own personal salary roughly unchanged this year, 58% say the same of salespeople, and 63% say the same about administrative staff.
A Big Year for Cloud and Security
Though the pandemic’s worst effects on channel partners proved temporary, it’s impact on the cloud computing market looks to be enduring. IDC, in fact, expects worldwide spending on cloud software, hardware, and services to climb at a 15.7% CAGR through 2024 to more than $1 trillion. Global outlays on public cloud services alone will rise 18.4% this year, moreover, according to Gartner.
The big driver behind that growth, of course, is last year’s swift embrace of work-from-home (WFH) computing, which has 67% of channel pros currently offering remote work services to their clients, according to our new survey. Forty-three percent of participants in that survey, moreover, increased their use of cloud solutions in 2020 to support WFH use cases. At present, 48% offer unified communications as a service or VoIP, 60% offer cloud storage, 65% offer cloud consulting, and 70% offer cloud backup. Forty-nine percent now provide cloud management services, too, to help businesses provision, monitor, and optimize their increasingly multicloud environments.
In a continuation of a trend first highlighted in last year’s State of the Channel study, channel pros are still showing greater interest in more sophisticated, high-margin cloud services that require greater investment in skills. The number of poll respondents planning to roll out platform-as-a-service offerings in the future rose from 12% to 18% (a 50% uptick), while the portion planning to add online ERP and cloud analytics services both roughly doubled, from 7% to 13% in the former case and from 9% to 18% in the latter.
As a result of all that cloud growth, though 68% of readers derive less than a quarter of revenue from cloud computing today, 50% expect cloud to account for a greater portion of the top line by the end of this year, up from 44% a year earlier.
Meanwhile, 62% of channel pros now offer cloud security, according to this year’s study. Thanks to increased threat activity against often inadequately protected remote workers, 2020 was a big year for security generally. In fact, 40% of SMBs in the U.S. increased their security spending last spring when stay-at-home orders went into effect, Analysys Mason reports, and 93% of those firms plan to keep their spending at those higher levels going forward.
Good thing too, according to Ian Thornton-Trump, CTO of Winnipeg, Manitoba-based MSP Octopi Managed Services and chief information security officer of threat intelligence vendor Cyjax. Last year’s sudden, unplanned rush to WFH left home-based workers vulnerable to surging threats. “”Some of the decisions that we made, some of the equipment that we have, just were not up to the task,”” he says.
Accordingly, 36% of channel pros added security solutions last year to protect their work-from-home clients, 46% now offer managed security services, and another 18% plan to add managed security in the future.
Fortunately for the people going deeper on cloud and security, margins on both appear to be climbing. While 56% of poll participants called profits in cloud consulting, deployment, and migration average or high in last year’s research, and said the same of security services, 65% report average or high margins in both areas now. What’s more, 35% expect margins to increase in cloud consulting, deployment, and migration in 2021 and 41% expect margins to rise in security. Just 3% of channel pros believe margins on security will dip this year, and just 5% foresee a decline in cloud margins.
Further Signs of Managed Services Maturity
One reason COVID-19 hurt channel pros less last year than initially feared is that MSPs truly are essential workers. Companies unable to pay other bills found money to pay the people responsible for keeping their tech gear running, and organizations big enough to have in-house IT departments hired MSPs in growing numbers to ease the unfamiliar burdens of delivering remote support.
Still, though managed services have replaced break-fix as the channel’s leading business model, its position is hardly dominant. At present, 63% of ChannelPro readers derive less than 25% of their revenue from managed service offerings, and just 20% make more than half of their money that way. And although that last figure appears set to grow in 2021, the jump may not be a big one. While 43% of this year’s survey participants expect the share of their top line accounted for by managed services to climb in 2021, 52% anticipate little change.
MSPs have similarly mixed feelings about the profits they’re making. Though 37% call margins on managed services high, an identical 37% say they’re average. And while 42% expect margins to improve this year, 38% foresee no change.
The picture on break-fix margins is even worse. Just 18% of survey participants call them high, while 43% call them average. Forty-nine percent expect little change this year, moreover, against 19% predicting improvement.
Let’s hope those channel pros are unduly pessimistic, and that there’s improvement in store not just for break-fix margins but for everything in 2021. We’re all surely due for it.
Methodology and Demographics
The 2021 ChannelPro State of the Channel survey was conducted online from August to October 2020, and was open to everyone in our email database. About 51% of the 1,178 respondents are MSPs, 44% say they’re primarily VARs, and 22% are custom system builders. Fifty-three percent hold executive management titles such as CEO, owner, and president; about 22% work in unspecified technical management roles; and about 13% are sales or marketing managers. Approximately 36% work at companies with one to four employees, while roughly 17%, 27%, and 21%, respectively, are affiliated with firms that have five to nine, 10 to 49, and 50-plus people on staff.
Opening Image: iStock
