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MSPs can expect a multidimensional business challenge in 2022 as they navigate market consolidation, a laundry list of industry-specific requirements and new ways of working with customers and vendors.
The economic outlook for MSPs, consultants and other service providers remains generally favorable. Gartner Inc. expects the worldwide IT services market to expand 8.6% to $1.3 trillion in 2022. The projected growth rate has dropped somewhat from the 11.2% uptick forecast for 2021. Actual results will depend on a range of influences, which include rising COVID-19 cases and inflation.
Against that backdrop, here are a few managed services trends set to emerge in the new year.
- The big get bigger: MSP platforms consolidate
Consolidation among MSPs and cloud consultancies will continue apace in 2022. MSP platforms, sizeable service providers to which smaller add-on acquisitions attach, attracted an abundance of private equity dollars in 2021. Cloud professional services firms likewise saw a spike in investor interest. Both types of businesses will become larger still in the coming months.
Trent Hickman, managing director at VSS Capital Partners, a private equity firm in New York, suggested the top managed service platforms will soon emerge from the current phase of consolidation. "You'll see, over the next year or two, who are going to be the platforms," he said. Hickman's firm in October 2021 sold Coretelligent, an MSP platform based in Westwood, Mass., to Norwest Equity Partners. VSS retains a minority stake in Coretelligent.
MSP platforms seek to expand their geographic reach as they buy smaller service providers.
"Convergence is happening in the marketplace," said Michelle Accardi, CEO at Logically, an MSP with headquarters in Portland, Maine. The company has purchased 10 companies since 2019 and plans additional deals as it seeks to surpass the $100 million revenue mark by early 2022.
"We want to be able to have national scale and local services," Accardi said.
The next round of consolidation will involve the national MSPs. "At some point, we will see the platforms come together," Hickman said.
That point could be 2022, said Abe Garver, MSP team leader and managing director at Focus Investment Banking, an M&A advisory firm in Vienna, Va. He predicts that PE-backed MSP platforms will begin to merge next year.
PE firms are looking to cash out faster than in previous years, Garver said. Creating bigger platforms with higher valuations is one approach, he noted.
- Vertical market needs loom large
Service providers that organized around key verticals in recent years could see that strategy pay off next year -- but they'll need to address the specialized needs of industries still battling the pandemic. COVID-19 and the need to rapidly digitalize operations will continue to influence customer projects in 2022.
"The pandemic forced organizations and business leaders to revamp their business models and focus on areas that required the most urgent attention," said Ingo Piroth, chief revenue officer, U.S., at Trianz, a digital transformation consulting firm based in Santa Clara, Calif.
Those areas, Piroth noted, include improving employee and customer engagement and experience. Accordingly, consumer-facing industries such as banking, insurance, retail, media and entertainment, are likely to generate the highest demand for systems integration and transformation services, he said.
In B2B, legacy sectors such as manufacturing, real estate, construction and utilities will be playing catchup next year. In those industries "the opportunities and challenges are equal, as these industries have remained laggards and are facing threats from their digital-native competitors," Piroth said.
Legacy industries will ramp up their digitalization of assets, business processes and operations. Priorities include improving supply chain visibility, tapping data analytics to boost decision-making, and managing the health and safety of the workforce, Piroth said.
Some traditional industries face problems beyond the digital business gap. Organizations in verticals, such as utilities and transportation, must deal with federal mandates to secure the hardware and software that maintain public infrastructure as well as their internal IT systems, noted Phil O'Konski, practice director of managed services, for the Cloud and Data Center Transformation division at Insight Enterprises in Tempe, Ariz.
Examples of recently imposed requirements include a Department of Homeland Security directive that compels pipeline operators to protect against ransomware threats to operational technology and IT systems. That mandate followed the May 2021 ransomware attack on Colonial Pipeline, which temporarily shut down the oil conduit.
In addition, pandemic-depressed vertical markets such as hospitality and retail must refresh outmoded technology to remain competitive but face capital constraints. Businesses in those sectors will seek to acquire infrastructure through Opex models to avoid a heavy upfront investment.
"We see a lot of them looking to shift to an as-a-service model," O'Konski said.
Insight anticipates customer interest in public clouds and hybrid private clouds, according to O'Konski. On the private cloud side, businesses may look to purchase consumption-based IT and Opex storage offerings such as HPE GreenLake, Dell Apex and NetApp Keystone.
Finally, the public sector market could prove an active vertical in 2022. The $1.2 trillion infrastructure bill, which President Joe Biden signed into law Nov. 15, could spark a wave of RFPs among municipalities, school districts and state governments. O'Konski said projects could range from community wireless services aimed at bridging the digital divide to traffic cameras and image analysis systems to improve vehicular flow in cities.
Preparing people for change
Digital transformation is all about change, but initiatives typically focus on retooled business processes and updated technologies.
Pariveda's Rogers suggested such projects may overlook the individuals asked to execute those alterations. The consulting firm recommends customers undergo a change readiness assessment, which considers an organization's adaptability and resilience. This approach aims to head off problems such as resistance to change, slower adoption and increased iterations, Rogers said. Not to mention disaffected employees.
"With the Great Resignation, not considering your capacity for change increases the probability that employees will likely hop rather than stick around to see how things go," Rogers said.
- Customers seek deeper thinking on digital transformation
Customers of all sizes will need more help with digital transformation in 2022.
SMBs, for example, need to pursue digital business to stay competitive, but typically lack the strategic IT thinking needed to get projects off the ground. Service providers offering virtual CIO (vCIO) services may find themselves in a position to help. Customers, however, will be demanding more from them.
For many MSPs, vCIO might be more accurately rendered as vCO -- virtual captain obvious -- said Gary Pica, president and founder of TruMethods, a consultancy that offers business coaching to service providers. An MSP needs to rise above tactical -- and perhaps self-evident -- advice on refreshing aging hardware or renewing soon-to-expire software licenses.
"A true virtual CIO understands the customers' business, their goals and risks," Pica said.
With that insight, a vCIO can make useful recommendations as clients migrate key applications to the cloud, build a hybrid work environment or develop a cybersecurity plan, he noted. SMBs need that type of guidance but can't afford to hire a full-time tech maven.
"They can't afford to have a CIO," said Pica, who ran his own MSP before becoming a consultant. "They are depending on us."
Gary PicaPresident and founder, TruMethods
Larger enterprises employ an IT executive to shepherd technology investment and oversee pivotal projects. But those organizations also seem likely to increase their use of external consultants and service providers in 2022. Staffing shortfalls amid the Great Resignation have hampered digital transformation efforts.
Eighty-four percent of the senior decision-makers polled by Dae.mn cited "lack of skills/resources" as a concern that keeps them awake at night. The skills gap ranked second on their list of pressing issues, trailing only security threats. Half of the decision-makers also cited a lack of skills and resources as the reason they would hire a digital transformation consultant. Dae.mn, a technology consultancy in London, surveyed 200 IT and business executives, more than 60% of which work at organizations with more than $1 billion in revenue. The company published its survey in November 2021.
Forrester Research's Business and Technology Services Survey 2021 provides an additional datapoint: Twenty percent of the decision-makers the market researcher polled said they benefit from third-party partners because they "don't have the required skills or methods in-house." Forrester's survey focused on enterprises with more than 1,000 employees that have purchased consulting or third-party technology services in the last 12 months.
Consultants have observed the skill deficit in the market and expect the pattern to continue.
Employee churn "revealed cracks in the system," said Margaret Rogers, delivery excellence leader at Pariveda Solutions and managing vice president for the company's New York office. Organizations are beginning to acknowledge the number of people required to sustain digital transformation, she added.
Resource-constrained businesses ask Pariveda for help reevaluating their business models, Rogers said. They want to know, for example, how to build digital offerings that accommodate consumers' shopping preferences. The tricky part, as COVID-19 heads into its endemic phase, is anticipating whether customers will stick to their new purchasing habits and, if so, which ones. "Will they continue to order groceries online?" she asked.
Rogers said she expects to field more of those types of queries in 2022, while also helping clients gauge the effects of inflation on consumer behavior. The consultant's task: collect and analyze consumer data to support client's personalization efforts.
That could prove easier said than done, however, amid changes in mobile device privacy settings.
"In 2022, personalization will continue to be tricky to navigate as customer touchpoints, such as the iPhone, control what information is shared with apps," Rogers said. "These policies have the power to enhance or hinder personalization."
Trianz's Piroth said he expects to see IT service providers help businesses craft digital strategy and execution plans while also transforming their business and operational models. Other roles include developing workforce and workplace readiness strategies and helping customers reimagine customer experience, he said.
- Emerging partnering models gain momentum
The way partners work with vendors and customers will continue to evolve, as approaches such as co-innovation and generative partnering build momentum.
With co-innovation, a service provider collaborates with a technology vendor to create an offering for customers. The co-created product could be a vertical niche application built on top of a public cloud provider's platform, for example. Co-creation also takes place between partners and their customers, particularly when a client seeks to launch a new product or service faster than it could on its own. To that end, partners offer tools such as software accelerators, which jumpstart application development.
"It's a relatively new trend," said Fiona Mark, principal analyst at Forrester, who discussed co-innovation partnering at a recent company conference. "We do expect to see growth in this area, but it will take time for some organizations to mature to full co-innovation."
Changes on tap for partners include a greater use of outcome-based contracting, in which some portion of contractor's fee is linked to hitting performance objectives. Outcomes, rather than traditional service-level agreements, will guide co-innovation projects, according to Forrester.
Mark said 35% of the service providers Forrester polled expect an uptick in client agreements emphasizing outcome-based delivery. "Anecdotally, most providers in this space -- large and small -- are seeing more of an interest in clients wanting to explore more co- ways of working," she added.
MSPs and consultants can also anticipate discovery engagements as the front end of a co-innovation deal. Chad Routh, principal analyst at Forrester, described such engagements as a small piece of work to evaluate the customer's problem statement in advance of a larger project.
Gartner, meanwhile, also sees the future in co-innovation, which the market researcher terms generative partnering. In this approach, a customer and a partner co-innovate and build an offering, which they co-sell to share the revenue stream, according to Hung LeHong, a vice president and analyst at Gartner.
"It's happening more often than you think," LeHong said, speaking at a recent Gartner event. Gartner expects generative-based IT spending to grow at a compound annual growth rate of 31% over the next five years.