Highlights from the Service Leadership Index® 2023 Annual IT Solution Provider Industry Profitability Report™
Contrary to popular belief, you don’t have to offer the highest base salary to score top talent. These findings equip TSPs with the data to evaluate the current state of their pay structure and determine whether they are delivering appropriate compensation packages that meet their business objectives.
The Best-in-Class Companies:
- Pay the least for staff and managers
- Had the smallest increases in 2022 and are planning the same in 2023
- Have the highest % of that pay tied to incentives
Geographic influences on profitability
A common but mistaken assumption by TSP owners and executives is that specific marketplace conditions have a material impact on profit performance, meaning geography impacts profitability. Most commonly, TSP executives in large cities dream of the “lower wages” supposedly available in smaller markets. In contrast, their peers in the smaller markets envy the supposed “higher rates” being charged in the larger markets. Each falsely assumes these wage and price differences give the other an enviable profit advantage.
In any given marketplace and Predominant Business Model™ (PBM), you will find executives operating their company at Best In Class (BIC) profitability (globally speaking). You will also find companies in the same PBM operating at Median and Bottom ¼ profitability. Therefore, while different geographies have different compensation, some higher on average and some lower, geography makes no material difference to profitability. Management skill makes the difference—the creation or acquisition and diligent application of best practices suited to that PBM.
North America
While NA led the way in overall revenue growth, EMEA had the highest adjusted EBITDA profit growth at 52.8%, with NA coming in second at 29.4% and APAC experiencing a significantly lower profit growth at 12.7%.
North America
EMEA
ANZ
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Note: The definition of the term “compensation” has a different meaning outside of the US and Canada. In many parts of the world, “remuneration” is used instead of “compensation”, which refers to employee wages, and TSPs should interchangeably use the appropriate term for their region.
Profitability Growth
Gross Margins
Total Services
Click the tabs below to explore the data by region
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From company approximate valuations being the highest on record to strong revenue growth, 2022 was a year of revenue and profitability growth.
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From company approximate valuations being the highest on record to strong revenue growth, 2022 was a year of revenue and profitability growth.
2022 Financial Performance by Geo
Revenue Growth
Profitability Growth
NA had the highest total revenue growth of 27.3%, comprised of 28.3% services growth and 25.6% product growth. Both are historically strong numbers.
This high-revenue growth was driven primarily by two factors:
1. Successful price increase management by consistently evaluating what they need to charge each client to attain target profitability, annual increases included in agreements, and higher pricing for new clients.
2. Increased cybersecurity product and service sales across a growing proportion of their customer base, both stand-alone and in the higher OML firms, as part of their fully-managed offering.
Gross Margin & Total Expenses
29.4%
30.3%
29.3%
Total Revenue Growth
Services &
Product Growth
Product Growth
Services Growth
27.3%
25.6%
28.3%
Profitability Growth
Gross Margin & Total Expenses
Gross Margins
Total Services
52.8%
16.1%
19.1%
Total Revenue Growth
Services &
Product Growth
Product Growth
Services Growth
15.6%
3.6%
28.6%
EMEA
EMEA achieved the highest profit growth of the three regions by growing gross margin faster than they grew total expenses. This is the universal prescription for higher financial performance.
Revenue Growth
Profitability Growth
EMEA had the lowest overall revenue growth of 15.6%, yet they had the highest services growth of all the geographies at 28.6%. Unfortunately, EMEA TSPs experienced low product growth of 3.6%, which, despite strong services revenue growth, depressed overall growth to the lowest of the three regions.
A key factor for low product growth was a lack of investment in new technology. This was due primarily to delayed upgrades of old technology due to reductions in “discretionary” cap-ex spending caused by the impact of extreme energy inflation, driven significantly by Russia’s invasion of Ukraine. These cap-ex delays in 2022 are likely to be reflected positively in product growth in 2023 and 2024.
Even with low product growth, EMEA produced the highest services revenue growth of the three regions, a positive indicator of the health of the EMEA market.
Profitability Growth
Gross Margin & Total Expenses
Gross Margins
Total Services
12.7%
16.8%
16.6%
Total Revenue Growth
Services &
Product Growth
Product Growth
Services Growth
17.1%
21.0%
14.0%
APAC
APAC experienced the slowest profit growth because their expenses increased faster than their gross margin production.
Revenue growth is a good thing, but it delivers the most benefit with the least risk when:
• Gross margin growth is faster than revenue growth.
• The cost of that growth in sales, marketing, and operating expenses rises more slowly than the gross margin.
Revenue Growth
Profitability Growth
APAC experienced 17.1% in total revenue growth, comprised of the lowest services growth at 14.0% and 21.0% product growth.
One factor in this lower service growth was due to not heavily implementing successful price increase management and increased cybersecurity product and service sales.
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