Technology service providers (TSPs) had a record-setting year for profit, and mergers and acquisitions, in 2021. So says Service Leadership, a ConnectWise solution and a data-driven TSP consulting firm.

The findings were released in the Service Leadership Index 2022 Annual IT Solution Provider Industry Profitability Report.

Examining the performance of TSPs over the past 12 months, the report reveals a financially impressive year. TSPs continued to rise to the challenge of enabling their clients to work from home and increasing security measures. This happened asTSPs were going through the same challenges themselves.

ConnectWise’s Peter Kujawa

Peter Kujawa is vice president of Service Leadership.

“Despite the pandemic and supply chain issues that ran rampant last year, TSPs did remarkably well financially in 2021,” Kujawa said.  “We are seeing this trend continue; MSPs are extremely optimistic in their projections for 2022. They are budgeting 19% revenue growth in 2022, a 64% increase over budgets in 2021.”

Mergers and Acquisitions

In all predominant business models, 2021 was a year of profit growth, even exceeding strong revenue growth. Revenue grew nearly 9% from 2020 while adjusted EBITDA grew 13.5%. Not surprisingly, best-in-class firms grew the fastest.

The report also showed 2021 exceeded expectations for TSP mergers and acquisitions (M&As). This was driven significantly by aging TSP owners looking for an exit strategy. Private equity-funded TSPs also impacted M&A and accelerated the growth in the average size of TSPs, particularly MSPs. While the average MSP has increased in size, the industry is still dominated by smaller companies. More than four in five (82%) TSPs have less than $10 million in revenue and about 69% are under $5 million.

Notably, government financial aid programs made only a minor contribution to TSP profitability. The report showed many TSPs ultimately did not need the aid programs to survive, though many of their customers did. This was largely due to cost control measures taken by TSPs in mid-2020 and the sharp rebound in the economy that persisted through 2021. In addition, continuing work-from-home and security issues fueled increased demand for IT outsourcing, making a significant positive impact.