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MSPs Are Dead. Long Live Managed Services Providers

Every few months, I read another eulogy about the death of MSPs. It typically involves a short rant on Facebook. And it usually resembles something like this:

“After a glorious life in the SMB market, managed service providers are now retired to the IT graveyard — buried next to the long-rotted corpses of resellers, Web integrators, eSolutions providers, and the list goes on.”

The stench of lost recurring revenues is overwhelming, some pundits suggest. But all I smell is a mounting pile of bulls***. That’s right. The next time someone tells me MSPs are dead, I’m going to cry out “bulls***.”

MSPs ain’t dead. Their models simply evolved. And those who evolved are thriving. Each of these recent data points and research reports suggest MSPs continue to thrive:

Looking Beyond the Market Bias (Including Mine)

Admittedly, you should read all market research with a skeptical eye. All of the reports listed above — including ours — have a vested interest in the MSP market’s continued success. But frankly, if MSPs died then ChannelE2E would move on to blog about the “next” business model for IT service providers and channel partners.

And that’s precisely the point. The next business model IS the MSP model. It just contains a new combination of services, talent/skills and delivery mechanisms. Oh, and a ton of AI-driven automation.

Updated May 29, 2019 – An example: Mission Cloud, an AWS-focused MSP, just raised $15 million and expects to be cash-flow positive in 2020.

Kaseya CEO Fred Voccola

Datto CEO Tim Weller

Datto CEO Tim Weller

ConnectWise CEO Jason Magee

As Kaseya CEO Fred Voccola pointed out during his company’s recent customer and partner conference, the market for traditional PC and server monitoring is now mature. Today, cloud monitoring ranks among the fastest-growing workloads for Kaseya’s MSPs.

That’s not surprising, considering Amazon Web Services (AWS) and Microsoft Azure have emerged as today’s preferred IT platforms — much in the way that Windows NT Server, Small Business Server and Linux dominated server workloads (on premises) from the mid-1990s until about 2010.

I see plenty of opportunity ahead for MSPs. I expect to see those opportunities in action at ConnectWise IT Nation Explore 2019 and DattoCon19 — both of which are set for June. New executive leaders like ConnectWise CEO Jason Magee and Datto CEO Tim Weller will surely have the opportunity to show their leadership chops during conversations in Orlando and San Diego, respectively.

MSPs: Good News, Bad News, and Opportunities

Amid all my optimism, I also have concerns — a sort of yin and yang that stretches across multiple market segments. Here’s a sampling:

1. Cloud Services – The Good: MSPs are finally waking up to the AWS Marketplace. They’re finally attending conferences like AWS re:Invent, Google Cloud Next, Salesforce Dreamforce, and other cloud-centric ecosystem events. And the bad: But we’re now a decade-plus into some of those platforms and gatherings. MSPs were late to the ball. Most don’t even realize that Amazon’s next big conferences are Amazon re:MARS 2019 (artificial intelligence and more) and Amazon re:Inforce 2019 (cybersecurity). Other MSPs have yet to embrace multi-cloud management and cloud cost management opportunities that surround us.

2. Security – The Good: It’s now a universal conversation. High-profile ransomware attacks in Atlanta, Georgia; Cleveland, Ohio; Baltimore, Maryland; and Albany, New York, have put businesses of all sizes on alert. MSP software companies are ramping up with a range of tools to assist MSPs in the cyber wars. And the bad: MSP technology platforms and remote control software are now prime targets for attackers. The FBI and Department of Justice have repeatedly warned MSPs of the risks. But some MSPs can’t even get the basics right — such as proper Office 365 security settings. The risk: The weakest MSPs and software providers among us may wind up giving the broader industry a black eye.

3. Automation and AI – The Good: Through organic R&D and private equity, we’ve seen hundreds of new software integrations emerge across the MSP software landscape. The lines between PSA (professional services automation), RMM (remote monitoring and management), BDR (backup and disaster recovery), endpoint security and more are now blurred. And the bad: The overwhelming majority of the MSP market has so far missed the artificial intelligence (AI) opportunity.

AI will absolutely reinvent IT service desks. Not a decade from now. Not five years from now. But right now, it’s already happening on enterprise service desks. And now it’s starting to happen with MSP service desks. Skeptical?

MSPs Don’t Understand Emerging AI Opportunities

Consider the story of UiPath. The company develops AI-based RPA (robotic process automation). In 24 months:

  • the company’s annual recurring revenues have grown from $8 million to more than $200 million;
  • and the company’s valuation has surged from $110 million to $7 billion — with a B.

UiPath CEO Daniel Dines

I realize valuations rise and fall. And UiPath’s valuation may be due for a correction at some point. But the recurring revenue numbers above are absolutely shocking — in a good way. And the company’s rapid adoption across Fortune 500 accounts is amazing, if you probe UiPath’s media statements.

There are major implications here for MSPs. Why? Because UiPath is leading the “automation first” era – championing “one robot for every person, delivering free and open training and collaboration and enabling robots to learn new skills through AI and machine learning,” the company claims.

That may sound like a Fortune 500 enterprise pitch. But take a closer look folks. UiPath is pitching the following video to IT help desks…

No doubt, SMB-focused MSPs will need that type of technology to keep pace with the type of automation we’re seeing from all the major CSPs and Silicon Valley’s best venture-backed businesses.

How MSP Industry Funding Will Help — and Potentially Hurt

Fortunately, MSP software companies are well-funded, highly profitable and focusing aggressively on more automation for their partners.

To put things in context, consider the rare world of technology unicorns — which involves privately held technology companies that have valuations of $1 billion or more. Yes, unicorns are impressive. But profitable unicorns are truly impressive. Companies such as ConnectWise, Datto and Kaseya all fit that rarified description, Voccola recently pointed out to me. SolarWinds also was in the club before the company returned to public markets a few months ago (reminder: public companies aren’t unicorns.) It’s a safe bet Continuum is marching its way to the unicorn club, with profits in tow. And MSP-friendly companies like Barracuda Networks are on the list, while SonicWall is somewhere on the near-term invite list as well.

Meanwhile private equity firms also continue to acquire MSPs. Listen closely enough, and you may even hear chatter about a really large deal likely arriving long before Independence Day weekend…

More money will flow toward technology suppliers that work with MSPs — and the MSPs themselves. But I do worry a bit from time to time. The good news: Tuck-in deals will plug more innovation into MSP platform providers. The potential concern: M&A is difficult to manage, and sometimes distracts companies from their core R&D efforts.

Overall, I think private equity is a net gain for the MSP industry. But I believe MSPs need to hold their platform providers accountable for continued organic innovation.

Bottom Line: MSPs Are Healthy and Growing, But…

The MSP industry is healthy and growing — though some forecasts call for sub-10 percent annual market growth in the years ahead. Also, keep in mind that MSPs have enjoyed a strong, growing U.S. economy in recent years. And frankly, thousands of MSPs have never managed recurring revenue businesses during an economic downturn. At some point we’ll all learn a hard reality: Recurring revenues are not recession proof.

But here’s the true bottom line — within a bit of a ramble:

  • Whatever comes after AWS or Azure…
  • Whatever disrupts endpoint detection and response…
  • Whatever pushes aside today’s backup technology…
  • Whatever crushes smartphones and mobile apps…
  • Whatever squeezes each of those technologies, the next disruptive offering will be delivered as some sort of managed service.

MSPs are dead. Long live MSPs.

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14 Comments

Comments

    Charles Houser:

    My conversations with MSPs have been very consistent when it comes to cloud adoption – very slow. Even slower is the number of end users subscribing to a full service security offering. The MSPs have a huge potential for growth just selling these services to their base. Most are still scraping the surface outside of selling desktop support services to their customers.

    Joe Panettieri:

    Charles: My thoughts align with yours. If you look at our Top 100 Public Cloud MSPs list, you’ll see that only handful of MSPs on the list emerged from the classic PC support market to thrive in the AWS or Azure worlds.

    We’re starting to see more progress with those classic Microsoft partners monetizing Azure. But MSPs in the AWS market are more of the “home grown” variety without that legacy PC heritage.
    -jp

    Dimitris Miaoulis:

    Joe, great information….again. Thank you. Adoption usually appears to be slower, but the world of SMB has the reality of budgets and product life cycles to deal with. Line of Business software is typically the dragging force in many cases. (down here in the trenches). MSPs are no where near being dead. The complexity of managing a network can only be handled properly with a team within an MSP. An internal IT person or small team is not enough to handle hybrid cloud situations and security properly. Not to mention all the software tools you need to properly manage a network. Our modest MSP employs over 40 different software programs to manage our clients. Way too much for internal IT to learn and manage.

    Joe Panettieri:

    Dimitris: Life is similar for our MSP. I suspect they manage several dozen tools to keep our media sites humming along each day. And our spend with our MSP has grown every year (2015-2019) as our cloud services consumption increased. Even with the increased spend, we see more value from their services every year, and we don’t mind signing up for an annual commitment to get a bit of a discount…

    To be clear: I’m not referring to a generic web hosting provider that dabbles in WordPress. Our MSP is all-in, all the time on the platform that runs our business. That’s why they’re growing — as a specialized MSP — when more traditional web hosting providers may have struggled.

    -jp

    Dustin Bolander:

    I think a lot of the poor reputation of the industry is that many MSPs are effectively break/fix for a fixed fee. The security section is a great example, we just replaced one of the bigger regional MSPs (who is also getting a ton of press) and they’re still using a single user account for administrative login, no 2 fa, no password expiration, etc. Client got hit with ransomware 3 times in <30 days….

    (Joe – New email, I sold and moved on…back into the same thing. Ha. Can't quit the industry)

    Joe Panettieri:

    Dustin: On a related note, I’m amazed by the number of vendors that announce MSP & MSSP partner programs… while lacking a multi-tenant design for such partners. That’s inexcusable.

    Congrats on your latest biz. Keep me updated.
    -jp

    Howard M. Cohen:

    Some people just like to see the world burn, Joe. I agree with you that these proclamations are tiresome and pointless.

    The fact is that there are now way too many MSPs. Everybody who couldn’t survive as a “reseller” has tried to become an “MSP” and many took short cuts and didn’t do the homework. As always, the bad muddy the waters for the good and many customers having been burnt are now shy and resistant. That’s business, and nothing new.

    The WINNERS, though, will be those that focus and specialize to differentiate themselves from this mass of MSPs. Data science providers, internet-of-things service providers, mobile service providers, security service providers. My vision is of the day when our industry rivals medicine and law. There will still be generalists, but those who specialize will find the pot o’ gold at the end of the rainbow.

    Thanks so much for writing this, Joe. The channel really needs to wake up to itself and not let the naysayers dampen our enthusiasm!

    Peter Briden:

    Joe…
    Inspiring content as always. Your thoughts are spot on regarding the state of the industry and the opportunities/risks. Being in the IT services industry for over 30 years, there are repeating patterns that every 5 or so years technology (and thus the IT services industry business model) changes. The survivors and thrivers are those who can recognize these changes and adapt to them creating value in the marketplace. I do see so many MSP’s struggling with last generations model, these folks unfortunately may not make the cut. However, as you point out, there are greenfields out there begging for companies to help them navigate all the changes in the marketplace. Who is it going to be??
    Thanks again for a great article.

    Joe Panettieri:

    Howard M. Cohen: Dark Knight references earn bonus points here at ChannelE2E.

    Peter: “…so many MSP’s struggling with last generation’s model.” Agreed. And it’s true in all business markets now that mobile, cloud and wireless are ubiquitous, and basic platforms (SaaS, IaaS and PaaS) can be activated with the swipe of a credit card (or less).

    Name a last-generation retailer, healthcare provider, restaurant chain, transportation company, financial services firm, etc., that hasn’t struggled to stay ahead of the changes. They’re few and far between.
    -jp

    Jay McBain:

    Very well written article. There are about a quarter of businesses around the world that outsource their technology infrastructure – and no one is forecasting that to go away anytime soon. The market is maturing, prices are compressing in many areas, consolidation is afoot – but the strong are growing stronger and natural selection is winding it course.

    Salesforce just announced they need 250,000 new partners to double their business in the next 4 years. Microsoft is bringing on 7,500 new partners a month. AWS has doubled their partner base in each of the past 3 years. UiPath is the fastest growing enterprise software company in history to $100M with 5,614% growth last year. Tens of thousands of partners are joining them, Blue Prism, Automation Anywhere, and the other leaders in RPA.

    The elephant in the room is that these are not recurring revenue opportunities. The CMO now spends more than the CIO on technology and almost 100% of that spend is on software, upstream and downstream services – delivered as project revenue. 80% of the partners I shared above are non-transacting, project/consulting/coding type business models.

    Taking advantage of AI, automation, IoT, blockchain, and all of the other emerging technologies over the next 10 years (in front of line of business buyers) will take a project or software based approach. The successful MSPs of the future will have 2 parallel lines of business – infrastructure and non-infrastructure. They will compete and win amongst the 20 winning mega-ecosystem marketplaces, and the top echelon will grow themselves into unicorns.

    Joe Panettieri:

    PS: I promise to write part two of this blog when Jay and I are neighbors in Florida, circa 2025 or so. A recap of how it all played out. For better or for worse. Coffee still involved, either way.
    -jp

    Jeffery Ponts:

    Agree to everything said. Let’s not forget that 97% of the IT providers are micro businesses. The one constant in my business has been the big winners in the SMB space have not been the ones specializing in a technology niche. They specialized in a vertical niche, creating a turn key business solution, and adds modernized technologies where they fit.

    Howard M. Cohen:

    Jeeezzz… I’ve trying to get Jay and his beautiful family to leave that swamp and move here to our beautiful Valley of the Sun in Arizona.

    Note: Leaving LI for AZ was the best move I ever made…. 🙂

    Todd Wahl:

    I loved the article….I agree with the notion of MSP’s in the Information Age are either evolving or dying…….those who fail to evolve will certainly die. Cloud Platform or Application Consulting & Management is a key component to growth….even in the Micro Business and SMB worlds. If your MSP hasn’t partnered with a platform or application you should. In regards to Security……….I think most MSP’s are not properly equipped or trained on what security means in the Information Age (HINT: It is more complex than just Monitoring, Patching, Firewalls, AV and Antimalware). Artificial Intelligence (AI) or Augmented Intelligence (Ai) is also going to pinch those MSP’s who have not evolved out of existence (they will not be able to keep up). MSP’s not only MUST leverage it to shorten the data collection, data processing and data action cycle for their own good but they MUST be prepared to Advise their clients on how to leverage and implement it themselves. Microsoft, Google, Amazon are pushing Ai downwards to the SMB market….time to partner with one of them and learn how to advise and implement (ton of FREE courses out there now). It is not just accessible to Enterprise or Fortune 500 anymore.

    I also believe the most successful MSP’s of the future will be those who not only offer outsourced turn key services but also temp to permanent staffing services so they are not at odds with the evolution of their clients needs…….sometimes a client needs to insource and sometimes they need to outsource why not capitalize on the evolution and maintain the relationship?

    Agreed Dustin…..”many MSPs are effectively break/fix for a fixed fee.” There are a bunch of tech support firms purporting themselves as MSP’s but are either not using the correct tools or they have the correct tools but are underutilizing them. When was the last time your MSP sat down to figure out what they DO NOT know about their tool that runs their business operations…..if it is less than 50% utilization rate then chances are you are not fulfilling what an MSP is supposed to be doing!

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