The MSP landscape is undergoing some significant changes. What began as a smattering of small and scrappy firms handling outsourced IT services for SMBs has grown into an ocean of service providers delivering mission-critical endpoint and network management for SMBs and larger organizations that are increasingly reliant on their IT systems for every aspect of their operations.
While relying on a service provider for endpoint management was a nice-to-have for a few SMBs in 2012, by 2016 that number increased markedly, and it is expected to continue growing significantly through the end of the decade. SMBs know they can’t do it alone, and MSPs have slotted in to fill that gap in bandwidth and expertise.
As the needs of SMBs have evolved from basic endpoint management to include the likes of backup and data recovery, compliance management, and security, SMBs that were willing and able to manage those items internally are now increasingly open to outsourcing some or all of these functions to the skilled expertise of an MSP. Protecting themselves from bad actors, malware, and hacks; complying with a growing array of standards such as GDPR, PCI and HIPAA; and keeping up with a constantly growing portfolio of services hosted locally and in the cloud is simply too much for most SMB IT professionals.
With the SMB demand for IT services skyrocketing, more MSPs have moved away from a break-fix model, and services have become the primary revenue stream for a growing number of MSPs.
To keep up with an ever-growing client base and the additional services clients are asking for, MSPs need more manpower than ever. The headcount per firm has increased nearly four-fold at a time when unemployment in the tech sector is near zero and salaries are growing to ensure the right talent is procured. Even tiny MSPs are getting bigger. Their overhead is increasing, their portfolios are expanding, and the “four guys in a garage” model just doesn’t scale like it used to.
All this activity is creating market dynamics familiar to other sectors. Increased demand brings increased supply, increased supply ushers in lower prices as competition increases. Layer on the demand of SMBs requesting a diverse array of multiple services, and it becomes clear that the tiny MSP shops must scale up fast or be left in the dust capability-wise while clinging to their existing customer base.
M&A Dots the MSP Landscape
So now we’re seeing the inevitable evolutionary stage of small providers joining forces through M&A, midsize firms gobbling up small outfits that have attractive clients or key talent, and larger IT companies adding MSPs as acqui-hires to beef up their own burgeoning MSP offerings.
These acquisitions are being driven by key client relationships, technology-specific expertise to round out offerings, and pure manpower reinforcements.
When the dust settles on these deals, the result is larger MSPs with more staff, more technical knowledge and know-how, and more client engagements to manage.
For the MSP, this means replacing deep, lengthy personal relationships with each and every client with an increased reliance on tools, systems and processes to maintain the efficiency required to hang on to the accustomed remote monitoring and management (RMM) profit margins that got them into the business in the first place as well as to capture the multifold margins available when security, BDR and compliance services offerings are added to the mix.
While navigating this changing playing field, MSPs must adjust their strategies accordingly. Here are five ways to fully prepare for this new reality:
1. Self-Assessment: In the constant rush to put out fires, tend to clients, and nurture leads, there’s not often much time for strategic self-evaluation. But the modern MSP must have a firm grasp about what it can and can’t do, as well as what it excels at vs. what it could improve upon. Conducting a SWOT-like exercise can reveal how strategic partnerships, M&A and other relationships can shore up weak spots, giving the firm some direction about where it needs to be investing more resources or adding more firepower.
2. Self-Valuation: How much are you worth? What is the offer you couldn’t refuse? Figuring out what it would take to make an acquisition offer worthwhile is always a better exercise when there isn’t already a deal on the table or potential suitors sniffing around. If you know what the required return is and what sort of terms are acceptable to you and your investors, you’ll be better prepared if you fall in the crosshairs of a potential partner or acquirer.
3. What’s in Your Wallet: If you find yourself on the hunt for a new set of capabilities, more highly-trained and experienced staff, or customer growth via an acquisition, it’s good to know what your own war chest looks like. This goes beyond what’s in your bank account and being conversant about what kind of equity and other financial tools are at your disposal and palatable to investors.
4. What’s on Your Wish List: What could put you over the top and accelerate your growth? Do you need to fill out your team of techs or do you really need deeper expertise in compliance management? Is a follow-the-sun footprint what you’re lacking most or would a flagship customer in a new vertical move the needle for you in a big way? Understanding what could be the differentiator makes it far easier to spot potential opportunities for strategic moves and to be prepared if and when they present themselves.
5. Scalable Tools & Infrastructure: Whether you’re growing organically, striking strategic partnerships or making an acquisition, every MSP is destined to have more people managing more services for more customers than ever before. To maintain the quality customers depend on, you’ll need systems that can scale with your business and make it easy for new staff to support multiple solutions and customers with instantly available context across your entire portfolio. Piecemeal solutions that aren’t completely integrated offer too many opportunities for mistakes to be made and critical issues to be overlooked.
Ultimately, finding a solution that can scale to your RMM and professional services automation (PSA) needs is critical to your success.
Miguel Lopez is senior VP and general manager of Kaseya. Read more Kaseya blogs here.
