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:

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.

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:

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:

MSPs are dead. Long live MSPs.