As the Trump administration and Elon Musk’s Department of Government Efficiency (DOGE) continue to shred the federal government workforce with massive layoffs and cuts, U.S.-based MSPs are in a tough spot as they scramble to understand the shifting landscape and how these changes will affect them.
ChannelE2E contacted several managed service providers and vendors engaged with federal agencies and contracts; however, none were willing to provide on-the-record comments regarding how they are managing the situation or what the swift and significant changes imply for their operations.
The DOGE cuts are eliminating tens of thousands of federal jobs, agencies, and departments, gutting agency operations and leaving remaining workforce in a whirlwind.
Several IT analysts contacted by ChannelE2E shared what they are hearing from clients and observing in the marketplace. The consensus is that it is an incredibly difficult time to be an MSP serving federal agencies.
In fact, things are so grim that few MSPs are even willing to talk about it, Noah Dantes, a research analyst with Canalys, now part of Omdia, told ChannelE2E.
“I do not think you will have much luck getting an MSP to respond – I think many are still figuring out their approach since there seems to be a new headline about tariffs and DOGE every week,” said Dantes. “I cannot think of a client or contact of mine right now that would be willing to talk.”
The market is moving quickly and changes are coming, he said. “I think a lot of federal MSPs will be acquired this year. It is a contracting market right now from top to bottom. To survive in the fast-changing federal market, top partners and vendors alike are adapting.”
For top partners, this means building AI expertise, improving partnerships with vendors closely aligned with the Trump administration, and expanding business to the state level, said Dantes. “Expect vendors to increasingly align themselves with the Trump administration’s policies, acquire or invest in AI partners, MSPs, and ISVs, and build up North American inventory to support the coming distribution crunch.”
But even as these changes are taking place, there may be workable alternatives for MSPs to adjust their businesses away from the turbulent federal market today, according to Dantes.
“The real growth opportunity for all partner types in 2025 is in the state-level channel,” Dantes anticipates. “In the wake of federal cuts, Democratic-led states like New York are ramping up their budgets and hiring laid-off DOGE workers to boost services offered at the state level. In the coming years, look for states to increasingly become less reliant on federal funding for support. The Windows 11 refresh cycle is also driving a significant growth opportunity for state partners in 2025, particularly those that are in the education space.”
MSPs working on the state level are “not fundamentally threatened right now,” he added.
MSPs Play Critical Roles with Federal Government Clients: Analyst
Another analyst, Shelly Kramer, founder and principal analyst at Kramer&Co., told ChannelE2E that DOGE cuts will have a significant impact on the MSP market.
“For the federal government, the beauty of MSPs is that they augment existing staff, which is often lean and in many instances bring much-needed skill sets to the fore,” said Kramer. “You do not have to work hard to see the value that MSPs deliver, ranging from operational scalability and agility to shortening time to value on tech investments and tech initiatives.”
The administration’s cuts are resulting in unplanned consequences throughout the marketplace, she said. “The DOGE cuts, which have already impacted the big federal contractors like Deloitte, Accenture, PwC, and others, will no doubt have a ripple effect throughout the MSP ecosystem. In my view, there are tough times ahead – for us all.”
The importance of MSPs working with the federal government was made clear in a June 2024 survey by FedScoop that revealed how federal agencies are working with MSPs, and the logic behind those engagements. “Federal IT decision makers were clear – the federal government's adoption of managed services was already significant, and growing, with 64% of respondents saying they were either already using or considering working with an MSP,” Kramer states.
Federal Contracts Provide Some 9.3% of MSP Revenue: Analyst
Anurag Agrawal, founder and chief global analyst for Techaisle, told ChannelE2E that research from Techaisle's Channel Partner survey, which involves more than 2,500 partners, shows that 9.3% of MSP revenue overall is derived from government contracts, and across all channel types, 11.1% of revenue comes from the government.
“The most immediate impact for MSPs with federal contracts is the potential loss of these contracts and revenue,” Agrawal highlighted. “Contractors have reported a swift decline in federal work following the change in administration, causing financial strain and planning challenges.”
The impact on the bottom-line is real, he emphasizes. “Contract cancellations and federal workforce reductions can delay projects and reduce scope. Agencies with fewer staff may struggle with inefficiencies in contract oversight, approvals, and payment processing, which can further complicate MSP operations.”
This has also triggered additional impacts. “MSPs must also adhere to heightened compliance standards,” Agrawal states. “Fewer government employees mean intensified reviews, requiring MSPs to strengthen internal audits and maintain proactive communication with contracting officers. Especially for Department of Defense (DoD) contractors, staying up-to-date on cybersecurity regulations, such as Cybersecurity Maturity Model Certification (CMMC), is crucial.”
As the DOGE cuts continue and the market sees their full scope, “financial strain from contract losses and reduced project scopes may force MSPs, particularly smaller ones, to consider layoffs,” said Agrawal. “This extends the negative consequences beyond the federal workforce, potentially affecting private sector jobs.”
Adaptability is essential for MSPs to navigate the changes. Agrawal underscores, “MSPs are diversifying their client bases by exploring opportunities in state, local government, and private sectors to stabilize revenue streams. They are also focusing on internal cost efficiency, streamlining processes, optimizing resources, and managing overheads. Remaining informed and adaptable is essential.”
To stay flexible, “MSPs should track federal budget changes, agency priorities, and DOGE initiatives to adjust strategies accordingly,” stresses Agrawal. “Emphasizing efficiency and cost savings in operations can align MSP solutions with government objectives, improving contract retention chances. Strengthening cybersecurity and compliance offerings, particularly for DoD contractors, is crucial. Achieving certifications like CMMC and providing comprehensive compliance services can also help MSPs stand out in supporting federal clients.”
