The MSP market is Dead! Long live the MSPs.

The MSP (Managed Service Provider) business is in trouble, there’s no ignoring that. For sure, if you read the tool-vendor articles, business is booming, but the feedback I hear from MSPs isn’t positive. Believing the vendors is a bit like walking into a car dealership and asking the salesman if you need to buy a new car. The contradiction is telling. The desperation is clear.

The focus of the tool sellers is very much on data collection and management. Growth, we are being told, is about metrics. If you can measure it, you can improve it. I cry ‘BS’ on that message.

I spend a lot of my day advising MSPs on how to adapt their business model to survive and grow in a shifting marketplace. Their message is clear. The market has changed, and their traditional model is being squeezed. They want help and now.

So, what has changed? Why is the MSP market so difficult right now?

The primary reason, I’m sure you are aware, is Cloud Computing. Customers no longer want physical servers sitting in racks, depreciating whilst limiting agility. Have you tried getting your hands on server and PC components recently? The flexibility of on-demand pricing of paying only for what you consume has a real appeal to many.

As the market is being squeezed, there is a rush towards to the lowest price as MSPs compete for a smaller piece of the pie. MSPs are crushing each other whilst the larger suppliers who have the volume to weather the price-war, are doing the same. And then there’s the pricing issue.

How does an MSP structure its pricing model, per device per user, consumption, or on a fixed fee basis? It seems customers demand different models driving up complexity and lowering margin. pricing also doesn’t allow for any consideration of inflationary prices. Tool suppliers are increasing costs at an alarming rate and often mid-cycle on the MSPs. It’s almost impossible to align customer price rises with supplier increases. The net result, margins are being squeezed unlike ever before. MSPs are being throttled by those that they helped to expand in the first place.

As the move towards the cloud accelerates, hardware and software suppliers are moving their business model away from using MSPs as middle-man and attempting to sell direct. This pressure from suppliers is about removing MSPs from the future equation.

Over time, clients grow, often outgrowing their MSP as their business model adapts and they need different services from their suppliers. Often, they need CTO/ CIO level advice on an interim or limited-hours basis and this is where most MSPs fail. It’s through a lack of desire, it’s through a lack of experience. Technology, for a medium to large organisation, becomes about so much more than what technology to use. It’s also about business process, resourcing, financial objectives, marketing, and product design as much as it is technology. The traditional MSPs haven’t the exposure to these dynamics and their offerings stop to grow with client demand. Not through a lack of desire, just a lack of knowledge and experience.

The final change causing pain relates to knowledge and skillsets. The traditional MSP has been focused upon a business and staffing model where on-site hardware and desktop support was the norm. It’s not unreasonable to state that most MSPs haven’t adapted well to the cloud computing model instead denying its existence and refusing to adapt in the belief that the market will come back. Sorry, it’s not.

As you have read by now, the traditional MSP model is being squashed from all angles with greater competition for a smaller pool of customers. It’s also facing a smaller margin on hardware and software sales. So, is it time to pack up and go and get a corporate job in technology? After all, there’s a pent-up demand for experience right now.

The short answer is no. The long answer is also no.

Providing individuals can adapt their business model and thinking.

To start, an MSP needs to adapt its business model so that it becomes more agile, scalable, and responsive to market forces. Look at your current and target customer base. What do they have today that is a ‘must-have’, and what is a ‘could-have’? Instead focus on how to source, resource, and develop these aspects of the client offering? When that’s done, accept instead that it will need to change again next week.

Then MSPs need to accept that the cloud is here to stay and ignoring it is tantamount to commercial suicide. Yes, you could carry on as you are but that’s delaying the inevitable. You’ll also be chasing a smaller pool of clients for a smaller margin. Instead, MSPs need to adapt, learn, and change their offering. It’s about being more strategic.

A great MSP is there to help its clients grow, it’s more than managing the as-is. If this is the current business model, then that’s not healthy for either party. Growth is a strategic mindset, and a good MSP adapts their thinking to reflect the client and their needs. If the MSP supports growth, then they grow with their clients.

Providing a cloud solution without any structure or strategy is nothing more than a band-aid and something that must be avoided. The solution offered fits neither party, nor both will feel the challenges that a reactionary model brings with it. Besides, adding a cloud offering, it’s not going to add strategic value.

There are two ways that an MSP can bring the necessary change into their organisation to better support both themselves and their clients. The first way is to hire a permanent CTO/ CIO specialist. The second is to leverage one of the fractional management consulting specialists to work alongside both parties. Either option works, it’s about which model works best for the MSP and its financial and operating model.

The question shouldn’t be whether an MSP should adapt, it should be about when, and how.

Deming, the US management leader Summed it up best,

‘It is not necessary to change. Survival is not mandatory.’