A lot of the time, we can get caught up in discussions about ‘hot’ markets for MSPs – and the list is growing, from security to cloud to mobile to firewall management.
But it’s important to level set occasionally. The reason these markets are hot is because the technology requirements of small- and medium-sized businesses (SMBs) that MSPs serve is undergoing a sea change.
SMBs Now Have Enterprise Needs
Technological requirements that were once the needs of only large enterprises are now are becoming mainstream requirements for SMBs.
SMBs are increasingly demanding and requiring the same technologies and processes that have been pioneered and used for years by enterprises. This means SMBs are now commonly adopting IT functions such as end-user security, password management, multi-factor authentication, network/systems management, and InfoSec (threat monitoring and firewall management), all of which are required as SMBs’ dependence on their network and data to run their businesses grows.
SMBs Are Increasing Their Rate of IT Outsourcing
From 2000-2010, many large enterprises outsourced, or offshored, significant functions of their internal IT organization to lower cost locales.
The same trend is taking place within the SMB space. SMBs recognize — even more so than the large enterprises of the last decade — that the rate of IT technology innovation and change is putting a strain on their limited IT budgets. SMBs face even more pressure to focus on their core business, and are looking to outsource and focus on their core businesses. But unlike enterprises, SMBs do not have the scale to offshore to an internal low-cost center or large IT outsourcer.
According to research, 71% of SMBs surveyed in 2015 stated they are looking to outsource parts of their IT infrastructure.
In looking at how SMBs take on outsourcing, most SMBs are starting with the most complex and “non-employee facing” aspects of IT. This way, they get the most impact from an outsourced benefit perspective (as non-employee interacting aspects of IT are the most complex and evolving at the most rapid pace). In addition, by keeping employee-facing IT in-house (such as help desk), it minimizes the impact on internal customers.
New MSP Growth Opportunities
In short, SMBs are looking primarily to MSPs to be their outsourcing cost-advantage arm. This has been great news for MSPs which have been filling this SMB need with more services, and driving an increase in demand of more complex services from SMBs.
Overall, the rate of consumption of MSP services by SMBs is expected to grow annually over 45% year over year for the next several years, representing a global market opportunity approaching $75 BILLION USD per year by 2020.
But MSPs also face new risks and market pressures.
Because while the opportunities are clear and overwhelming for the MSP market as a whole, individual MSPs each must adapt to the increased risks of new technologies and competitive pressure.
SaaS and the Microsoft Example
New technologies, especially the cloud and cloud services and applications, have revolutionized how IT is ‘done.’ Take Software-as-a-Service (SaaS). These cloud apps can replace the need for in-house servers and apps that run on them – the very lifeblood of many MSPs.
In fact, SaaS vendors promote the idea that their apps dramatically reduce the need for IT support. Some simple SaaS apps do more or less run themselves. But in switching to the cloud, SMBs underestimate the effort it takes to manage these cloud-based applications.
Let’s take Microsoft’s hugely impactful introduction of Office 365. As customers move to Office 365, this move means less money in MSP pockets as the Microsoft Exchange servers disappear. The typical monthly deal to manage an on-premises Exchange implementation or to host Exchange for an SMB is $200-$300 per month. That is a potential loss of $2,400 to $3,600 a year per client if that business goes away. Not just that, but many clients that adopt Office move backwards and revert to working with MSPs on a break/fix basis only.
The Rise of “Super” MSPs
At the same time, MSPs have matured from part-time operators and small 1-5 person technician-dominated companies five short years ago to larger process-centric organizations with strong technical capabilities combined with professional sales, support, marketing, finance, and management teams.
This scaling has created new tiers of MSPs that have customers (and operations) across larger geographies – regional MSPs and global MSPs – that are changing the dynamics in the market place.
These “super-MSPs” are 100% focused on growth and expansion and employ professional sales, marketing, and technical delivery organizations to acquire new accounts and often displace smaller less mature MSPs. The number of “super-MSPs” with over 100 employees has grown to over 1,500 in 2015 and will continue to grow through merger and acquisition (M&A) activity.
MSP Table Stakes Have Shifted
The MSP community is made up of many diverse types of MSPs with different strategies and goals for success. Some MSPs want to offer multiple services to many different types of customers. Others are looking to expand into larger SMBs, and yet others are running a lifestyle business, and are not interested in significant growth. Rather they just want to continue to operate a steady business serving their customers.
But every MSP – no matter their ultimate goal for their business – needs to understand and react to today’s changing market environment. The combination of competition, downward pricing pressure and demands to broaden their service portfolio to address new customer requirements are squeezing operating margins and reducing the overall profitability of the business.
What are the options for MSPs to adapt, survive, and even thrive in this new environment? I’ll take up that question in next month’s blog.
*This blog was originally posted on MSPMentor.