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How Changing SMB Client Requirements Are Reshaping the MSP Market

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Technological requirements that were once relevant only to large enterprises are now becoming common for SMBs.

We often 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 the small- and medium-sized businesses (SMBs) that MSPs serve are undergoing a sea change.

SMBs Now Have Enterprise Needs

Technological requirements that were once relevant only to large enterprises are now becoming common for SMBs.

SMBs are increasingly demanding and requiring the same technologies and processes that have been pioneered and used for years by enterprises. It's now common for SMBs to adopt IT functions such as end user security, password management, multifactor 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 to 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 limited IT budgets. SMBs face even more pressure to focus on their core business, and are thus looking to outsource. But, unlike enterprises, SMBs do not have the scale to outsource to an internal low-cost center or large IT outsourcer.

According to research, 71% of SMBs surveyed in 2015 are looking to outsource parts of their IT infrastructure, opposed to just 12% in 2011.

In looking at how SMBs take on outsourcing, most 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 because these aspects of IT are evolving at the most rapid pace. In addition, by keeping employee-facing IT in-house (such as help desk), impact on internal customers is minimized.

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 that have been filling this SMB need with more services, and driving an increase in demand for more complex services from SMBs. 

  • In 2011 MSPs averaged 2.4 services offerings per customer.
  • In 2015, MSPs averaged 5.7 services offerings per customer.
  • In 2018, the projected average number is 7.5.

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 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, there will be 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 to $300 per month. That is a potential loss of $2,400 to $3,600 a year per client if that business goes away. In addition, 22% of clients that adopt Office move backward and revert to working with MSPs on a break/fix basis only.

The Rise of “Super” MSPs

Meanwhile, in just five short years, MSPs have matured from part-time operators and  one- to five-person, technician-dominated companies 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--changing the dynamics in the marketplace.

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 more than 100 employees has grown to over 1,500 in 2015 and will continue to grow through merger and acquisition (M&A) activity.

The dynamic of the maturity of small MSPs and the emergence of super-MSPs has substantially increased the competitive landscape for MSPs. In 2011, 89% of MSPs said they were not seeing any competitive pressure within their customer base from other MSPs. Contrast that with 2015, when 66% of MSPs said they were seeing  competitive pressure within their customer base from other MSPs.

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 the ultimate business goal--needs to understand and react to today’s changing market environment.  The combination of competition, downward pricing pressure and demands to broaden service portfolios 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.

Joining Kaseya in 2012, Miguel Lopez brings over 20 years of experience to his role as SVP, Managed Service Providers (MSPs). In this position, he consults daily with MSPs to help them solve their clients’ business problems with technology solutions. Prior to joining Kaseya, Miguel served as the director of consulting services for All Covered, a nationwide technology services company that is a division of Konica Minolta Business Solutions USA Inc. In 2008, All Covered acquired NetCor Technologies, a leading MSP that Miguel founded and managed since 1997. NetCor specialized in serving highly regulated industries such as healthcare, CPAs, law firms and retail companies.

 

 

 

 

 

 

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