January 31, 2025

Episode 60: Eat Less, Drink Less, Exercise More

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Erick and Rich discuss what dual acquisitions by Cytracom and AvePoint say about the importance of platforms in managed services, as well as why and how to get in on the large and growing opportunity in co-managed IT. Then they’re joined by Peter Kujawa, vice president and general manager of ConnectWise’s Service Leadership unit, for a fascinating, fact-filled exploration of what Service Leadership’s latest MSP benchmark reports says about the state of the channel. And finally, one last thing: what happens when generative AI gets snippy.

Discussed in this episode:

Hot Take: AvePoint, Cytracom, and the Platform Play in Managed Services

How do AvePoint and Cytracom define platform?

Service Leadership Q3 Index Data Reveals Revenue Growth Slowdown But Continued Profitability for Managed Service Providers and Revenue Growth for Value-Added Resellers

Google’s NotebookLM had to teach its AI podcast hosts not to act annoyed at humans

Transcript:

Rich: [00:00:00] And three, two, one, blast off, ladies and gentlemen. Welcome to another episode of the MSP chat podcast, your weekly visit with two talking heads, talking with you about the services, strategies, and success tips you need to make it big and manage services. My name is Rich Freeman. I’m the chief analyst at Channel Mastered, the organization responsible for this show.

I am joined this week as I am every week by our other co host, our chief strategist at Channel Mastered, Erick Simpson. How goes it? It goes well, Rich,

Erick: as we record this I can’t believe that we’re already halfway through January as of this recording right now. And holy cow, it just seems like Christmas was yesterday to me.

Rich: And this is actually our our, what, our third podcast episode of this very young year actually, cause we had a bonus episode out earlier in the week. So yeah, we, it’s been it’s been a busy half month.

Erick: Yeah, hit the ground running, as they say.

Rich: Which is what we love to do. The other thing we love to do is dive into a story of the week.

And this week it’s two stories that are one story. So bear with me on this a little bit, but as we record this, there were two different acquisition announcements made in the channel this week, by the time people are listening or watching, this is last week’s news, but this week as we record we learned that Citricom which is a company that specializes in unified communications and SASE, has acquired a company called Televi, which does attack surface management and data security posture management.

And actually just a few days ago in that bonus episode, Erick, we were talking about the importance of of data security. This acquisition gets Citricom into that realm there. The other acquisition that happened just one day after the Citricom news broke was AvePoint, a data management company with a particular specialty.

In the Microsoft cloud, although they do Google and Salesforce as well, they acquired a SaaS management company called Edentic. Now on the surface, these two acquisitions have nothing in common with one another. What they do have in common though, Erick is the thing that turns these two stories into one on my point of view, both companies and explaining why they made these acquisitions said.

That this is part of our larger, longer term plan to build a platform. And it’s all about platform in particularly in the world of managed services these days. Isn’t it, we’ve spoken before about how Ingramicro is redefining itself as quote unquote, a platform company, we know. Kaseya is all about platform, ConnectWise is all about platform Unable in the cyber security realm that you see companies like Palo Alto and CrowdStrike talking all the time about this phenomenon known as platformization.

So everybody is interested in building platforms. And precisely because of that, everyone is using that word a lot, and I suspect, I fear a little bit that the definition of platform is going to get a little bit harder and harder to pin down over time. Cause when Ingram says they’re a platform company, they’re not really talking about what AvePoint is up to, but there is a similarity across all of these different platform plays out there and that there is a widespread, very accurate assessment within the world of vendors and distributors.

That what MSPs want is a consolidated, a smaller set of deeper, better vendor relationships. They’re looking therefore for more integrated suites of products. They want to be able to get or do more of their work with fewer and fewer vendors. That implies. Integrated suites of solutions.

And that in turn implies platform everybody in, who’s working with or selling to, or through MSPs understands the importance of having a platform play because it plugs in so closely to what MSPs are looking for right now. So two stories Erick, that on their own are interesting.

And if you want to, we can talk about, where these two vendors, Citricom and AdPoint are going. But what was interesting to me is the way that, they it together. Two different platform building stories within a 24 hour span,

Erick: And you’re right, rich. I’m seeing more and more of that term being used.

In fact I’ve seen it with Oh, my goodness. I just had it on the tip of my tongue. More and more vendors are doing these acquisitions that Are now being promoted using the term platform. And for the first time earlier this week, now this may, [00:05:00] I may have missed this in prior marketing, but I started to see scale pad talking about its platform as it’s doing acquisitions and putting these.

Different organizations together and integrating them for the MSP. So I think you’re right, Rich. I think that this is the term that is gaining a lot of traction right now. It is appealing to MSPs because yes, we want to, consolidate. We want to have less panes of glass as we service our clients.

We want to make it easy and more efficient for our technicians to do their work. And to stay within vendors ecosystem. And I think platform is the way that we’re seeing this being delivered now. And to add, the, our favorite term on top of it, a little sprinkle of AI on top of it, to add even more value. I don’t see this slowing down rich. I think that, my experience being in the channel for, the few years that I’ve been in it we seem to like. hold on to some of these. Buzzwords and to your point, they start to blur the lines over time as everybody says, Oh we can get more clicks if we start using that hashtag.

So what we. What we identify as being a platform today. Maybe a little bit different in 12 or 18 months down the road in internet time. What do you think?

Rich: It could be. And even today again, I think how company a defines it is likely to be different from how company B defines it as well, because there is that element of everybody wanting to be in the platform neighborhood and throwing that word around scale pad, by the way, is an excellent example of this phenomenon.

In a louder way about platform last year I’m going to guesstimate six ish months ago around the time Chris Bay stepped in as CEO and Dan Wensley moved on to another role within that same. Set of parent companies and so on. And then another one that popped into my head as you were talking there is there was an integration announcement between Halo PSA and Ninja one last year that one of the.

Two companies involved in that described CRN as a kind of platform. It was like they understood we’re not actually going to at least in the short term, build a platform. But if we’re not talking about ourselves in the context of a platform, we’re going to get left behind. And okay, we, they made an integration agreement and they said, this is our platform place.

So yeah, it is absolutely everywhere. That is a great segue to your tip of the week. Actually, cause if you want to talk about something else that is everywhere and has been for a good four or five years right now, it’s co managed IT another term you hear a lot and a trend that isn’t going anywhere.

What does your tip of the week have to do with commits?

Erick: I love that. I, that’s the first one I’m going to borrow it. And rich this really bubbled up for me the last week or so, as I’m been working with a new MSP client helping them improve their business performance and things like that.

And they are traditional MSP offering fully managed services. to a segment of their client base that they describe as between 20 and 100, maybe 125 to 150 on the at the outside. But those are outliers. This is they own the complete responsibility of managing technology environment, security, full stack.

You you name it. That’s they own that. And then they’ve been doing home managed it now for a while, as many MSPs. Have been able to succeed in selling and delivering more co managed I. T. services based in large part, as I’ve talked about before on the program on what happened during COVID. And now these internal I.

T. organizations were left flat footed having to support this, geographically dispersed work from anywhere. Staff contingent MSPs were there at the ready. And so I know a lot of MSPs that increased their co managed IT revenues by as much as 30 percent or more because they were ready and took advantage of it very quickly.

Guess what, Rich? That has not gone away now. And I think that internal IT departments And their leadership now see external expertise from a managed services perspective in a very unique and different way. And it may be a little bit, I’d love to get your input on this piece, but maybe all of this has also been accelerated a little bit by these same internal IT departments hiring outsourced resources, in other countries as well to support them.

And now they see MSPs as being this. Another good option. So [00:10:00] this particular MSP says anyone from about 100 to 200 to 50 is that mid market size for them. They’re promoting and marketing and selling co managed IT and they have a bundle of services for those folks. So they’ve segmented their target audiences.

Not only by what they sell, but whether it’s fully managed or co managed, which is very interesting. So my three tips are how to take advantage of the co managed IT opportunity. If you haven’t already as an MSP, number one, you’ve got to identify and understand that the services that you deliver now are in are in service.

Of a larger vision and goal that you don’t specifically direct or manage. So you are a gear in the machine that is the internal IT department now. So understanding what those particular needs. And pains are of a decision maker. That may not be the organization’s CEO. It may be a technical leader, a cybersecurity leader, someone that has budget authority, but isn’t the same decision maker that you deal with.

When you’re doing fully managed I. T. Smaller organizations that have not yet grown to the point where they have an internal I. T. Resource at all. So promoting those, identifying what those pains and opportunities are and then promoting them and creating a very tight messaging process and a sales process around These complimentary services that you can deliver to fill in skills gap or resource gaps for an internal I.

T. department. Tip number two, defining the clear roles between what you’re delivering as the co managed outsourced I. T. provider and what the internal I. T. department, their team is responsible for. Having really clear lines around what that scope of work is. I saved a lot of MSPs bacon and not having that be blurry.

And then the internal IT department, I experienced this myself as well. Tossing stuff over the fence going, Hey, can you do us a solid and take care of this too? Hang on a second, right? That’s change management now outside of our scope of work. And if we agree to do something that is right within our wheelhouse and we kill it and we’re measured by that success and they throw us something that we agree to do maybe a little bit outside of that wheelhouse, we don’t want to be judged differently or less effectively or efficiently because we may be figuring that out or helping out just in pinch hit a scenario.

Be very clear about that and let them know, Hey, we’ll do this for you. We’ll bill you this way, but just know. That it’s outside of our agreed upon scope of work. We’ll take this on as a side opportunity and work it that way and number three providing that specialized expertise a lot of msps that I talked to rich position their co managed it in one of two typical flavors.

The first flavor is the value is we will take care of the noise for you so that your internal it team can focus on these higher priority things. So like we’ll do the service that’s the level on the level to several escalate things up. That’s one approach. The other approach that I see that I like better, that is much more strategic and offers a lot more business value as we like to talk about on the show rich is having a specialized expertise, whether that is cyber security or Microsoft Azure or AI, right?

Something that you layer on top that internal it department simply doesn’t have the skills. Or the the justification to hire somebody internally to do that. And now you’re adding more additional value that is not a kind of a commoditized service like help desk.

Rich: First of all, in terms of the the question about why this is maybe catching on now that you raised before, I think a.

That you know, there was this anxiety within corporate I. T. departments. Once upon a time you open the door to some outside I. T. provider, and we’re all going to wind up losing our jobs. They’re going to take our jobs. And I think what people in the. Corporate I. T. World have seen in the last four or five years is that’s not truly not the case.

And I just think even from a peer to peer feedback perspective, this C. I. O. R. I. T. Manager talking to another. I think there’s less concern. About the dangers of letting an MSP in I also think that there is more of a an appreciation of desire in the corporate IT world to get into these more sophisticated kinds of digital [00:15:00] transformation projects and AI.

And so they really want to have the time and the resource to focus on things that are more strategic. And so the value of having somebody handle some of this other stuff. That is less strategic, but very time consuming. I think that has really caught on to some degree as well.

In terms of the other thing I want to say, you were talking about the different flavors, the different models and so on. And I just want to point out, there are actually a lot of different flavors and models for how M. S. P. S. Do co managed I. T. And I think that the kind of examples that you provided are the most common.

The one where we’re going to take care of the noise, as you put it, or we’re going to take care of this particular skill requirement that you don’t have. And we’re just going to do that. The impression they get. I don’t have data around this. That’s the most common, but I’ve heard about MSPs out there who enter into a co managed I.

T. Agreement with a company and they bring a tool stack to that company. They teach the I. T. Department how to use it. They set everybody up to actually Do that work themselves. And then the MSP is in more of a support backup kind of role. If you have a question, if you’re shorthanded, if you need to escalate beyond level one or something like that, you don’t, that’s where we and I’m sure there are other kinds of agreements and delivery models that we’re not even talking about.

So there isn’t just one way to do co managed IT. And I would encourage people, who are. Hesitant to get into that area because it doesn’t feel like a fit for their business to think if there is a way to do it, that is a fit.

Erick: Yeah, no, obviously there’s opening up the conversation and having the MSPs consider it is step one, and then to determine what can they add that’s valuable to that particular internal it department. Some folks want the noise. But some other folks want more strategic value, upskill competencies, certifications, those types of things. I remember rich back in my enterprise days. We were very constrained in our, in, in our ID chip, in our it department around headcount.

Like we could not hire the folks that we needed, but boy, we could bring on as many contractors as we wanted. It’s that’s what it felt like to me when we needed some outsourced expertise. It’s no we are not hiring. We have a hiring freeze, but yeah, there’s budget for hiring contractors and things like that.

If that’s a way to. Qualify an internal IT department that may be a value. I’d say, Hey, if you guys are, constrained on hiring high level engineers or other folks on the team to do service desk work or whatever it is, do you have some budget to allow us to come in?

And add that and fill one of those gaps for you. So again, just another way to look at it.

Rich: Okay. It is time to head into our spotlight interview segment for this show. And you remember some episodes back we had Colin Knox from gradient MSP on the show, you’re sharing some really interesting data that gradient has collected and published.

And I hope I’m remembering this right, but I think it was after, or at the end of that interview that we were. Talking about is, if you’re into these kinds of statistics about MSPs, wouldn’t it be great? If we could get Peter Kujawa from Service Leadership, which is part of ConnectWise, onto the show.

And by golly, we’ve done it, folks. When Erick and I come back from the break in a moment, we will be joined by Peter to talk about his latest data set. It’s Q3 data. That is the most recent complete data that he has and that Service Leadership has. It’s going to give us a view. Into what the managed services landscape looks like heading into 2025.

And it’s all coming your way in just a moment. Stick around. We. We’ll be right back.

All right. Welcome back to this episode of the MSP chat podcast for our spotlight interview segment where we are pleased to be joined by the vice president general manager of ConnectWise’s service leadership organization. His name is Peter Kujawa. Peter, welcome to the show. Thanks Rich. Glad to be here.

Erick, nice to see you. It’s

Peter: seeing you, Peter.

Rich: We’ve known each other for a while, and my relationship with service leadership goes back to your predecessor, Paul Dippel but for folks in the audience here who are new to you, new to service leadership tell them a little bit about yourself and about service leadership.

Peter: Sure. Yeah, we’ve been working together the last few years. I joined service leadership in October of 2021. Prior to that, I ran a pretty decent sized MSP. About 17 million when I left there in 2021, but I ran that from 2020 to [00:20:00] 2021 and did some m and a and did a significant turnaround on that MSP.

And largely I attribute a lot of that to starting to benchmark. In 2011, we started to get data and learned what we were doing wrong. So we were a member of a peer group for nine years. We benchmarked 4, 9, 9 or 10 of those years where I was there. And it was a big part of the success that we ultimately had this business.

So in 2021, I joined service leadership to lead it. Paul Dippel had sold it to ConnectWise and Paul wanted to transition into his next phase in life and needed somebody to run it. It was, so I was jumped at the chance to join service leadership. Today, three years later I am at leading a new CEO asked me to lead a new business unit that combines.

Service leadership, it nation, including the events and the peer group community, the evolve and service leadership, peer group community, as well as our partner advisory council organization. We combined all of those into a single org. That’s we have nicknamed partner communities. So that’s what I’ve been doing these days.

Rich, no rest for the wicked.

Rich: Yeah, that is a giant job. It’s really, and it makes a ton of sense for those parts of the connect wise business to be in one place, but boy, oh boy, that’s That’s a lot to do. Now, most of what we’re gonna be talking about in the interview here is results that service leadership saw in the most recent quarterly installment, which happens to be the Q3 installment of your benchmarking data.

So just tell folks a little bit, because as far as I’m concerned, there really isn’t. A data source, an MSP benchmark that’s deeper or more authoritative than what you guys collect. Tell folks who are new to that a little bit about what’s in there and where it comes from.

Peter: Yeah, you’re exactly right.

There’s nothing like it from a partner performance standpoint. It was originally Paul started the company with the idea that there was a lack of independent data out there and also that the data that was out there, you couldn’t trust it because it didn’t compare apples to apples. And what I mean by that, the way that we solve those things is really a couple of significant things.

One is we benchmark 10 different business models in the TSP space. If you’re an MSP and you’re trying to understand how your service gross margin stands up, you want to compare yourself to other MSPs. You don’t wanna compare yourself to an app dev shop or to a var, for example. And if you’re, same thing, if you’re a VAR or an app dev shop.

So we look at the revenue mix and depending on the revenue mix, we our system determines what your business model is. For example, if you are 60% or more product, both recurring and non-recurring, Euro var or product centric, under our terminology, if you’re 40% or more services, then you fall into one of nine.

Infrastructure application development PDMs predominant business models. And if you benchmark with this, that you’re going to be compared to others who are doing the similar business model that you are. The second really huge differentiator. Is service leadership has a single chart of accounts called the N.

S. P. C. O. A. Which is the normalized solution provider chart of accounts and everybody who benchmarks with us aligns to that chart of accounts. The significant of significance of that is really huge. So let’s say I’ll look sometimes at industry reports that come out that don’t have that kind of alignment and I’ll see something like, let’s say.

Managed service gross margin at 75%. Okay, as an example. When I see that, I know that they are not measuring gross margin the same way that we’re measuring gross margin, which is to say that we include both tool cost and labor cost to deliver the services in our gross margin calculation. So all of our revenue gets put into the same buckets.

All of our expenses gets put into the same buckets by everybody who benchmarks. So when you get your reports and the way that it works is you put your data in every quarter and our system is state of the art. It’s built on a zero 100 percent built on a zero as of about a year and a half ago. And you enter your data in every quarter.

Right now, actually, data is being collected for your Q4 until the 22nd of the month. After that, we run our, what we call our best in class calcs, and then we reopen it up and providers can log into the platform and they can see how did I do? How did I do compared to last quarter? How did I do compared to a year ago?

Most significantly, how did I do in over 80 different KPIs compared to the top quartile, most profitable companies in my business model known as the best in class. So I can see as my, how’s my product gross margin, my service gross margin, [00:25:00] my productivity and I spending enough for too much on sales and marketing is my G and a lining up.

What? So I get really granular feedback if I’m a partner every quarter. Not only how I, what my profitability was, but how did I get there? What did I do? And what do I need to improve in the business that because we collect that data from a 10 different business models all over the world, every quarter.

And it’s a large sample set. We have data that nobody else has on what real world performance looks like today. We’re able to just, we’re able to see it in a way that nobody else can see it.

Speaker: So let’s let’s get into what performance looks like today or as close to it as we can get, like you said, you’re collecting the Q4 numbers now.

So the most recent data available is the Q3 stuff that came out during it nation connect in November. And if I was to zero in on a headline, let’s say out of that report, it would be that revenue growth, and we’re not talking revenue, but revenue growth for MSP peaked in Q3 of 2022.

It’s been declining more or less steadily since then, and in Q3 of 2024 revenue growth for MSPs continued to decline a little bit, not a lot, but a little bit. One explanation for that might be that there was, giant growth, giant revenue growth for MSPs coming out of the pandemic and inevitably it was going to come back to earth.

But from your perspective what is going on behind that slowdown in revenue growth for MSPs?

Peter: Yeah, to be clear, first of all what you’re referring to is managed service revenue growth. And so we car, The data set that you’re referring to, we pulled out of their private equity growth because the private equity growth is heavily based on acquisitions, and we really wanted to get a feel for what was going on in organic growth.

And so we ran a new data set a couple of quarters ago and have continued to update it. But what it shows is historical pre COVID revenue growth for managed services was right around 12% going back years, plus or minus 2 percent of 12%. Anything between the 10 and 14 percent historically was pretty normal.

Growth 14 was actually pretty high. What we saw during COVID was we saw a couple of quarters that were over 25 percent growth on a four quarter trending basis. That’s unbelievable growth. So we’ve been coming back down, but I over the past couple of quarters, we’re still over 10 percent on a trending basis.

And the plane appears to be landing. We think we’re going to, the growth will still be double digits. But definitely it’s coming down. There’s three reasons why number one is the one that everybody thinks about with organic growth, which, of course, is new customer growth, right? You go out and you land a new logo and you onboard them and that’s going to be 100 percent new growth.

What? And there was a lot of that during cope. There were a lot of companies that for the first time just realized that they could not handle doing I. T. Anymore. The work from home and hybrid and all the security issues that come with that definitely accelerated some of that growth. But the other two reasons were folks were adding a lot of new employees.

And as a result, most MSPs are charging on a per user basis. So yeah, If your customers are growing, so are you. That’s organic growth. But the third one is much more, has much more of a dark edge to it. And that is inflation. So when you’re doing 10, 12 percent increases for your customers because you’re getting whacked with 10 to 12 percent increases, you’re having to pay your team to do who are doing the services.

It looks really fun on the chart because it’s a really nice growth spike. The revenue is up and everybody’s excited about it, but what doesn’t show up on that chart, at least, is that it really negatively impacted your service gross margins in the meantime. And for MSPs, the downside of negative wage increase wage growth is gonna be, it’s gonna hit you much faster than the upside of the revenue growth will.

If, for example, today’s a Friday. Anybody who’s run an MSP knows that Friday afternoons get to be a pretty dreadful time. Sometimes you, that’s when your techs tend to come in and put in their notice. So you get the tech who comes in on a Friday afternoon and you decide to match their offer.

That’s going to start hitting my income statement in the next couple of weeks. I’m going to, the next payroll is going to start, I’m going to have to start paying them more. But the customers that they’re servicing, I may not be able to increase them for six months, eight months. And so a lot of that revenue growth that hit during COVID was fueled by inflation.

As a result, we saw constriction on service gross margin and [00:30:00] specifically managed service gross margin. And so interestingly, the last few quarters, even though organic revenue growth has slowed a bit, profitability has actually held its own and actually come up a bit. Service gross margins have improved a bit over the past few quarters.

So that’s all good stuff. So the point of that is revenue growth. Yes some of the craziness that covid has come back to earth, but that’s okay. It was a great industry before covid. We had four really wild years, but getting it back to a more normal growth time, it’s still healthy growth, there’s still plenty of profitability to be made and it’s still a good market out there.

Erick: Peter you and I had known each other for a while as well. And in fact, I’m very familiar with service leadership because as part of. The HTG peer groups in HTG one you know with Arlen Sorenson back in the early days and with Paul Dippel introducing this methodology and platform to us, we participated in all that and got a tremendous amount of benefit from this data in our group in the early days.

It’s a much different world today. We sold our practice in 2007. So the things that we’re seeing now are just amazing from a recovering MSP like myself to see the tremendous growth that we’re seeing. So my question to you is, where do you see, or where do you foresee the largest opportunity in not only revenue growth, but also in profitability growth?

Or MSPs, if you had to look into, the future for 2025, where do you think those opportunities are for MSPs now?

Peter: A few things. Number one, it’s fun that you brought up Arlen and HTG, a little known fact that we’ll be talking about a lot throughout this year and it nation is this is actually the 25th anniversary year of the peer groups that Arlen started HTG 25 years ago.

And it’s amazing today to see. 600 or so companies worldwide getting together every quarter. And it’s amazing how the tens of thousands of lives that program has positively impacted. And yeah we benchmark, we have for many years, we benchmark 100 percent of the community. If you’re going to be a peer group member with HTG or service leadership groups under HTG, you’re going to benchmark.

You’re also going to use sleek, which is our operational maturity level evaluation tool. To answer your question, though, about growth and where we see growth and where we see profitability opportunity, we think, first of all you’ve been in the industry a long time. So what’s old is new.

And vice versa. I remember the year I joined, I came from being a CEO at a financial technology firm. So I came from outside the industry and I remember in 20, 2010 and 2011 going to comp T events and going to other events and having MSP owners who’ve been in the industry a while, all really depressed and they were all telling me you shouldn’t ever join this industry.

It’s about to die. Sbs servers going away and the cloud is gonna put us all out of business and all of the cloud providers were talking about how bulletproof they were and they could do. And there wouldn’t be customer service needs like there were today. And guys are all, it was a depressing place to go to, to be at the time.

And. What did we see then we saw an additional complexity that was created the additional need for security service that is that were created the additional need that companies had for somebody to come in and really tell them how to navigate all of this and really help lead them through it and provide them that kind of guidance.

It’s no different today. We saw that wave with cloud. We’ve seen that wave and that wave is continuing with cybersecurity. And we’re definitely seeing that today with A. I. We’re in the early innings of A. I. But customers out there, the customers of M. S. P. S. They’re all asking for help. They’re all reading the same articles that everybody else is.

And in 2011, you couldn’t read an article about I. T. Without cloud being worked in every fifth word or so today. I think it’s the same ratio. You can’t read an article about I. T. Services without A. I. Being about every fifth word or so. So if I’m running an M. S. P. Today, I’m going to be focused in on building out building my services in a way that are going to really appeal to the strategic buyer, the buyer who under, who understands the impact.

That high quality managed services and I T makes on their businesses. That though, those kind of buyers are less price focused, they’re more results focused, and they want somebody who’s going to [00:35:00] help them understand what they should be doing or what lever should they be pulling on technology to achieve better business outcomes for themselves.

And so I’d be making sure that my, my qualification processes and sales. My front end, my assessment processes, all of that should be designed to help me be more appealing to that buyer. And then I should be built making sure that I have a QBR process that is not focused on tech, but is focused in on those kinds of discussions.

It should be on understanding their business today and businesses change, people come and go and businesses, you need to relearn what their objectives are, you need to reeducate them on what you do, and you need to be having discussions with them on a regular basis to understand their needs and then be bringing them solutions that can help them whether they’re coming from you as a provider, Or whether you quote unquote know a guy.

Either way, if you can add value to a business owner or executive to help them achieve their business goals, they’re going to need to continue to have you around. And that’s, those are going to be the higher value, really higher quality clients that if I’m running an MSP today, I’m going to be focused on finding.

So I think, yeah. That’s where you’re going to find a good revenue growth from the answer. Your first question, your second question on profitability, the model is well known on what drives success. Yet we continue to have about 30 percent of MSPs, either losing money or barely making any money today. And when I popped the hood on those MSPs.

They either have a bad understanding of what they should be charging what efficiency should look like for them. They just oftentimes struggle, they don’t have the benchmarks or they’ve chosen to get data from a source that maybe doesn’t translate to their business. But first of all, you have to understand how you’re doing and where you have opportunities for improvement.

You might be doing great running your service operation. Your service gross margin might be off the charts. But I had an MSP I worked with recently who was spending three times best in class on sales. I don’t care how Efficient. Your help desk is and your project team is when you’re spending 45 percent of gross margin on sales, you’re not going to make money, right?

So in that case, they needed to understand that. But we often see the opposite very efficient sales and marketing engines. with really inefficient service delivery engine. So understand your business specifically. Benchmark if you’re not benchmarking, join a peer group if you’re not in one, but understand where to focus.

And then the second part of it is you’re gonna have to commit to some pain. Everybody knows what drives weight loss and fitness. Eat less, drink less, and exercise more. Yet yet if you look at me, I need to apply all three of those concepts a bit more to my life. There’s times I’m better than others, but but the same thing goes true with MSPs.

I know a lot of MSPs who know all this. They look at their numbers. They know what the numbers are telling them. But you’ve got to have the commitment to action and you’ve got to follow through. And oftentimes that’s the value of the peer group is holding you accountable to following through on taking difficult action.

The MSP that had that really high sales cost, they had to go back over a period of about three or four quarters. And completely reengineer their comp plans, their approach to sales, who they are paying for what they were overpaying. But those were really tough moves to make. They came out fine on the other side, but they’re not fun while you’re going through them.

So understand where you are, but then take action. Be willing to really do the things you need to move the needle. If you do those things, you will get better results.

Rich: So let’s stay on the topic of profitability here because another interesting finding from your Q3 data was that in, in aggregate for all MSPs EBITDA was 13.

2% on average, which is actually down a little bit, but that’s Consecutive quarter. Apparently that EBITDA has been averaged EBITDA has been above 13%. Compare that, beyond those three quarters, what does that look like historically for MSPs? And what do you think, to the degree it’s different, what do you think accounts for that level of profitability?

Peter: Yeah, it is different. So if you go back to COVID, as we were talking about the negative impact of wage inflation during COVID, despite all of that rapid growth and revenue that we were seeing for managed services, we were seeing average profitability more like 11. 2 or 11. 5, and historically, if you go way back, commonly that was in about the 10.

percent range. Average profitability has come up, and one of the reasons why is that the MSPs on the bottom end, [00:40:00] that there’s less MSPs that are losing money today than there were a couple of years ago. Today is 14 percent of MSPs in Q3 lost money. And that’s terrible. That’s 14 percent more than should.

But it’s way better than the 26 and 28 percent we saw a couple of years ago. So the top end, the best in class are still averaging around 23. 5 percent EBITDA. And so we have plenty of MSPs out there that are doing 20, 21, 22. And obviously, because that’s the average, we have a bunch of them over 23.

5%. So it’s an industry that you can do really well in, and you can do it on a sustainable basis, quarter in and quarter out, if you apply the right business principles to running your business.

Erick: Can’t hear you. Sorry, Peter. You talked a little bit earlier and answering my questions about, the opportunity for, new services, AI and things like that to grow revenue. But project and professional services revenue was down quite a bit in your Q3 reporting. Regardless of the need for AI and these complex new services and solutions.

What kind of insight can you share about why that might be?

Peter: We had a really interesting data set last year that you may have seen it got a little bit of play on social media on LinkedIn particularly, but we got approached early in the summer by a reporter who asked us if there’s any correlation between U.

S. presidential election years And revenue growth for MSPs and we talked about it internally and we thought that’s a ridiculous premise. There’s no possible way. That there’s a correlation on these two things, but being curious about it, we decided to run the data set. And as it turns out, there is a dramatic correlation in the last four presidential election years, revenue growth for MSPs.

And this is not just managed service revenue, but project revenue product All of it. Revenue growth was down from previous year between five and a half and eleven and a half percent. And last year, the trend continued. We think when the final numbers are in, revenue growth rate will be down about eight and a half percent from where it was in 2023.

So the logical question, once you see that, is, of course, why? Why would a presidential election impact what customers are spending with their MSPs? And when we looked at it, there’s really two things. One is in the U. S. Primary season starts in January, right? So all year long, starting in January, the non incumbent side in every presidential election Spends a lot of money educating the public as to why the economy is bad and why they will do better.

And at some point as a business owner, you start to hear that message, right? At least in the back of your mind, you start to agree with it. Maybe not the second half of the premise, but at least you start to recognize the possibility of the economy being worse. The second is by definition, a presidential election brings uncertainty and.

Our experience is businesses do not like to sign large project contracts and large new managed service engagements at times when they have uncertainty about the future of their business. In November, which is almost the end of the year at that point, the election is done, and businesses have certainty.

They may like the outcome, they may not like the outcome, but at least they know who’s going to be president over the next four years, and the messaging goes away. The other thing that we’ve seen is starting late in U. S. presidential election years, MSP start to get signatures and revenue starts to go back up, including project revenue and the following year.

So we’re pretty optimistic that trend will continue again this year, that you’ll see a nice bounce back effect in 2025 on and that’ll that should include projects as well.

Speaker: I want to go back to EBITDA, actually, because you mentioned before, one of the things you’ve been doing for a little while now is breaking out data for private equity backed MSPs, and this reveals some interesting patterns.

So we were talking about the fact that for all MSPs, average EBITDA was down a little bit to 13. 2%. It was down a little bit for the. Private equity backed ones as well, but it was still at 17. 3%, which is a whole lot more than the average EBITDA for MSPs in aggregate. You touched on this a little bit before.

Why are the private equity backed MSPs more profitable than everybody else, broadly speaking? And what are the implications for those [00:45:00] non private equity backed MSPs?

Peter: It’s a, it’s an excellent question. All your questions thus far guys have been good, but that’s one that I do get a fair amount and a lot of times the non PE MSPs ask the question almost from a place of fear that if these guys are able to gen out that much more EBITDA than we Are they, is, are they generating scale?

Do they not have the challenges we do with staffing our business or sales or any of those things? My answer back is that the PE folks put their pants on one leg at a time, just like the non PE folks do. They may not have some of the same challenges that, let’s say, a 4 million MSP has, but they have a whole nother set of challenges that the 4 million MSP has.

There’s no magical size of MSP to be more profitable or less profitable. Our data says, if anything, that in every size range, there’s some that are running their businesses more profitably, some less so. So it’s okay. You can non PE folks can relax. There are certainly challenges that both folks are dealing with.

The real difference though, that we believe is where that comes from. Is if you go back years to when we started a site to carve out the P. E. Back from the non P. E. Back the P. E. Back have consistently run 3 to 5 points of even to higher than the rest of the market has. Why? They’re not better at Microsoft.

They’re not better at. At some of the things that drive gross margin, and certainly they are able to leverage some purchasing power on the cost of their tools, on the cost of product that they’re ordering, subscription, et cetera, no doubt, but they also have some expenses that the average smaller MSP has the real difference, though, is primarily in how they run their business and the financial discipline they bring to the business.

When you work, when we talk to MSPs who are not PE back about budgeting, for example they either don’t do a budget at all and just try to beat last year or they do it, but they don’t put a lot of energy into it. And once they’re done with it. They largely put it on the shelf to gather dust and they don’t use it to manage the business throughout the year.

The PE guys, they put a mind numbing amount of energy into developing their budgets. I know this both from working with them and from working for one. But budgets are a huge deal. And the reason that they’re a huge deal is another thing that PE tends to be much better at is they link a significant part of their executive compensation for the business.

Not to, did we grow more than last year? Did we make more money? They link it to, did we hit budget? And if I have 20 or 25 percent of my annual pay tied to a year end bonus linked to did we hit budget, I want to make sure that it’s an aggressive but attainable budget, right? So I’m going to put a lot of work into building a budget that’s going to really reflect where we think we can take the business.

And then the second thing they do better is they they measure throughout the year what their performance to budget is. And what their projections are for the likelihood of attainment of budget. So they’re looking month to date, year to date. They’re they’re looking at their projections for next month, next quarter, the rest of the year.

And the third thing it, that they do better is course correcting. If they get to June or July and it looks like there’s a chance that they’re going to miss their budget. Their discussions are along the lines of what do we need to do so we don’t miss the budget? Because again, you’ve got 20, 25, 30 percent of your pay tied to it.

I’m not going to just give up on the year. I’m going to make some decisions. So they’ll do things like maybe they’ll wait three more months to fill an open FTE. Maybe they will pull back on a sales and marketing initiative. They were going to launch in Q4, whatever it is, they’re going to look at things that they can do that will either lower expenses or accelerate revenue so that they can hit their budget.

The privately held folks I talked to they’ll look at some of that stuff, but they tend to wait till later in the year to take action. And by then it’s not going to have as much of an effect. If I get rid of an FTE, for example, and I do it in July one, I’m going to get somewhere about five to five and a half months of relief on that position.

If I do it October one, I’m going to get two to maybe two and a half months by the time I pay out benefits and last paycheck and all that stuff. So I think they’re just, they’re more disciplined from a financial operations side, and that’s really the major difference that we see.

Erick: Peter, it reminds me a parallel is they’re taking the same approach to [00:50:00] finance and budget decisions as an MSP would on the service delivery side.

We’re monitoring, we’re managing, we’re tweaking, we’re alerting, we’re making, optimization so it’s just the parallel as we’re looking at it from the financial and budgeting side, which I think is interesting when you think about. Who the majority of MSP owners are, right?

They’re not finance experts and things like that. So it sounds like the PE relationship brings those controls in that oversight.

Peter: Yeah, that’s a great metaphor. I think we actually think this is such an important thing for the average non PE backed MSP. That we built a budgeting tool into our benchmarking platform that they can go into.

It pulls from their actual data, their actual historic growth and revenue and expenses, and they can perform a model out a budget in there. And when they save it every quarter, in addition to getting their benchmark data, they will also get a dashboard that shows their achievement to budget. And we’re really trying to provide the tools to help them get that same mentality because it is so important, but your point’s a great one.

We are starting to see, as the industry is starting to have a lot of larger MSPs. It’s interesting. We’re starting to see more professional management being brought in to help run finance and to be, in some cases, help run the businesses. Frankly, folks like me, I, my experience was running organizations, being CEO of a tech business, but law, but it was not in managed IT.

I’m the last guy you’d want to have touch your computer. Let me assure you but I had run growth businesses, I had done turnarounds and that was the right fit for our business at the time. And I think you’re starting to see some more of that. You’re also starting to see this layer of really experienced MSP leadership that is starting to come back into the space after exiting due to an, due to a sale.

And so it’s a pretty exciting time. I think for the industry, I think the next. Next several years are going to be really exciting as we see some things like the efficiency gains from automation within MSPs and the things that are going to be really transformative over the next several years.

Erick: Yeah, you talk about, building these additional benefits and features into the platform. You’re you in the platform and in your methodology you mentioned this earlier, you’re measuring like 10 different. Predominant business models, the PDMs, right? One thing that was of note in the Q3 results was the increase in VAR revenue growth.

Like they had a great quarter in Q3. Yes. Is that something new and lasting or is it an anomaly? How do you look at it?

Peter: It’s cyclical. So Q3, the VARs, we, every year we see a huge pop from the VARs and the reason is government purchasing in the U. S., but also in Canada, I believe, and there’s a handful of other countries.

So what happens with the VARs is they answer all the bids in Q1, Q2, and then the money is released at the beginning of Q3. So every cycle we tend to see this really big pop in VAR revenue. In Q3. Now we can look and see was the percentage increase as big this year as it was last year and some other things.

But overall, generally speaking, bars are doing fine. The average bar profitability and best in class is more like in the 14 to 15 percent range. And there’s some bars that we benchmark that are hundreds of millions of dollars. We have a couple that I think are in the range of a billion dollars.

And some of those folks, because they’re going after so much government business, they might be running EBITDA of 5, 6%, but, the average FAR is about 9 to 10 times the size of the average MSP. So if you’re doing. 14. 5 percent compared to 17. 5%, but you’re doing it on 9x the revenue, you’re doing just fine.

So that model has not disappeared. Generally speaking, VARs are really, a lot of them are really working hard to get into managed services and to build up more of a recurring revenue services business. It’s a really hard pivot to make though we have two peer groups that are entirely composed of ours of various sizes that are focused on this and it’s a tough transition.

It’s really, you’re trans, you’re having to change things that are really fundamental to your DNA in order to pull that off. But overall they’re generally speaking, doing fine.

Rich: Peter you’ve got this great data set. You don’t have a crystal ball, so we are not going to hold you to this, but you’re someone who has been looking at MSP performance, VAR performance, quarter over quarter for a long time.

If you were to guess. What the Q4 [00:55:00] data you’re collecting now is going to show, and maybe just in, in general, what the 2025 data is going to show. Do you have a hunch for MSP revenue growth EBITDA margins working ahead?

Peter: Yeah, we, Q4 is generally pretty good in the U. S. Because of end of the year we see for revenue growth.

And so even with the presidential election phenomenon. It should be a decent quarter we think. The slowdown and managed services revenue growth will continue, but it’s going to keep tapering off, we believe. So we think we’ll see that throughout 2025 as well. And so we’re not going to see it jump back up.

I don’t think on a 4 quarter trending basis to the. 14 15 percent range, but I think it will probably hover this year somewhere in the 10 to 11 percent range, which is, that’s really healthy growth. You can run your business. If you’re focused on efficiency and all of those things, you can run a great MSP on that kind of growth.

So overall profitability Q four will probably be down. We see a fair amount of tax moves getting made to every Q four to accelerate some expenses. So that will probably be the case in spite of good revenue growth and decent gross margins. So as long as revenue and gross margins are holding I’m fine with whatever the ultimate profitability is.

So we’ll see probably a little bit of a dip in Q four, but Cute 2025 should be a good year. We think again you’re right. We don’t have a crystal ball, but the best predictor of the future are patterns from the past. And after each of those slowdown years, the presidential elections, we’ve seen a nice lift year the following year.

And so that coupled with what’s going on in the industry and Customer’s needs for help with automation and AI should be another really good year.

Rich: I love it when we can leave our audience on an upbeat note which is what we will be viewing right here. Peter, for folks who want to get in touch with you, learn more about service leadership where would you point them?

Peter: You can find us in two places. You can go to connectwise. com and you can find information on there, links to IT Nation and to service leadership. You can also go to service dash leadership dot com. But as a reminder, what we talked about earlier, the best way to get into our stuff is through a peer group.

And so if you join a peer group benchmarking is part of it. You get a lot more support and training and you get the support of your peers to help you navigate through. Getting up and running and all of that and using the data and accountability of action and all those things. But you can subscribe to a benchmarking.

We have a lot of subscribers who do that without a peer group, or you can join a group and get

Rich: it that way. And to join a group you look for the it nation section of the connect wise website.

Peter: Yeah, you would go and you could search for it nation evolve and that will take you there. And make sure you come to our it nation events there.

They’re the industry leading events. We are much more agnostic than some are. We have a lot of our competitors at those events. The only requirement that we have is that we’re allowed to come to their events as well. But. I. T. Nation Connect North AmEricka is the big one in November. We had 7000 attendees between the 6000 on site and 1000 virtual.

But we also do we’ll be doing London in March and Australia in August and then I. T. Nation secure, which in and of itself has become a really big event. We’re excited. We’re gonna have some really neat stuff will be announcing that we’ll be doing at that event. Mhm. And anybody who is in cyber or runs a business that is pretty much, I think every MSP these days that has a cyber practice to it should be there.

That will be in June in Orlando.

Rich: All right. Fantastic. Peter Kujawa from ConnectWise. Thank you so much for joining us on MSP chat and for this informative and characteristically enlightening conversation. Folks, Erick and I are going to take a quick break now. When we come back on the other side, we’re going to share a few final thoughts.

About this conversation with Peter Kujawa, have a little fun, wrap up the show, stick around. We. We’ll be right back

and welcome back to part three of this episode of the MSP chat podcast. It is always an education to speak with peter, Erick and I as regular listeners and viewers are aware i’m into Data and research and stats and so and he’s just a font of amazing stuff about that two, two quick things I want to call attention to and one, and I, this is in some ways the eye opening revelation from this conversation, if, even if it isn’t the most germane to the audience, but the bit about election years being down years, he didn’t expect that service leadership didn’t, I had certainly never heard this before, That was new information.

And, and it’s not like the 2024 number of service leadership [01:00:00] has been reporting were bad in 2024. So the outlook for 2025, which, he just said tends to be a bounce back year, should be pretty good. The other thing that or one other thing that I thought was particularly interesting was that conversation about the differences between private equity owned and non private equity owned MSPs.

And private equity companies in general tend to get accused of engaging in what people sometimes call financial engineering and that’s a whole other topic, a bigger a topic than we want to get into here, but it is true that they’re really into matters, financial, including budgeting.

And it was just, I think, important to hear Peter say. Speak at length about why that focus on budgeting at these private equity backed MSPs plays such a large role in why those companies are more profitable than MSPs in general. It’s just, it just goes to show that operations in general are really important consideration for MSPs and finances or finance as part of operations budgeting within finance.

Really important for folks to zero in on.

Erick: And that was my biggest takeaway as well, Rich, because I, assumed that the PE backed organizations were more profitable because of the the benefit of having shared services, and having that purchasing power and things that deal those other drivers that Peter was talking about.

And I just thought, Oh I’m eliminating, a cost of my. HR and my accounting and legal and all that, because it’s being shared maybe across all of these rollups, if you will. So that was a key takeaway for me. It’s Oh, it’s the financial acumen and discipline and measurement and accountability and making those tough decisions.

And obviously, that, that keyed my. My comparison to, Oh, I, I can translate that into MSP. I just need to do the same thing I’m doing here with my financial perspective. But I think at the end of the day, it’s those tough decisions that MSP business owners sometimes put off making that are the big difference.

Like I love the example that Peter gave about, Oh maybe we won’t. Make that capital expense or we’ll push it off a quarter or two I don’t think that msps can wait, to hire folks, too long if they’re growing rich But it’s just it’s something to keep in mind is like how do I juggle?

All the drivers that impact my profitability including, you know on top of increasing my efficiency cutting my operating costs reducing my vendor and solution sprawl, making sure my profit margins and my bundling are good and truing up my clients like I should. There’s this whole other uh, whole other realization that says, Oh, but now I have these other tools that also have such a huge. Huge impact on EBITDA and profitability that I bet many MSPs until they get to a specific maturity level or join a peer group and are being held accountable and benchmarking like Peter’s group does.

At service leadership we’ll realize,

Rich: well, interesting stuff to be sure. And it leaves us with time for just one last thing on this episode of the show. Folks. Now if you have been in our audience for some months now, you might remember when we were talking last year in 2024 about notebook LM, this red hot artificial intelligence tool from Google that helps you interact with and query.

Documents and other files and the buzzy, trendy feature in Notebook LM was this ability to get answers to your questions in the form of an automatically generated podcast. Not unlike this show. They added very late last year, Google added what they call interactive mode to that feature, which is basically the ability to, as Google put it metaphorically call into that AI generated podcast and ask questions of the hosts.

And just an interesting little illustration Erick, of the fact that even when AI sounds like people, AI is not people unless the people we’re talking about are the most emotionally insensitive, out of tune people you’ve ever met, because AI the Notebook LM podcast hosts were getting a little snippy With some of the users who were calling in somebody would ask a question and one of the hosts would say, Hey, I was getting to that.

Or I was, as I was about to say, and then answer the question. And what they had to do with Google is go in and engage in a little bit of what they call friendliness tuning to make the podcast hosts a little less rude and off putting to the users. That’s

Erick: so funny, rich. They had to up the niceness gene on [01:05:00] the algorithm and, while AI isn’t people rich.

Soiling green is. How do you deal with that?

Rich: Indy I, I wonder if if we had the kind of polling tools that Peter Kajawa has, we could find out what percentage of our audience gets that reference. I hope it’s pretty high.

Erick: I would guess it’s pretty high. If not, you’re in the wrong podcast.

Rich: Yes. Yes, indeed. Folks, that is all the time we’ve got for you this week on the MSP Chat Podcast. Thank you so much for joining us. We’re going to be back in a week’s time with another episode for you. Until then, I will just remind you this is both a video and an audio podcast, which means if you’re listening to the show right now, but you’d like to check us out on video, you can go to YouTube, you’re going to find us there.

Watching on YouTube, but you listen to podcasts too, and would like to check us out that way. Go to Spotify, Google, Apple, wherever it is. Get your audio podcasts. You’ll find us there as well. And wherever, however you find us, please subscribe, rate, review. It’s going to help other people like yourself, find the show and enjoy it.

This show is produced by the great Russ Joms. It is edited by the great Riley Simpson. They are part of the team with us here at Channel Mastered. They can create a podcast just like this one for you. If you’re interested in podcasts are really the tiniest piece of what we do for our clients at channel Mastereded.

If you want to learn more about the complete suite of services we provide, go to www dot channel Mastereded. Dot com. Channel Mastered has a sister organization called MSP Mastered. That is Erick working directly one-on-one with MSPs to grow and optimize their business. You can learn more about that at www.mspMastered.com.

So once again, we thank you for joining us. We’re gonna see you in a week. Until then, folks, please remember you can’t spell channel without MSP.