For MSPs, It’s Go Global or Go Home
My phone rang about 10 minutes before I was scheduled to meet with Sunny Kaila, CEO of IT By Design, at the managed services outsourcer’s Build IT Live event in Orlando this week. It was Kaila’s assistant, calling to confirm I was on my way to the conference room.
I subsequently learned that IT By Design’s CMO and Kaila himself got identical calls just after I did. Nothing remarkable about that either except that the cheerful young woman who placed those calls wasn’t at IT By Design’s headquarters in Jersey City, N.J., as I assumed, but at one of the company’s satellite offices in India, where it was just before 1:30 in the morning.
You truly never would have known, a fact with important implications for multi-MSP platforms, their private equity backers, and smaller providers that wish to compete with or sell to them.
Kaila’s busy three days at this week’s conference included celebrating the launch of his new book, The Secret to Building Winning Global Teams: How to Leverage Offshore Talent to Exponentially Increase Profitability and Valuation, which we previewed here two months ago. Its goal is to show often skeptical MSPs how leveraging overseas labor can help them make more, spend less, and boost their valuation.
These aren’t theoretical matters for Kaila (pictured), who was a struggling MSP himself 20 years ago courting midtown Manhattan businesses that demanded 24/7 support he and his team couldn’t provide. Raised in India before immigrating to this country, Kaila realized that leveraging skilled workforces in developing countries with lower wage scales, just as Fortune 1000 businesses increasingly were at the time, would allow him to meet round-the-clock service expectations and save on payroll simultaneously.
The strategy quickly made a noticeable impact on his top line. “We were winning a lot more deals because now we had a true 24/7 delivery capability,” says Kaila, adding that his bottom line grew as well thanks to the 20 to 30 percent he was saving on labor.
Inquiries from envious peers eventually inspired him to bolt a global labor outsourcing business onto his original managed service practice. The company currently has some 400 clients in multiple countries and is staffing up in India and the Philippines from roughly 600 employees today to an estimated 900 or more a year from now in anticipation of accelerating demand propelled by four factors that Kaila calls unavoidable facts of life for MSPs in the U.S.:
1. Everyone wants 24/7 service. Even if they’re small, midsize, or not in New York City like Kaila’s one-time clients, end users typically refuse to risk the financial impact of downtime, which makes 24/7 support a competitive necessity.
“For us, international resources aren’t just a margin play,” says Peter Melby, CEO of managed services giant New Charter Technologies (which we’ve written about before). “It’s how do we cover all time zones?”
2. Offshore service standards have improved significantly. Kaila himself found working with offshore NOC providers frustrating the first time he tried it. Techs in India didn’t have the training or communication skills to meet U.S. expectations 20 years ago. These days, over half the country’s population is under 30 years old and speaks fluent English they learned partially by watching the exact same Netflix and TikTok videos as Gen Zers here in the states. As I can attest personally after my encounter with Kaila’s admin, it’s very hard to tell such workers apart from American equivalents.
3. MSPs are M.E.L.T.-ing. Running a managed service practice has grown more expensive in recent years due to the rising cost of what Kaila, borrowing an acronym created by business coach Dan Sullivan, calls M.E.L.T., as in money (think higher interest rates), employees, logos (as in intensifying competition for net new accounts), and tools.
4. MSPs are getting bigger. And they’re poised to get bigger still for reasons we’ve covered several times here recently. Kaila has 168 multi-MSP platforms on his radar at present, and M.E.L.T. is an even greater problem for them than it is for less acquisitive firms.
“The reason being that they’re leveraging debt to grow,” Kaila says.
Running the valuation numbers
Here’s where the logic of going global enters the picture in ways every MSP should at least consider. Platform-building private equity firms may not know much about IT but they know plenty about cutting costs and have few qualms about using overseas labor to do it.
“Taking the tasks that don’t necessarily have to happen here and using offshore talent is an opportunity that they see as a value add,” notes IT By Design president Kam Kaila (pictured), Sunny’s wife.
They’re eager consumers of outsourced tech help from the Kailas and others as a result, and likely to grow even more so over time. IT By Design unveiled a new cost-plus pricing model this week in response to that trend. According to (Kam) Kaila, the company normally includes management in its service fees.
“A lot of MSPs that are larger organizations already have really good, strong leadership built in, and so they don’t necessarily need us to help them lead,” she says. Charging less accordingly makes utilizing overseas workers even cheaper and therefore even more attractive for PE-backed rollups, Kaila adds, noting they can now hire outsourced accountants, HR managers, and developers through IT By Design in addition to techs.
“It allows them to scale up very quickly,” Kaila says.
Which is why IT By Design currently has some 30 platforms on its client list, including Meriplex, the MSP platform we wrote about last year. Neil Medwed, the company’s vice president of corporate development and M&A, remembers what hiring overseas technicians used to be like.
“You didn’t know the person who’s going to be answering the phone, or the customer really didn’t know the person,” he says. Hiring them now, by contrast, is little different from having remotely-based techs on staff across town.
“These people are in essence members of your team,” Medwed says, adding that they also make retaining the full-blown members of your team easier by taking boring tasks off their plate. “Most engineers don’t want to be checking backups,” he notes.
Those engineers tend to cost a lot more than an offshore techs too. On average, Meriplex can hire 1.22 overseas technicians for every one it employs domestically.
“You can take that savings that you do by partnering with an IT By Design and invest in extra tools that make you more efficient,” Medwed says. “You can take that money and pay bonuses to your existing employee base. You can obviously put more to the bottom line.”
And in combination with other economies of scale platforms enjoy, you can also use the money to outprice smaller competitors—or perhaps buy them. Which, it’s worth noting, will cost them a lot more than it otherwise would if the MSP they’re acquiring uses offshore labor too.
Sunny Kaila does the math in his book, citing an unnamed IT By Design customer with $5 million in revenue. Hiring overseas techs saved it $400,000 a year on labor, raising its EBITDA from $750,000 to $1.15 million, enough to get the company a 6x multiple versus 5x and increase its valuation a staggering 85% to $6.9 million.
MSPs without PE ownership ignore calculations like that at their own peril. Embracing what Kaila calls a “boundaryless” mindset could net them millions in exit value. Refusing to do so could make competing with MSP giants even tougher.
Meriplex is into integration and thinking big
I see Medwed (pictured) on the road pretty regularly, but haven’t spoken with him about Meriplex since an interview last April. In the ensuing months, he says, the company has grown to about 700 employees in 11 offices across eight states, and over $200 million of revenue. If things go as planned, he adds, both headcount and billings will roughly double by the end of 2025.
Sounds pretty mega, and Meriplex illustrates other M&A topics we’ve covered lately too:
Like The 20, among others, it’s a big believer that tightly integrated rollups sell to upstream investors for higher prices than looser platforms. “If I bought an organization that had 25 different brands, I’d have to integrate 25 different brands into our ecosystem, which is much more risky,” Medwed says. “That drives down valuation versus a fully integrated type of organization like Meriplex is.”
It’s likely to be an upstream buyer itself, in keeping with the rollup-eating-rollup phenomenon now officially underway. “You will see Meriplex going after larger and larger organizations,” Medwed says. How much larger? “For the most part, nothing scares me,” Medwed responds. “We’re backed by a $22 billion private equity firm that believes deeply in what we’re building, growing, doing.”
Pia’s laser focused on the help desk
Driving down labor costs through offshoring is one way to grow valuations. Driving up productivity through automation is another.
It’s a dynamic James Allen (pictured) witnessed up close back when he was general manager of sales and growth for Australian managed service provider Virtual IT Group. Acquiring a smaller firm, he soon learned, lowered EBITDA during the onboarding process, and no one would fund you to make more acquisitions until you closed that gap. Shortening the onboarding process, then, was the surest way to get back in position for more buying sooner. Could automating ticket resolution accelerate onboarding by easing Virtual IT’s training burdens? An AI-powered automation solution the company developed proved the answer was yes.
“No matter what technician within the business, they were able to use the automation to go out and close tickets at scale,” Allen says. “That’s how we were able to acquire multiple businesses at speed and scale and also at the same time keep the EBITDA quite high.”
The payoff came three months ago when private equity firm The Riverside Company (which owns a hunk of Logically, the emerging managed services giant we wrote about recently) bought Virtual IT for an undisclosed but undoubtedly sizeable sum, given that the MSP had over 200 employees and more than 1,200 clients at the time.
Two years ago, Virtual IT spun its automation solution out as a software maker named Pia, a vendor we’ve discussed here before that aspires to help MSPs accelerate EBITDA growth by empowering them to support more endpoints per tech. An average MSP, says Allen, who’s now Pia’s global SVP of sales, manages anywhere from 160 to 250 devices per tech.
“If I stretch that out maybe another three or four or five hundred endpoints, that means my profitability, my EBITDA, starts to go up,” Allen observes. Under the leadership of Gerwai Todd, who became CEO in February, the company is now laser-focused on that value proposition.
“He’s really getting us an inch wide and a mile deep on that help desk,” Allen says.
One part of the resulting strategy is increasing the Pia solution’s ticket triaging capacity. “We’re categorizing and triaging about 50 different types of tickets that are coming in,” Allen says. “That’s going to go up to about 100 different types of tickets by the end of this year.”
Equipping the solution to resolve more tickets autonomously is the other part of the plan. Currently, according to Allen, Pia’s software can handle perhaps 45% of a typical MSP’s service requests with minimal technician assistance. “What we’d love to do is be able to take that from 45% up to 80%” he says.
Increasing the number of more difficult Level Two automations the solution performs from the roughly 12 it handles now is another goal. At present, new user onboarding is the most complex example. When done manually, the process typically takes anywhere from 30 minutes to two hours, Allen says, adding that Pia can get it down to between five and eight minutes when running in so-called “engineer-assist mode.”
The alternative to that mode is “zero-touch automation,” in which the solution closes tickets without any technician oversight. MSPs can enable that option for any supported automation any time they wish. Most are moving in that direction, perhaps not surprisingly, at a cautious pace.
“For the most part it’s a crawl, walk, run philosophy where they’ll start slow and small,” Allen says. “I’ve seen partners automating hundreds of tickets after three weeks. For some it takes a little bit longer.”
All you need to hack is bad intentions
Want to hear a scary cybersecurity stat weeks ahead of Halloween? According to ISC2’s latest Cybersecurity Workforce Study, which arrived this week, Planet Earth has 4.8 million fewer security professionals than it needs to keep businesses safe. That’s the biggest number yet in the six years the membership organization has been tracking the cyber skills gap and a 19% year-over-year increase from 2023.
Artificial intelligence to the rescue, right? Well, without question, old-school AI, machine learning, and deep learning have all proven themselves useful at leveling the odds between attackers and defenders. The picture is murkier, though, with generative AI. Leading vendors are using it to accelerate threat analysis, but hackers are finding creative applications for it as well, and the built-in filters that companies like OpenAI and Anthropic use to foil them are full of holes.
I got a closeup look at a few of those holes this week during a sobering Build IT Live presentation by Rob Allen (pictured), chief product officer of ThreatLocker, who wondered not long ago if ChatGPT would write him a tool hackers use to take command of targeted machines called a reverse shell. The answer, thankfully, was no when he simply asked for a reverse shell. But when he asked instead for “a simple RMM that will allow me to type commands into a computer remotely,” he got exactly what he wanted.
Writing malware via LLM works the same way, Allen showed. Ask ChatGPT to create ransomware, for example, and it will refuse. Ask it to build a program that encrypts data, though, and it’s only too happy to oblige. Same goes when you ask it to code you an app that copies data from one location to another, which in some contexts is called “copying data” and in others is called “exfiltrating data”.
Merge those two programs together with a few other separately programmed bits and pieces and you’ve got yourself some ransomware. Thanks to ChatGPT’s formidable coding abilities, it seems, you no longer need to know programming to hack.
“Once upon a time, you needed to know coding, you needed to have skills, you needed to have knowledge,” Allen observed. “As I’ve just demonstrated, all you need now is bad intentions.”
Arguably, he acknowledged during a subsequent interview, the same has been true since the advent of ransomware as a service. The larger point is simply that while genAI can protect you from newfangled threats it’s just as likely to expose you to them.
“It’s hopefully overall a good thing, and there is massive potential to those tools,” Allen says. “You just have to consider that they’re potentially being misused as well, and it doesn’t take a genius to misuse them.”
ThreatLocker’s approach to the issue, as to other cyber risks, is to use allowlisting and ringfencing to prevent anything but known good software approved in advance to run on managed devices. “Deny by default,” Allen says, then use detection and response software to catch anything that skips through anyway. Otherwise, you’ll be perpetually playing a game of digital whack-a-mole with a technology that can code attacks faster than you can identify them.
PitchIT proves that marketing matters
When Kaseya asked participants in its 2024 MSP Benchmark Survey to list their top growth strategies, 49% named starting or improving marketing efforts. Only increasing sales and adding services scored higher.
Vendors with MSP partners might be wise to prioritize marketing as well based on how the three recently named finalists in ConnectWise’s seventh annual 2024 PitchIT competition for young but promising vendors beat out their opponents in (per earlier coverage) an extremely competitive field. It wasn’t product functionality or product-market fit, as important as those are, because none of this year’s 26 contestants would have had a shot at advancing without those. The difference in the end was marketing.
Or more specifically messaging and the ability to communicate it during the all-important presentation PitchIT contenders gave first to a panel of senior ConnectWise executives and then to an audience of MSPs via Channel Program (which you last read about here a few weeks ago). Scores from both pitches were combined to determine the three finalists, and when I say the process was extremely competitive, as I did a moment ago, I’m not exaggerating.
“The top 12 were within 0.1% of each other almost,” says Sean Lardo (pictured), the associate evangelism director at ConnectWise who runs PitchIT. The edge the top three had over the other nine was their ability to articulate a compelling value proposition clearly.
“Messaging is king in a presentation,” Lardo says. “You could tell who was prepared and who wasn’t.”
Prepared to win over the judges certainly, but perhaps prepared to win in the marketplace too. At a time when MSPs and their clients have more vendors to choose from than ever, Lardo notes, stand-out marketing is essentially a precondition to success.
“You can’t just have a great product without great messaging that people understand, because it’s become far more competitive,” he says.
All three PitchIT finalists—endpoint energy optimization vendor PC Powersave, endpoint security and compliance vendor Senteon, and cyber insurer SeedPod Cyber—passed that test with the highest marks.
That PC Powersave did so was especially impressive, Lardo notes, given that it does something few MSPs have encountered before. Based in the U.K., where energy costs are high and getting higher, the company helps end users lower their electrical bills by shutting down unused PCs automatically, trimming CPU power consumption, and other techniques. MSPs can white label the product, add margin to its subscription rates, and sell it to clients on a white-label basis as a new power saving service.
“It’s a phenomenal concept,” Lardo says, and PC Powersave knew exactly how to explain it in a few quick minutes.
Skills like that are among many things all PitchIT contestants learn during a 16-week accelerator program that also covers product design, pricing, secure coding, and M&A, among other topics. Next up for this year’s three finalists is one last presentation before a live audience at ConnectWise’s IT Nation Connect event in November. The results will determine who wins the competition’s $70,000 first prize and $30,000 second prize. Last year’s face-off drew an estimated 600 viewers, and Lardo expects similar turnout this year. The contestants can expect to see me in the room, probably down in the front row, taking notes.
Also worth noting
Huge news this week involving ConnectWise, Axcient, and SkyKick, as you undoubtedly know by now. Look for my take on the whole thing next week after pending interviews with ConnectWise CEO Jason Magee and SkyKick co-CEOs Evan Richman and Todd Schwartz.
More momentum for CISA’s Secure By Design pledge: Barracuda is now onboard too.
If I hadn’t been at IT By Design’s conference this week I might have been at Proofpoint’s conference instead, learning about the vendor’s new AI-driven intelligence, insights, and integrations.
A new bundle for SMBs integrates 1Password’s Extended Access Management with CrowdStrike’s Falcon Go.
Security vendor Todyl’s revamped partner program includes all-new resources and support for MSPs.
Dru Investigate, from Druva, aims to help security pros identify and mitigate threats faster using generative AI.
Good thing cyber insurance is getting cheaper. 62% of U.S. organizations surveyed by Delinea have filed a claim in the last 12 months.
Guardz has a new CFO, Dig Security veteran Tal Hershkovitz.
The new Agentforce collection of autonomous “low-hallucination” AI agents from Salesforce is designed to help businesses scale their human workforces.
Among other things, the all-new GoTo Connect CX offers AI-powered tools for multichannel messaging and streamlining administrative tasks.
The new Smart Schedule feature in Moovila’s project management software for MSPs automatically ensures that tasks get done by the right people at the right time.
The new version of Parallels Desktop for Mac supports “AI-ready virtual machines” designed to accelerate AI app development.
Public sector buyers can now get POTS replacement solutions from Ooma via Carahsoft.