Money is flowing in the managed services industry, to the tune of half-a-trillion worldwide—that’s trillion with a T—according to industry analysts at Canalys. Yet managed services profitability is a struggle for many business owners.
What gives?
“The industry is not good at articulating the value and the complexity of what they do,” says Kaseya CEO Fred Voccola, even though “one can argue the MSP industry is probably the biggest enabler of the Western world’s economic boom that we’ve had for the last 10 years.”
So Many Dollars, So Little In MSPs’ Pockets
The numbers don’t lie. There are 335,000 companies around the world that have at least one managed contract, with “one out of every 10 technology dollars now—hardware, software, services dollars—spent on managed contracts,” says Canalys chief analyst Jay McBain, in an interview earlier in the year. And there are the 86,000 MSPs with 30% or more recurring revenue, he says, “but 30% of them don’t make money consistently.”
As he explains, “The average MSP has eight employees. And given the cost of goods sold, given the fact that you have to run the entire company—sales, marketing, operations, finance, HR—usually with one person, with seven being technicians, it’s very difficult to drive an EBITDA north of 15%-17%.”
Paul Cissel, CEO of Growth Caddie and a TMT Expert in Residence, says Service Leadership data shows that only about 25% of MSPs are best in class, which means achieving service gross margins over 50%, total blended gross margins of over 42%, and subscription recurring revenue of 50%-60%.
On top of that, “an average MSP has 20 to 25 different vendors that they work with,” says Angus Robertson, chief marketing officer at ConnectWise. “So the time it takes to onboard those different products, work with support for all those different products, train employees on those different products, build the integrations and the scripts across those different products, and provide automation and an efficient experience to their clients—there’s a lot of overhead in that.”
Costs per technician are high too. “Their engineers are not leveraging automation in a full way. So the number of clients or endpoints that a technician or engineer can manage is 15–20% lower than what it should be,” Voccola says.
Drive Down Your COGS
Voccola believes MSP margins should be on par with the other professional services that small and medium businesses rely on, such as legal and financial, which are approximately 30% to 35% versus an MSP’s 8% to 12% profit on average.
The rollout in April of Kaseya 365 (now rebranded as Kaseya 365 Endpoint)—a low-priced subscription bundle with tools and built-in automations for managing, protecting, and backing up endpoints—was Kaseya’s first step in a four-part strategic plan to drive up margins.
Last week’s announcement of Kaseya 365 User, an all-in-one, low-priced subscription for MSPs to help their customers prevent, respond to, and recover from user identity and security threats, was Phase 2. Voccola also announced the acquisition of SaaS Alerts, which is included in Kaseya 365 User.
“We’re solving that [MSP] profit margin problem in two ways: by allowing their engineers to generate more revenue per engineer and lowering the absolute cost of the [software] to provide it. And that’s having a material change in the industry,” Voccola says.
“Anytime that you’re able to drive more profitability into an MSP without them having to go and generate additional clients, which is typically the hardest thing for them to do, that’s a huge win,” says Mike Sanders, Kaseya’s chief revenue officer. “And we’re able to do that in a pretty convincing way.”
A “Happy Meal” For MSPs—With A Profitability Prize Inside
The concept of a bundle is not new, says McBain. “Other industries and other parts of tech have really done well with bundles.” In the MSP industry, he says, “you’ve seen this over the last 20 years as the PSA companies acquired RMMs and then they brought it together with data backup and then with cybersecurity. So these companies have been building these bundles—but charging separately for them.”
In terms of bundles like Kaseya 365 Endpoint, he says, “It makes sense that there’s going to be a ‘Happy Meal’ for one price.”
There are some things to weigh when you go all-in with one vendor, he says. “Does that simplify it for the partner? Maybe. Are they getting best of breed? Are you getting the best hamburger, the best fries, and the best drink [with a Happy Meal]? Probably not, but are you able to overlook that the fries aren’t the best, but I’m getting a good deal and I’m getting it all in one place? Yes.”
He concludes, “[Kaseya 365 Endpoint] was an impactful announcement for one-third of this entire managed services market who struggle with profitability.”
Is The Pricing Pressure On?
Since announcing Kaseya 365 Endpoint, MSPs already have more than 5.5 million endpoints under management, according to Kaseya. Are other vendors responding to the price gauntlet Voccola threw down?
In May, ThreatLocker announced ThreatLocker Unified, a bundle of all their existing products and add-ons, for 30% less than purchasing the products individually. ThreatLocker CEO Danny Jenkins told MSP Success at the time that ThreatLocker Unified wasn’t a response to Kaseya 365 but acknowledged that several companies are doing the same thing when it comes to bundle options.
In September, HaloPSA announced a bundled offering with the NinjaOne RMM as a single license with what the company calls “a great price.”
Corey Kirkendoll, president and CEO of 5K Technical Services, an MSP in Allen, Texas, who is a NinjaOne user, views the HaloPSA/NinjaOne announcement as a competitive response to Kaseya. “This is a direct response to what Kaseya is doing. I think you will see this with all of the big vendors. They are finally responding to bundles and better pricing that we as MSPs have been asking for, for a long time. It will simplify some of our biggest pains like billing and reconciliation.”
And in October, new ConnectWise CEO Manny Rivelo told MSP Success that the company “will definitely respond” to competitors’ aggressively priced bundles. “You will get some [information] at IT Nation, and we will always respond to the market dynamics. We are not going to be priced out or create a disadvantage to ourselves because we didn’t respond.”
How pricing plays out going forward—and if MSPs will be the beneficiaries—remains to be seen.
