Q&A: The Hidden Costs Behind MSP Growth and Margin Pressure

Managed service providers are reporting strong revenue growth, but many say profitability is moving in the opposite direction. As tool costs rise and service complexity increases, margins are failing to keep pace—creating a paradox for growing partners.

Paessler Director of Global MSP Sales Edward Knight shared more about this trend and his advice for MSPs in 2026, in the following Q&A with Channel Insider.

Walk me through what’s happening with MSP margins right now. Revenue is growing for most providers – so why are profits shrinking?

Yes, we’re seeing a profitability paradox for providers. I speak with MSPs every day who face the same struggle – revenue is up, customer counts are rising, and service catalogues are expanding. The problem is that margins aren’t keeping pace. Most are finding that, while you can win all the clients you want in 2026, the question is whether you can service them profitably.

MSP leaders are being squeezed to scale services without adding headcount, without losing control of their operations, and without sacrificing profitability. This is no mean feat, and companies are really feeling this tension. On the ground, we’re more often seeing engineers stretched thin amidst rising tool costs.

The frustrating thing is that providers can see the growth, but not much else. Thanks to the demands of the modern era, MSPs are expected to manage more endpoints and cloud services per client while meeting higher security expectations and tighter SLA requirements. Clients shopping around further ratchets up price pressure, and providers are finding it harder to tell which clients are actually profitable.

As a result of tighter bottom lines, the old model of “hire more engineers to handle more clients” no longer works. The cost-to-serve is rising faster than contract values, and tool sprawl exacerbates the issue.

You mention tool sprawl – What’s the real cost beyond just licensing fees? How does this fragmentation hurt MSP profitability?

Tool sprawl hurts efficiency just as providers need it most. Yes, licensing costs are a part of it as each new client adds more seats, modules, and subscriptions. But the operational friction makes matters worse.

When your engineers need three different dashboards to diagnose one client issue, you’re paying for the same problem a few times over. And then there’s the time lost context-switching between platforms, the training to onboard new engineers, and the integration complexity that never quite works as smoothly as vendors promise. Simply put, tool sprawl is a productivity tax.

Providers recognize this and are trying to streamline as much as possible. Those best placed to pair growth with profitability have figured out that fewer, more deeply integrated platforms beat a sprawling stack every time.

Got it. So what are the characteristics of providers that can pair growth with profitability?

Well, that’s the good news: providers can fight back and bring their growth and profitability more in line. For me, three areas together can help rein in expenses and up internal efficiencies: 

• Commercial precision is about knowing your margin by customer and by service. Providers that get this right can quickly determine when and where to raise prices because they understand actual cost-to-serve. 
• Operational efficiency is about doing more with less. This comes from fewer platforms, deeper integration, and better automation. Here, unified monitoring is a strong enabler to unlock scale without proportional headcount increases. In my experience, engineers at companies with seamless workflows can support 40 clients instead of 20 without working weekends or burning out.
• Outcome-based pricing is the commercial model that ties it all together. Providers are ultimately selling business outcomes and not tool licenses or monitoring “seats”, so price it this way. But be careful because providers can only deliver in this way once they’ve mastered the commercial precision to price profitably and the operational efficiency to deliver without eroding margins.

How should MSPs experiencing this profit paradox respond? What’s the first thing to tackle?

The thing about a “paradox” is that it’s something inherently complex, so first take a deep breath and know there’s a way forward. Realigning profits with growth starts with visibility because it’s very hard (nigh impossible) to fix what you can’t see. Find out which customers are profitable and which services are dragging down your margins. Armed with this clarity, providers can begin making more strategic decisions about pricing, service mix, and investment.

From there, take another look at your tool stack with fresh eyes. I find the providers scaling most profitably have consolidated around unified monitoring for complete visibility – IT infrastructure, cloud services, and security metrics all in one place. A solid ecosystem foundation always trumps fragmentation across platforms and silos.

I also suggest identifying your most painful operational bottleneck and working backwards. Perhaps it’s knowing which customers to prioritize for service improvements. Focus on that one thing, measure it, and prove you can fix it profitably. Then repeat across other facets of the business. 

Profits won’t return overnight, but your team will feel less overwhelmed, your client relationships will improve, and your margins will stabilize. This way, you can slowly but surely build momentum toward sustainable scalability and thread that most difficult of needles between growth and profitability.