msp business model

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Managed service providers (MSPs) are always worrying about keeping up with changing customer needs — and having the skilled IT staff needed to provide all those services.

MSPs face a seemingly endless supply of business and customer challenges and demands. Some may require MSPs to make small adjustments to their service offerings, while others might require a complete business makeover. Knowing which opportunities to take advantage of and how to do so prudently is an important part of scaling successfully.

How MSPs are evolving to meet market demands was the subject of CompTIA ChannelCon sessions and research earlier this month.

Keeping Up With Changing Customer Expectations

A majority of MSPs had an optimistic outlook at the beginning of 2022, but now, it has shifted a bit because of the unpredictable and uncertain market conditions.

MSPs that planned for the future before the pandemic fared well in the rapidly changing market of the last few years. And now, the post-COVID work-from-home culture is presenting MSPs with an entirely new set of challenges — at the same time that the economy has become unsteady. As a result of all that uncertainty, 25% of MSPs expressed some degree of pessimism in a recent CompTIA survey.

As a result of all that change and uncertainty, MSPs are venturing into new areas — and they’ve become acutely sensitive to customer demands.

“If MSPs are learning one thing in the cloud era, it’s that customers today, especially those non-IT line of business workers, are buying technology directly, often SaaS solutions online,” the CompTIA survey said. “To be taken out of the actual transaction has many MSPs rightly looking to where they can add value. One way is by providing a superior experience, which is especially critical for MSPs that operate with customers on long-term contracts.”

As a result, “customer experience expectations” is the biggest driver of changing MSP business models, with cybersecurity coming in second (see chart below). Customer behavior is changing rapidly — who they are and how they buy — which impacts the business.

This changing customer behavior and shifting expectations around customer experience put pressure on MSPs to provide customers with a frictionless experience. In short, customers don’t just need a service from MSPs; they need a great customer experience with it.

After customer experience (54%) and cybersecurity (47%), 46% of MSPs feel that shifts in customer procurement habits are the key factor driving business change. The adoption of cloud computing and demand for business consulting are also driving MSPs to explore new opportunities.

Further reading:

Premium Services Gain Momentum

The CompTIA survey found that the top services offered by MSPs remain largely the same — network services, help desk, storage and device management — but also noted that MSPs are increasingly offering premium services, such as business applications-as-a-service solutions, data analytics, cloud-based services, more advanced types of cybersecurity, and consulting-level work around compliance and privacy (see chart below).

“Generally speaking, tried-and-true network services, help desk, storage and device management are mainstays in the MSP arsenal,” CompTIA said. “That fact has not changed significantly over the years, though it has built a foundation on which MSPs build their reputation and a nice cushion during lean times. Today, however, many MSPs are broadening their customer reach and profit margin potential by offering more premium services, often software-oriented, in addition to their traditional slate of infrastructure wares.”

Retaining the Best Talent

Retaining employees is a painful task for every business, especially for MSPs. It is even harder for technical staff since every company wants to add top talent to their workforce.

MSPs need to hang on to their great employees by bringing transparency and creating an atmosphere their employees will love. For employees to keep working for you, they need a reason good enough — so give them one.

Another way MSPs can retain their top talent is by helping employees upskill through various means, including technical certifications, one-on-one mentoring, tuition reimbursement, and other skill development opportunities.

Also read: How MSPs and MSSPs Can Attract Talent Despite IT Skills Shortage

Current MSP Profile: Pure-play vs. Hybrid

MSPs have been evolving since the early 2000s, when internet speeds got fast and reliable enough to make managed IT services possible. Currently, almost 40% of companies in the tech channel offer managed services in one way or another. According to CompTIA:

  • 37% of this group is pure-play MSPs, deriving more than three quarters of their annual sales from recurring revenue activities.
  • 64% are hybrid MSPs that depend on managed services and non-recurring revenue streams of work, such as project and product sales.

MSP Business Sentiment

The last two-plus years have indeed changed the usual course of business. Yet many MSPs somehow managed to perform well during this time. They were able to capitalize on the major move of shifting to remote work. Despite doing good even in such a hard period, there are some relatively high negative sentiments amongst MSP leaders regarding the future.

  • Between 11% and 14% of MSP leaders are either pessimistic or very pessimistic about the future of their business and/or the state of the managed services market.
  • The figures for leaders feeling optimistic or very optimistic are between 32% and 35%, and 15% and 18%, respectively.
  • 23% to 26% are in the middle; they aren’t sure what the future holds for their business or how the MSP market will change.

The Evolution of MSP Services

What MSPs expect to offer in the near future can be poles apart from what they are selling today — device management, help desk, and tried-and-true network services.

Currently, MSPs are mainly focusing on broadening their customer reach by providing their customers with more premium software-oriented services along with their traditional slate of infrastructure wares. All these efforts are meant to help MSPs open new streams of revenue.

  • Nearly half of the MSPs have added premium services to their business offerings — 43% have done this to a significant level.
  • Only 9% of MSPs are sticking to traditional managed services.
  • Aggressively embracing the premium-services model, 54% of pure-play MSPs are selling these offerings on a large scale. For hybrid MSPs, that figure is 36%.

MSPs face two primary challenges while implementing these emerging technologies and other premium services to their business offerings:

  • The need for technical training among staff (44%); and
  • Difficulty hiring people with the necessary skill set (37%).

Speaking of emerging technologies, MSPs are taking many steps to embrace cloud computing, such as investing in ongoing customer experience and elevating cloud management capabilities. It also includes creating a cloud cybersecurity practice, shifting to business consulting, changing pricing structures, partnering with independent software vendors (ISVs) to resell software as a service (SaaS), and shifting to the vendor line card.

How MSPs Can Shape a Better Future for Themselves

MSPs face many business challenges, from technology adoption to retaining customers and revamping their service offerings. And since MSPs cater to the needs of a wide range of industries, from staples like healthcare and education to new opportunities like the metaverse, the list of challenges just gets longer.

What is working in favor of MSPs is that they now understand the importance of emerging technologies for their operations, offerings, and business model. And that’s the key to shaping a stronger future — embracing emerging technologies for everything, be it enhancing the customer experience, elevating their service portfolio, or overcoming challenges.