Mega MSPs and Consolidation in 2018
It's the end of the year and we are all making our analysis of the past year as well as predictions for the new year. Typical for this time of year, there are a lot of ideas floating around about what we can expect in 2018 related to mergers and acquisitions, consolidation, venture capital investment, the so-called rise of "mega MSPs", and other related themes.
I thought a quick recap of these issues would be helpful for our 2018 planning.
As the economy continues to grow, GDP in the United States increases, the general sentiment of exiting managed services has changed from a few years ago. While I don't want to get too political, it is an inescapable correlation to draw between the US tax policy of a few years ago and the sheer number of MSPs who sought to exit the industry.
Now, in fairness, it was a combination of both tax and regulatory policy which combined to cause many smaller MSPs to seek an exit strategy. Today, with a change in regulatory and tax policy occurring as we speak, many of these same small business MSPs are seeing a lot of growth potential in the future, making M&A less crucial. This doesn't mean MSPs won't entertain offers to sell, but the driving need to exit the business due to crushing tax or regulatory policies seems to be going away.
Consolidation & Investment
We are seeing more investment coming from private equity and venture capital firms aimed at managed services companies. These investment seem to be focused around security as well as larger MSPs (i.e., those MSPs generating at least $10 million in revenues).
This is not new behavior from the investment community; they've always favored larger businesses for a variety of reasons (better ROI, more options, etc.). This does not change my assessment that there is a) no market consolidation taking place in the managed services profession, and b) no guarantee these larger MSPs will be disruptive to the mid-market or SMB communities.
The so-called mega MSPs have historically not done that well. Roll-up campaigns rarely, if ever, work out for the operation teams or the investors. Every attempt "consolidation" play attempted has resulted in marginal gains, customer attrition, and discontent to those who participated in the roll-up (i.e., those MSPs who sold their companies). Consolidation due to market forces (i.e., weak customer demand) has never happened in managed services. It certainly is not happening now.
Whatever is happening in the M&A and investment world, think of the larger context. For every MSP involved in a M&A deal, there is a new MSP being created. I actually think it might be more than that, but the point is there is no "consolidation" occurring in the managed services profession today.
IT Spending Continues to Grow
With IT spending expected to grow at a rate of 3.5% in 2018, and IT services (where managed and cloud services reside, at least according to Gartner's taxonomy) projected to grow at nearly 5%, why would there be any type of consolidation taking place?
Larger MSPs have advantages smaller MSPs do not. Greater resources and access the capital are obvious benefits. But, smaller MSPs also have advantages their larger colleagues do not possess. Agility, greater connection to customers, and ability to provide boutique services often neglected by larger providers. The point is, there are clear markets to be served and MSPs who are optimally suited to serve them.
The presence, or lack thereof, of larger MSPs will not disrupt the MSP community in any significant way. Other than attract greater attention to managed services and generate a lot of articles, like this one.