I have been giving a lot of thought to the issue of "MSP consolidation" and why I have a problem with it. To summarize, people have floated the idea that we are in the midst of an MSP consolidation period since the mid-2000s.
My gut response to these claims is that no, we are not in the middle of consolidation because of the external data showing a) new MSPs being formed on a regular and consistent basis, and b) managed services spending continues to increase. If you agree with these two data points, how could you possibly think our profession is "contracting," as the claim of MSP consolidation.
MSP Deals Are Happening
It would be incorrect to assume from my writings that I deny M&A deals are taking place; they are. Besides a few periods over the last 20 years, there has been a relatively stable deal flow with a relatively stable valuation line.
So, what would explain the perception that we are experiencing MSP consolidation? While pondering this question, it struck me that there was a very elegant explanation for these seemingly divergent viewpoints.
Attrition vs. Consolidation
It would be an easy mistake to assume that there is turmoil within the managed services profession by looking at all the discussion around M&A activity. Any casual observer would believe the industry is contracting and going through struggles.
Instead, look at the profession not as going through consolidation but experiencing natural attrition of companies who are not maturing at a sufficient rate. This attrition is can both explain MSPs failing to advance at a rapid enough rate, (this includes MSPs who are doing well but just not doing well enough fast enough!) or not able to break through the all too familiar growth barriers, either due to lack of funding or other resources.
Attrition would explain much of the M&A activity in the last several decades and still allow for the tremendous demand for and growth in managed services spending.
Why do we have MSP attrition?
Even with the attrition rate as it stands today, we have more MSPs being created (both from scratch and existing companies) which is outpacing the attrition rate. The net result is we are seeing more MSPs being established, even with the attrition of MSPs through M&A and natural business dissolution.
I got to thinking about whether our profession was unique in seeing this type of attrition, and I have borrowed another theory I've held to explain this. MSPs have no formal regulatory or licensing path. What this means is there is no educational, regulatory, licensing, or governmental oversight of MSPs like there is with medical doctors, lawyers, accountants, etc. What these other professions experience is natural attrition before the individual (or organization) becoming licensed.
