Ep 255 | Internal IT vs MSP: If everyone could do it, they would

• Efficiency, not size is what matters
• Resources only gets you as far as your process
• It's all about execution

Full Transcript:

Is there a difference between internal IT and a managed service provider? The MSP market is still growing. And does size matter in managed services? Coming up next.

What's up folks? All of you out there in the MSP land, hope you're all doing well. I thought we'd start off this episode with a segment that looks at the differences and potential similarities, but more often differences between internal IT departments and managed service provider business units. And you might think, "Well Charles, why are you spending any time on this? I mean, we kind of know what the difference is. We help internal IT departments." Well, yeah, I get that, and other people do get it as well.

But I'm constantly reminded, especially now when we see again another wave, a huge wave of new members coming into the MSP Alliance. And where are they coming from? They're startups. A lot of them are startups with no prior managed services experience, which is good. It means that there's a new age, a new generation of MSP professionals that are being born and coming into the profession every day. And this is somewhat for them, although for some of you old timers out there who may have forgotten some of these issues, this is perfectly acceptable for you to listen to this. But a lot of the new MSP professionals may not really be aware of why there is a distinction, a difference between internal IT departments and the MSP. Because if you don't understand what that difference is, you're never going to be able to understand it and sell managed services as effectively as you could. And you won't be able to understand the pressures of the internal IT department and be able to offer a solution that makes their life better. And ultimately that is what MSPs going back 30 years have been about. Internal IT departments don't always see it that way. There was a time when they looked at MSPs as very much a competitive threat. I think that those days are by and large gone. I think most internal IT departments, most everybody understands that MSPs and internal IT work closely with one another.

But let's dive right into it. And I think you'll get what I'm saying pretty quickly. If you really examine the IT department and an MSP, they have a lot of similarities. Some of those similarities might be, well, they both are taking care of users potentially. They might have a help desk, they may have some tools, they have internal IT, they have IT technical professionals working to accomplish that goal. And that's good. That's at the surface level where the similarities end because an internal IT department – and this is not new, and it goes back decades – the internal IT department has unique struggles that are unique to them that really don't apply in any other MSP environment.

And what I mean by that is the internal IT department has an ownership group, has a board. Maybe they have a particular goal for being in IT in that company. All right, I'll give you a good example. If you are Coca Cola, your internal IT department is all about equipping the company, its internal users, its executives, its salespeople, the manufacturing plants, the distribution partners, equipping them with IT capabilities to sell a beverage. If you're an IT department for a law firm, you're there to make those lawyers better and more productive at delivering legal services. If you're in medical and so on and so on, you get where I'm going. But that's their core focus. Their core focus is whatever that entity or organization does it's to further that goal. It is not, I would argue it is not the goal of the internal IT department for that company to be the best internal IT department they could be.

Now, that may sound really counterintuitive and sound strange, and I am not besmirching our friends in the internal IT community because there's really fantastic people. This is an organizational thing, right? This is an organizational, not an individual thing or attribute that I'm bringing to the table. The internal IT department isn't there, does not exist to become efficient, to become scalable, to become the best that it can be for giving great customer service to their customers.

Now, a few of you may say, well, no, we do all that stuff. Maybe there's a few of you out there, but it is not the majority. It is not the majority. And I don't want to go over that too much further in detail. But I think you get the point that the internal IT department is there at the behest of the larger entity and it's there to promote and to help that entity, that organization, that corporation do whatever it is that they're doing. It is not to become proficient with high customer service and all the other things that we in the managed services field value. And it doesn't mean that it's bad. It just means that it's different.

We value certain things differently than internal IT values. And a lot of it is not the fault of internal IT. A lot of it, I hate to say, but I think it's true, is the responsibility and due to corporate mindset, legacy corporate mindset of IT and what it is and not really understanding what it is. Today, I think that that may be different, especially as you have newer generations coming into the workforce and you have them in organizations and entities that have IT from day one, which was not the case. Right? Going back decades, you've had companies that only late in their careers had IT departments and IT capabilities.

But why don't internal IT departments scale? Why don't they have efficiency? Why don't they have high customer service markers as not only goals, but how come they don't try to achieve them? The reason for those questions, in my opinion, is the internal IT department, again, is motivated by very different outcomes. Their goal and what they actually end up doing. Right? Their goals and their day to day life aren't always the same, but their goals are very different than an MSP. And their outcomes, that what they actually end up doing, is very different from that. What does that mean?

Okay, if you are a small or mid-sized company today, and you don't have unlimited budgets, you've got maybe a few IT people, probably supporting a much, much larger workforce, and you probably don't have the training that you need or would like. You probably don't have budget to go out and hire more people in the disciplines that you need. You probably don't have access to the tools that you need to do the services, to do the job that you were hired to do, to do the job that the internal IT department is supposed to do. That has nothing to do with desire or a wish to do those things. It's just lack of resources. They don't have the people, they don't have the tools, they don't have the time and the day to do all those things that they need to do to push the company forward. And also make sure that the sales team has email access, make sure that they can print, make sure that HR has application support for the things that they do, make sure that accounting team has access to their applications, and so on and so on and so on.

What ends up happening in internal IT is that they work on break-fix kinds of things more often than not. How often have you seen this? I know you MSPs at home in the car listening to this. You're nodding your head, right?

Internal IT ends up, more likely than not, dealing with the fundamentals, the blocking and tackling of everyday IT drudgery. Yeah, it's drudgery, but it has to be done. Backing up the data, patching up the systems, making sure that things are properly provisioned, making sure that the lights are all green and we haven't even started to scratch the surface when it comes to all the effort around security. Internal IT departments are strapped.

And so it is really, really rare that you ever see an internal IT department actually achieve scalability, efficiency, and high customer service outcomes on their own. You just don't see it. But they do happen. And so we know that it can happen. We just know that it's really rare.

One of those examples, there's a very famous story, I think, was Caterpillar. Caterpillar, the manufacturer of equipment, farming equipment, among other things, had an internal IT group at one point that achieved that ability to scale. And they got to the point where they realized, wow, we, we actually have something that's really good. We are really efficient in our movement. We are doing things that we need to do. People love us. What do they do? They said, we're an MSP, let's pull this out of Caterpillar and let's sell our services back to Caterpillar as an external unit. They're one example. There are others.

I've seen hedge fund IT departments who were really uniquely attuned to hedge fund problems. And so they developed an internal IT department for hedge funds and they achieved because they were good at it and because their management gave them money and funds and resources to go and do that and achieve that. And what did they do? Same thing. They realized, "Wow, we're good. We're doing things the way that nobody else is doing. We're unique." Then what happens? They pull that unit out and they start selling it to other hedge funds.

It's a curious thing, don't you think – that the market drivers, the natural evolution of an internal IT department is when they actually mature and they actually become really proficient – scalable. Not all the time, but I think more often than not, they feel a calling to do this for others because they realize that there's a need that isn't being fulfilled. And so I call that out for your attention so that you guys understand that there is a really big chasm.

If it's not large, then it's deep, at least between MSP and internal IT. And the reason that it's there is that most of the internal IT departments that you face today are maybe through no fault of their own, but they are just locked into a perpetual reactive IT mode that they can't get out of. Maybe management is not willing to invest in them. Maybe they just will never have the access to resources in that size of a company to be able to do what they need to do at scale and at efficiency, whatever. The point is, we need to recognize the difference.

We need to understand that internal IT are struggling. They want to become better. They want to do those things. And that is one of, not the only, but one of the significant benefits and reasons why MSPs are so vital today is that they give that internal IT department the ability to unlock what they need to be doing, but really are unlikely to ever do if not helped by someone on the outside.

That's a big topic. I get that. That's a huge overarching theme. A lot to think about. Maybe if you're in the US, you're going into Memorial Day weekend or whatever and you're thinking about this for a while because I think about this type of stuff for a while. It's an existential reason why MSPs are so valuable is what this is.

But if you can understand it, if you can understand that internal struggle of IT departments and what they want to do, but what they can't do, you will be better off as an MSP in understanding their problems, being able to rationally talk to them, not talk down to them, being able to say, "Look, I get what you're trying to do. This is what we do. This is how we can help. This is why we are different than you. Doesn't mean that we're necessarily better. Just we can do things that you can't let's partner up." If you get that, you're going to be much better off. You'll communicate better, you'll sell better, you'll deliver better services. Trust me.

All right, next topic. The MSP market still growing strong. You read the news today. You listen to the news, watch the news. Whatever you do, it seems to be a bunch of negative financial stuff, right? The stock market's going up and down. People are talking about recession. They're at least talking about a slowing of the economy. At some point, something's got to give, right? I thought this was somewhat good news.

So this piece came from Allied Market Research. And again, I sound like a broken record. You have to take this with a grain of salt, not because it's not accurate, but because it's focusing on a segment of the market that is just – it doesn't represent numerically the majority of MSPs out there, but it does, and I'll explain why.

Title Managed Services Market to reach $594 Billion globally by 2023 at an 11.3% compound annual growth rate, according to Allied Market Research. Okay, this is dated May 17, 2023, this year. All right, so Allied Market Research, not sure who these guys are, but they they cover the tech sector, and they look at a handful of, quote, MSPs and they come up with this number.

Now, a couple of things. Number one, they are talking about the Enterprise class, the leading managed services market players that they list, which, by the way, is identical. Identical to probably a dozen or two dozen other reports and studies that come out every year that are kind of similar in this style. They all list the following companies as leading managed services market players: IBM, HCL, TCS, Atos, AT&T, Cisco, Fujitsu, Ericsson, Accenture, and Dimension Data. All enterprise-class. Undeniably enterprise.

Is that bad? No, it just doesn't represent the mid-market, medium or small business sector covered by MSPs globally, which is numerically, there are more MSPs of that type than there are of this type right here's. Like, what, a dozen, ten? That's fine. I'm just letting you know. If you're saying about your $5 million MSP practice in the middle of Cleveland, does this apply to me? It does, but just hold on. I'll get there.

So the players that they're talking about here that represent that $594 Billion market share that they're writing about are largely enterprise. Not largely. They are enterprise. Point number two. At $594 Billion, by 2031, that would be roughly half, a little less than half, but roughly half, let's call it, of the Gartner IT services global spend, which I think is around a little bit over 1.1 – I think it's, it's over $1 trillion. I don't know if it's actually at $1.1 trillion. I'll go, I'll have to go check that. But, but it's a lot. It's over $1 trillion.

Now, the Gartner number should rise, you know, in the next coming years, you know, by the time we get to 2031. Let's assume that this number is roughly half of that $1.1/$1.2 trillion, whatever that's at in 2031. That would mean that managed services, according to Allied Market Research, is representing at least half of the total IT services spend on the planet. Makes sense. We're over, a little bit over $1 trillion in IT services global spend, according to Gartner. Allied Market Research says by 2031 we're going to be at $594 Billion of managed services spend according to those ten or so enterprise-class MSPs. That's roughly half, right?

That's good. Most of you are saying, "Well, that sounds pretty good." It is good. Not just the number, because it sounds big, because it is big, but the growth rate 11% – 11.3%, to be precise. But what doesn't this market research talk about? What area doesn't it cover?

Everything else outside of enterprise, which is massive. It is massive when you take everything below the enterprise-level, mid-market and SMB combined, numerically, you are talking about a lot more MSPs. But in the aggregate, you are talking about a lot of money in that sector alone. How much, we don't know because Allied Market Research and Gartner don't really cover that segment of the market. But we could probably deduce, using logic, that if we're at $594 Billion in enterprise managed services by 2031, and there's probably another half a billion plus unaccounted for, you could probably deduce that the rest of that money is coming from somewhere.

Now, where is that money likely to come from in IT services spend on planet Earth? Well, it's not the Martian MSP sector that's red hot and adding to this number. No, I'm going to go with planet Earth based SMB mid-market, good old-fashioned managed service providers. Now, if you're a $5 million MSP in Cleveland, that's something that I would be really happy about. Now, I don't know. I'm assuming that the growth rates would be relatively close for the SMB and mid-market as they are to the enterprise. Again, I'm going into areas of statistical haziness because some of you who have statistics degrees would say, well, Charles, your methodology is really flawed here. We'd have to look at the sample size and yeah, I get all that. I get all that. I'm just trying to do the best that I can with the information that we have, which is flawed. It's incomplete. It's not flawed, it's just incomplete.

So I'm trying to fill in the gaps and try to reasonably deduce what this information means in the midst of a whole bunch of other market chaos and generally bad news that people want to talk about. I want to talk about something good. I want to talk about something that's positive. I think that that's a really positive story. It's a really positive story because what it says is, "Hey, look, yeah, over the next couple of years, we may have a recession, maybe, maybe not. We may have a soft landing out of this hot inflationary period. Maybe, maybe not. Who knows? The point is that at some point we're going to get through this, and by 2031 we're going to be sitting at close to $600 million sorry, $600 billion in global managed services spend, with roughly another five or six hundred billion likely coming from the SMB and mid-market sectors.

So if I was you, what would I be doing with this information? Well, I would be planning I would be planning for growth. I would be planning for a reasonable, ongoing, continued growth cycle in your managed services practice. Now, this brings up a whole host of other questions. If I'm a VAR making 50 to 60 or 70% of my revenue from reselling hardware or software, and I'm looking at this report or I'm listening to this podcast or watching the podcast and I'm saying, "Well, how do I capitalize on that money over the next seven years?" It's not by being a VAR, I'll tell you that. You got to be in managed services for that to happen. You got to make that shift.

If you're highly reactive, if you still have customers that are pulling you into the reactive universe, I imagine there's, like, a reactive break-fix multiverse, right? Where there's a bunch of computer repair people who are just perpetually repairing the same old unplugged ethernet cords and jammed printer spoolers and stuff like that. And they just over and over and over again every day. And they never can get out of the rut, right? But then maybe there's an alternate MSP universe where everything's running fine and all the lights are green, printers work, email flows, everything's secure, life is good. Maybe Marvel will make a movie about that one day. Anyway, back to reality.

If I was you, I would be really looking at the next several years and examining your business model and wondering, is your business model going to get you to that $600 billion in revenue if you're in the enterprise sector? If you're not in the enterprise sector, you still have, I think, $600 billion or so up for grabs that consumers are going to be spending with somebody. The question is, are they going to spend it with you? Are they going to spend it with an MSP? Good question. Good question to ask yourself. Anyway, some good news, in my opinion, in a world of maybe not so, not so perfect economic news, but on to better and bigger things.

Speaking of big, does size matter in managed services? Does size matter in managed services? So I hear this a lot actually from MSP operators, owners who say, "I want to get to this revenue line, this marker before I consider myself success." Or I hear a lot of investors, a lot of PE firms say, "We're not looking at any MSP unless they have an EBITDA number of this, anything below that, we're just not interested because we don't think that they're serious or to be taken seriously." Okay? I get why they say those things. I get why the investors say it. I get why business owners and operators say that they have revenue goals.

Goals are not the problem. But it always seems like there's a fixation on I got to get to a certain size in my MSP practice before I can be considered good. That's the issue. That's the question that I want to dismantle, tear up, throw away, burn and never deal with again. Because I don't want any MSP operator, I don't want any investor for that matter thinking that the value, the worth of any MSP is contingent on the size of their company. Because it's not. I'm going to give you some examples.

I have seen many large organizations who have managed services divisions. That's not all they do, managed services. In fact, more often than not it's a very small portion of what they do. They do something else. But they have managed services and those managed services divisions have been ugly. Ugly is the best way to talk about it, best way to describe it. Nonfunctional inefficient, not scalable, disorganized, highly unsecure, highly at risk. Not because they're a big company, no because they never took the managed services game seriously. They never looked at it as a profession. They never looked at it as anything other than a new technical offering. And therein lies the problem.

So any of you larger MSPs – and by the way, I know a lot of large MSPs who have really fantastic internal MSP departments, really, really top-notch. But it's not the size that got them there. It's not the size of their organization that got them to that level of proficiency, efficiency, scalability. I've seen small MSP organizations who had really fantastic hyper scalable, hyper-efficient, really secure managed services offerings that would put internal MSP offerings of those larger organizations to shame or just pale in comparison. I've seen small organizations that have really abysmal MSP, right?

Get what I'm saying here? Size is not an indicator of anything. I mean if your sole objective is to become bigger as an MSP because you think being bigger is going to make you a better MSP, that is not the case. If you're a good MSP, the chances are really high that your MSP practice and your company is likely going to grow. It just stands the reason because you're going to be able to keep up with and eventually scale and scale and scale. This assumes that you have good sales, marketing team. You can execute on that sales strategy and all that stuff, right? Things that are not technical related, so I appreciate that. Size is not an indicator of success, size is not an indicator of MSP efficiency.

And again, I make reasonable deductions based on what I see in the MSPs that I've worked with, not only consulted with, talked with over 20+ years, but also the countless MSPs that we've certified. We've got a ton of data to make these types of assertions and that is that the MSPs, regardless of size, that really focus on their efficiency and scalability first will be able to have a core engine that has the capability, not saying it will, but has the capability to grow exponentially.

An organization that has an MSP division, let's call it, and they really never cultivate it. They never really bother to invest in it to make it hum as an engine should, as an engine could. They never really invest in it. And as a result, they think, "Well, we're a big organization and we see this more in big organizations than in small organizations – that we do know." The bigger organizations tend to look at their experimentation in managed services as an experiment. They tend to look at it as competitive to other things that they do. That's a real problem the larger you are.

And we've studied this and we've done a lot of work to try to resolve that specific issue within larger organizations who are trying to get a managed services business unit off the ground. Some of their fiercest competition and fiercest headwinds come not from other competitors. It comes from internal, inside the company, from maybe management or maybe other departments or very often salespeople from another division who are trying to subvert the managed services offering because it's competitive to their compensation structure. That's a touchy subject.

The point is the resources that you have as any entity, but particularly a larger organization, those resources are not a guarantee of your success. They can guarantee that you have access to cut a check to get a tool. They can give you access to hire people who have the skill sets. But unless you have the right mixture, the right environment, the right sponsorship and approval and support from your management to allow you to execute, it's not going to do anything. It's not going to do what you need it to do.

And I think back to the Inspire group meeting in Boston several weeks ago, and someone said this because they were talking about the reluctance of some MSPs to open up and talk to other MSPs because they think that they're afraid of giving over secrets like trade secrets. Like if they talk to another MSP who's within 5ft of them, they're going to be giving over the secret to their Coca-Cola formula. Like it's that jealously guarded.

And this MSP executive, he's a business owner, he's got a not a small MSP, it's not a huge MSP, but it's a reasonably sized MSP said, "You know what? We don't have secrets from each other. We use relatively the same tools. We follow relatively the same process. We go through the same mechanisms every day. What makes us different from each other is whether we execute or not."

And I thought that's really good advice. It's really good advice for those MSPs who are really scared of opening up and talking to other MSPs because you think that you're going to leak out accidentally, some trade secret that's making you so unique and special. That's not what makes you special. It's not. If you're executing, that's what makes you special. You can do it.

Because if everyone could do it, guess what? The internal IT departments would be doing it all over the place. If internal IT departments could do it, all of those big ten enterprise-class MSPs that are generating $600 billion, or will be by 2031, wouldn't be making that money because all the customers that they sell to would guess what? What they would be doing. They'd be delivering their own managed services internally. They wouldn't need enterprise-class MSPs or mid-market or SMB class MSPs.

It's all about execution. It's not about size. It's not about resources. It's not about how much your budget is, how much your revenue is. Can you scale? Are you efficient? Are you secure? Do you follow best practices? Can you execute on all those things? Can you put them all together and execute on that managed services vision? If you can do that, regardless of your size, you'll be successful.

Till next time.