In previous writings, we have explored the various M&A strategies employed within the MSP market throughout the years. It is no secret that roll-up strategies have been historically popular within the MSP professional community. Still, it occurred to me that we have never addressed why such a strategy would be so popular and yet have such poor results.
Today, we will address that question.
MSP Roll Up Objectives
In determining why a business or investor would even consider a roll-up strategy, we need look no further than the stated goals of those pursuing roll-ups. Simply put, the roll-up is designed to acquire a group of MSP businesses and remove inefficiencies. The result will be accretive results more considerable than the sum of the individual MSPs before the roll-up. You can see why such a strategy would be attractive to an investor. Assuming you have the capital, acquiring a group of MSPs would result in a much larger MSP organization with more clients, more recurring revenue, and greater efficiencies.
We will explore the challenges associated with this strategy in a moment, but for now, you can see why pursuing a roll-up would be one of the best ways to achieve significant growth in the managed services sector. However, we cannot only look at the stated intentions or objectives of pursuing a roll-up strategy; we must also look at the actual results of attempted roll-ups and determine whether the goals were met.
I don’t want to spend too much time regurgitating how roll-ups have failed in the past; we have already spent considerable time discussing that topic within this community. I will, though, list a few of the more commonly known facts so first-time readers can become acquainted with them.
- Roll-up strategies often ignore the challenges of integrating so many MSP businesses
- Roll-ups view MSP business relationships as commodities when they are more appropriately viewed as professional services relationships
- We have no examples of successfully executed MSP roll-ups
MSP Roll-Up Assumptions
In arriving at why investors would even consider an MSP roll-up strategy in the face of irrefutable (at least so far) data showing such acquisition strategies have never worked, we must ask why. Why would investors pursue such a significant business risk with such scant evidence of it working?
The answer I have arrived at is there must be a fundamental misunderstanding (the MSP roll-up myth referred to in the title) as to the actual MSP market; at least a misinterpretation sufficient to allow so much capital and resources to be allocated to M&A transactions of this sort. What is the misunderstanding?
Investors sold on the idea of an MSP roll-up must believe that there is a surplus of MSP organizations and a scarcity of demand from customers. Only this belief would justify the significant investment into a roll-up campaign. This belief is wrong. There is no easy way to say it; it’s just incorrect.
Over the last 30 years, there have been periods where people have said the managed services profession has hit a peak or has become too fragmented. My view of the last 30 years in managed services is that we have seen a steady expansion of the profession, with a few minor periods of stagnation (primarily due to external economic factors), but always expansion, never contraction. Even during the challenging periods of the global economic recession and the post 9/11 years, MSPs did quite well overall.
The belief that there are too few managed services customers and too many managed service providers is not just wrong; the exact opposite is true. If you agree with this statement, it would certainly explain (as I believe it does) why so many attempts at MSP roll-ups have not turned out as planned. (NOTE: Please know that I am not opposed to M&A activity in the MSP profession; quite the contrary).
The perception that there are too many MSPs is easy to understand, although it is wrong, in my opinion. The perception has come about because we a) have no defined marker of who is an MSP and who is not, and b) many companies have been given the label “MSP” when quite a few of these are at best early on in their managed services maturity journey.
MSPs, like many other professions, have a maturity path that never stops. MSPs should constantly be advancing their practice. However, many companies who adopted managed services practices that have a) never expanded that practice or b) never allowed it to mature past its infancy. It is safe to say there are far fewer “mature” MSPs compared to early-stage MSPs. And, complicating things even further, the number of early-stage MSPs continues to grow!
What are some examples of these types of companies? Value Added Resellers, IT consultancies, telecommunications firms, hosting providers, and cybersecurity consultancies are just a few. Companies like those previously mentioned, who have dabbled in managed services but never fully committed to it, often still trade on the name managed services for marketing and sales purposes. This means that although there may be many firms calling themselves “MSPs,” there may not be as many fully matured MSPs as one might think. If you are starting to get confused by all this, imagine how the investors feel.
The numerous examples given on this site about the significant growth we have seen in the managed services profession (and continue to see) should all lead to one unmistakable conclusion. There is a strong demand for managed services, and that demand is still outpacing the number of qualified (i.e., mature) MSPs available to do the work. If you agree with this statement, then an MSP roll-up strategy is probably not a wise policy for MSP growth or investment.