With the recent uptick in IT channel M&A activity, for many MSPs, consolidation is a forgone conclusion. In fact, in 2018 Channel Futures found that roughly half of all MSPs were considering a merger or acquisition in the next 12-24 months. Some executives have gone so far as to predict that 20% of MSPs will dominate 80% of managed services revenue in the U.S. by 2020. While this is great news for some of the larger MSPs, it does beg the question: what happens to everyone else?
Let’s look at how current M&A trends will impact you over the next few years and what steps to take in order to future-proof your MSP business.
What Trends are Driving M&A for MSPs?
Trend #1: The exit of the baby boomers from the workforce.
As baby boomers enter their final years in the workforce, retirements will continue to shake up the MSP industry. According to the Bureau of Labor Statistics, the labor force participation rate is projected to decline to 61% percent by 2026. Meanwhile, consolidation among MSPs is expected to rise at least through 2022. This means aging owners will be looking to exit their businesses and unlock net worth from the companies they created, making M&A all but inevitable for many MSPs.
Trend #2: High customer expectations for comprehensive cybersecurity.
The increasing demand for managed services among SMB customers has already impacted the MSP industry. But going forward, the need for managed security will also be a major differentiator. It’s clear that today’s SMBs want more security-savvy partners, and in some cases, are willing to switch providers for ones with “the right cybersecurity solutions.” To keep up with these demands, consolidation—or at least new partnerships—between MSPs, Managed Security Service Providers (MSSPs), or other cybersecurity providers is highly likely.
Trend #3: Vertical market consolidation and geographical expansion.
This has been happening for a while now, but MSPs will continue to merge or acquire other MSPs to try to become the dominant brand in a specific geographical region. In fact, many are already starting to tailor business efforts to gain a foothold in specific markets and to differentiate from their competitors. M&A is an obvious shortcut to successfully navigating the hoops and regulations in specific industries and regions. For example, a U.S.-based MSP may want to establish a foothold in Europe and acquiring an already established European business that understands both the EU market and the region-specific compliance requirements places them firmly on the fast track.
How to Prepare for the Future
Let’s be blunt: just putting your head in the sand and ignoring the ongoing M&A frenzy could result in your own peril. To survive in our ever-evolving MSP landscape, innovation and business growth are key.
Consider these strategies:
- Focus on customer retention. As the market consolidates, SMBs will seek out tech-savvy partners with a solid reputation. Positioning yourself as the go-to contact for IT issues will render your business indispensable.
- Position your MSP business for long-term profitability. Don’t chase the instant dollar! To grow through M&A, you must be profitable. Don’t be afraid to charge premium prices for your services or add recurring-revenue opportunities through managed security.
- Future-proof with automation. Again, this relates to profitability. Reduce operational costs and shorten your incident response time by taking advantage of automated solutions. If you plan to add managed security services, leverage vendor solutions with automated, MSP-ready solutions, like Webroot, to increase your bottom line.
- Plan ahead by becoming educated in cybersecurity. As the MSP landscape grows more competitive, your expertise is invaluable. To help you prepare, Webroot offers educational information on the threats we see today, as well as other beneficial business security resources.
- Get familiar with security frameworks. Frameworks such as NIST (National Institute of Standards and Technology) and CIS Controls (CIS Critical Security Controls for Effective Cyber Defense) provide guidance on today’s essential cybersecurity practices. At Webroot, we offer valuable information on NIST in our “Lockdown Lessons” podcasts with industry experts Joe Panettieri and Nick Emanuel.
- Consider verticalization. Specialization can help you stand out in a competitive market. For example, your industry expertise, coupled with in-depth knowledge of cybersecurity technologies, best practices, and solutions will set you apart from the pack.