741 MSP Growth, Profits, and Wellness

[Uncle Marv]
Hello friends, Uncle Marv here with another live episode of the IT Business Podcast presented by Thread, the winner of last year's Pitch It competition and powered by Rhythms, internet in a box. That is how we are coming at you live from the Rosen-Shingo Creek Resort. And I am joined by a previous guest we've had on the show when we were back here at IT Nation Secure, Peter Kajawa, Vice President and General Manager, Service Leadership at ConnectWise.

Peter, how are you?

[Peter Kujawa]
I'm great Marv, great to see you again, enjoyed our last discussion, looking forward to this one.

[Uncle Marv]
It should be good here, and how have things been? It's been six months?

[Peter Kujawa]
It's been unbelievable. Yeah, the year's been a great one, it's been really interesting. Our data that we've collected so far this year has been fascinating on what's going on in the industry.

Okay. So, it's an intense ride. Well.

It's been a lot of fun.

[Uncle Marv]
Let me ask, is there any of that data that you can share?

[Peter Kujawa]
I can share all of it, sure.

[Uncle Marv]
Because, I mean, all of the reports out there, you know, we see from our friend Jay at Canalys and stuff that the industry, it's still expanding.

[Peter Kujawa]
Yeah, Jay does a great job, Canalys does a great job on their reporting on the macro industry. Our data is mainly focused within the MSP and TSP communities, so we benchmark ten different business models. And every quarter, those providers put all their balance sheet and performance data, financial data, all of it into our system.

So we're able to get a really granular and very specific look at how partners are performing in each of those ten business models. So the answer is yes, the business is still expanding. If you look at Q3, we saw a couple of interesting trends.

In MSPs, growth, organic growth, specifically, is continuing to slow. The peak on it was about 18 months ago or so, and it's coming back down. The four-quarter trend on it, on managed service revenue growth, was just over 10%.

It was about 25% a couple of years ago. But the good news is, a lot of that higher revenue growth a couple of years ago was because of inflation. And the negative impact of wage inflation really hurt gross margins for a lot of MSPs out there.

And so as wage inflation has slowed down, while we're seeing revenue growth go back to historical norms, we're also seeing profitability improve, gross margins up. So running an MSP is, right now, it's still a great time to own and run an MSP, and we think it will be for quite a while.

[Uncle Marv]
So how specific does that information get? Because there's a perspective that, since COVID in 2020, wages have gone up, and yet people are working remotely. So people would think that, well, do they really have to keep going up and stuff?

So is there data that really drives deep into that aspect of it?

[Peter Kujawa]
Absolutely. Every year, we collect industry compensation data. In fact, right now, if anybody listening goes to service-leadership.com or goes to our LinkedIn page and follows us, we have a link to our data collection portal. So if you put your comp data in right now until the end of November, you'll get a free copy of our 400-or-so-page report when that comes out in March. But yeah, we looked. Wage inflation started to slow about 18 months ago, the second half of 2023, and this year, certainly, wage inflation has continued to slow down, which is great for MSPs.

That's their biggest expense. So wage control and wage inflation is really helpful. So yeah, people are working remotely.

We captured that data last year. Our data said that there's way less guys working fully remotely than you hear about. Most employees, even at MSPs, are back in the office, at least on a hybrid basis, at least two days a week.

And there's a lot more that are back full-time than there are working fully remote at this point. So I think some of that really came back down a couple of years ago. And certainly, obviously, we saw that during COVID.

We saw it in 2020 and 2021. But starting in about the middle of 2021, I know a lot of MSPs started bringing their people back, at least part-time, to the office.

[Uncle Marv]
Well, part of that is because our clients started bringing people back to their offices. That required a lot of us. The other aspect that I was wondering about, if revenue is down overall, how much of that is tied to security, where we had a nice run for a long time, everybody was hammering security.

We know that compliance is a big thing, but I got to imagine there's still growth there.

[Peter Kujawa]
Oh, there's still growth in all of it. I want to be clear, it's not that revenue growth is negative. We're back to normal.

Normal growth, okay. Historically, managed service revenue growth, including managed security, was in the range of 10% to 14%. And that goes back a long way, so years and years.

So for about a three-and-a-half-year period that started in the second half of 2020, about a three-year period, we saw that really ratchet up. And that was because of three things that go into organic growth. One of those is certainly inflation.

The second is new logo growth. Especially in the early days of COVID, there were a whole bunch of companies out there that hadn't previously outsourced that realized, we don't know how to manage remote employees and hybrid and security on those guys and all that. So you definitely saw a lot of new opportunity for new sales during that period of time.

And the third thing was companies were growing. They were adding their own employees. And every time, if you're pricing a per-user model, which you should be, every time they're adding new bodies, you're organically growing your revenue.

So those three things combined to create really frothy growth. We're back at that right now. We're at just about 10% on a four-quarter trending basis.

And we think the plane's going to land around there for a while. Okay.

[Uncle Marv]
And it's still healthy.

[Peter Kujawa]
And that's still healthy growth. So it's back to basics. You've got to really be managing your business for efficiency, managing for optimization of your margins, and figuring out how to invest in sales and marketing.

Every MSP out there should be investing somewhere around 14% of gross margin in sales and marketing right now. And when times are dialing back a little bit, it's especially important to be doing that.

[Uncle Marv]
Now, that's a look back, I guess. And I know there's some announcements that'll be coming out here at the conference. We're still in the pre-day, technically, so I can't allude to any of them.

But in terms of the perspective of an MSP going forward, ConnectWise, how do you see things going from an overall perspective?

[Peter Kujawa]
Full speed ahead. Full speed? Yeah, it's a great time to own an MSP.

And multiples have never been higher for valuations. There's an extremely healthy market of buyers out there. Is that true?

[Uncle Marv]
I mean, in terms of those valuations, are the valuations high or the multipliers high?

[Peter Kujawa]
First of all, Mark, everything I say is true. Of course. Okay.

No, the both. If you're running the multiples, we benchmark the multiples. And what matters is quality more than ever.

So if I'm running an MSP today, I'm really focused on maximizing my profitability. And I'm also focused on whether I'm planning on selling or not, I'm going to have a strategy for what I want my business to be worth someday. I'm going to know what that is because that's going to affect budgeting.

We refer to that as a value creation strategy. Anybody who's in an evolved peer group uses the service leadership toolkit and goes through value creation strategy. But what value creation strategy basically means is my business is worth X today.

I want it to be worth Y at whatever date, five years from now, 10 years from now. And so that requires you really understanding what you need to retire or if you want to sell and just do something else, what do you need to have? And what are you going to need to do to get it there?

And so for most MSPs that we work with, there's a combination of two things that they need to do once they know that. They need to figure out what they need to do incrementally next year for budgeting, following year, etc. But they also need to focus on maximizing their EBITDA both as a percentage of revenue and in terms of total size.

So if you grow your business and you grow your business the right way, high quality customers, you focus on efficiency in your business and gross margin, quality of service delivery, you do all those things, you're going to increase the value of your business substantially. And there's so many buyers out there right now for high quality MSPs. And you don't have to be a huge MSP.

If you're running a business that's 5 million and you're doing 20% EBITDA, you're generating a million EBITDA. There's going to be a large market of buyers that will want to talk to you and they're going to pay as high of a multiple as we've seen to get you.

[Uncle Marv]
Okay. The reason I asked the question the way that I did is I understand that M&A right now is almost the rage. And in a sense, I'm looking at it from the standpoint of if every MSP is looking to raise their value or if every MSP is looking to acquire another MSP, is there going to be something similar to what happened in the housing market where there's going to be a correction where there's too many buyers and not enough MSPs that want to sell, that sort of thing?

[Peter Kujawa]
You know, I've heard that question for a few years and there's no evidence of that. I think the supply of MSPs is much, much larger. Now, the supply of quality MSPs that are generating a high percentage of EBITDA and are running efficiently or efficiently run top quartile type MSPs, those are in harder supply.

So their value is higher. If you're running an MSP that's generating bottom quartile profitability, you might have a hard time finding a buyer. You're certainly not going to be able to sell at a multiple that would be at all comparable to a higher quality MSP.

Will we run out of buyers? We're seeing the opposite. There's more and more private equity folks coming into the space every year.

It's a high percentage of recurring revenue. That makes the business very predictable. It makes the business very recession resistant, not recession proof, but resistant.

So there's a lot of reasons why buyers are getting into this space and have discovered the managed service space. So I think that'll continue.

[Uncle Marv]
So, of course, it was announced, what was it, Monday? CompTIA, one of our organizations, is now in the PE space. I know that's not your area, but any thoughts?

[Peter Kujawa]
Yeah, I actually do have a thought on this. It kind of relates to your last one, and that's what's the likely health of the industry going forward. And to me, CompTIA is spinning that CERT business out.

What makes that CERT business valuable? Why does private equity want to buy that and expand that business? Well, it's because they see this as a growth industry, and it's a people business.

Managed services is a people-based business. And so if I'm bringing people in, and those people need to learn and knowledge up and get skilled up, I need to have a source to do that. And CompTIA historically has been a source to do that.

That's been very good. So if I'm a buyer in this industry, if I'm buying that business from CompTIA, I'm doing it because I believe more and more people are going to need more and more training and skill sets in this industry going forward. I don't buy that if I think that this industry is going to taper off, or it's going to go away, or any of the things that I hear, predictions of relating to AI, and it's going to put everybody out of business.

I think it's the opposite. We're going to need to change two, three years from now. MSPs will do some different service offerings in their managed service stack.

But that was the case three, four, five years ago with security. That was the case 10 years ago with replacing a block time, 12 years ago. It's part of the evolution of the business.

The evolution of the business will change, and it will indicate we're going to keep changing. But as long as there's companies out there, particularly small, medium, and small enterprise, they're going to need help on technology. And our industry is the industry to deliver that help.

So I think we have a great future.

[Uncle Marv]
All right. Well, Peter, I know we're coming up close to the time you have got to get. I'm assuming that your schedule is full, and we've got a very large media row here this year.

It's pretty packed, yeah. So thank you for spending some time. I know it's just a few minutes, a little bit of time.

So of course, we want to direct everybody to service-leadership.com, especially to fill out the report.

[Peter Kujawa]
That's till the end of the month.

[Uncle Marv]
And end of the month, okay. And just real quick, let me go ahead and ask you to explain to the people what's in that report, what do they get, and what's the value.

[Peter Kujawa]
So we benchmark, we collect data, and 100% of the data is from other TSPs, MSPs primarily. And so there's no enterprise comparable or anything. So the positions are really light for light positions to MSP positions.

We collect data on over 60 different common positions, including technical positions, help desks, engineer positions, project manager, project coordinator. We also collect data on GNA positions, like finance and other executive positions, and sales and marketing. So what we show back is, and we do break the data down by regions.

We have the top 15 or so metros in the U.S. have their own look at the data. We have international data in there for partners who maybe are in Europe or in Australia, New Zealand. And it shows, based on levels of experience, three years or less, three to six years, six years plus, what are the ranges that you should be paying them?

What percentage of their pay should be from variable pay? We've captured data on benefits in the past, benefit costs. This year, we're going to be capturing data on turnover rates.

And so it's a really valuable look for any MSP out there to be able to go in and look. And again, they don't have to be clients of service leadership. They don't have to be benchmarking with us today and in our regular system.

They can just go in and do this and get a copy of this report, and it'll still be free.

[Uncle Marv]
Okay, great. So everybody go do that, and I look forward to getting that. I'm going to have to go do it myself.

So Peter Kajawa, General Manager, Vice President, Service Leadership at ConnectWise. Thank you much, sir.

[Peter Kujawa]
Thanks for having me, Mark. Always a pleasure.

[Uncle Marv]
All right, folks, we're going to turn back on the cam, and you can watch more of what's happening here at IT Nation Connect. And I'll be back with another interview pretty soon. Holla!

Hello, friends. Uncle Marv here with another episode of the IT Business Podcast, and we are streaming live in Orlando at IT Nation Connect. Yes, that is right, folks.

We are here live. So today's show is presented by Thread, the winners of last year's IT Nation PitchIT competition. And how are we going live?

Well, we are powered by Rhythms, the intranet in a box. So that is what's happening here. And I have a guest with me.

You know her. She was the 2022 Darling of the Channel, Diana Giles from Skyline IT Management. Giles, how are you?

[Diana Giles]
I'm great. Uncle Marv, how are you?

[Uncle Marv]
I'm good.

[Diana Giles]
I dispute the Darling of the Channel thing, but, you know, that's fine.

[Uncle Marv]
Dispute it. I called it, so it's true. So here in Florida, having a good old time.

How are we?

[Diana Giles]
Doing well. Doing well. Got here yesterday and have already been having lots of fun.

[Uncle Marv]
So got here and experienced Florida. I heard you visited one of our attractions.

[Diana Giles]
Yes, Medieval Times.

[Uncle Marv]
Medieval Times.

[Diana Giles]
Thanks to Infima and Threat Locker. Shout out to them for sponsoring that. We had quite a good group and had a lot of fun.

[Uncle Marv]
All right. Was there yelling and screaming and name calling?

[Diana Giles]
Yes, we had ribbons for our... We were cheering for the Red Knight. And so, you know, we're cheering for that.

Eating with our hands. I was going to ask.

[Uncle Marv]
I mean, that doesn't seem like you would do something like that. You're OK with the hand eating?

[Diana Giles]
Yes, yes, definitely. Especially if it's chicken or whatever. So, yeah, it was good.

I mean, it was fun and something different. I'd never done it before.

[Uncle Marv]
I think I told you needed to do that before and you didn't believe me.

[Diana Giles]
It was really fun. OK, all right.

[Uncle Marv]
How long are you here for? Any other attractions in the works?

[Diana Giles]
Well, for my... I brought my husband for this conference. He's never come with me.

[Uncle Marv]
If I don't see him, he's not here.

[Diana Giles]
Well, you could see him tonight, I think. But yeah, he came. So he is going to be going to Universal Studios because he really enjoys those kind of things, the rides.

And I don't enjoy as many of the crazy rides as he does. So he is just going to go have a ball by himself and then catch up with us there later.

[Uncle Marv]
OK.

[Diana Giles]
And so, yeah, that's what he's doing. I don't know as far as... I'm just doing what the conference offers.

So the block party and the big party on Friday night as far as...

[Uncle Marv]
All right, so in terms of the conference, let's go ahead and get the technical stuff out of the way. But any thoughts on what you might be getting, you know, conference-wise for the biz?

[Diana Giles]
Oh, I am probably going to focus on the process improvement, you know, sessions.

[Uncle Marv]
OK.

[Diana Giles]
And maybe a little bit on the security side. I've already, you know, I've been to quite a few sessions, conferences where that was a focus. But I'm going to be seeking out a lot of like operations and process improvement sessions.

I'm also presenting in one that has nothing to do with that.

[Uncle Marv]
You're presenting?

[Diana Giles]
Yes, I'm on a panel.

[Uncle Marv]
OK.

[Diana Giles]
For one that is one of the Tech Degenerates breakout sessions.

[Uncle Marv]
OK.

[Diana Giles]
And I cannot remember the full title at the moment, but it has to do with mental health and wellness in our IT organizations. So I'm going to be on that panel.

[Uncle Marv]
OK. Does it really have a title and you just don't know it?

[Diana Giles]
It does. It's kind of long.

[Uncle Marv]
OK.

[Diana Giles]
Now, I could grab that piece of paper over there and tell you what it is, but it's a pretty long title.

[Uncle Marv]
No, that's OK. I assume that this goes hand in hand with one of your latest projects that seems to have taken off your very own podcast.

[Diana Giles]
My very own podcast. Yes. And I have referred to you as my podcast mentor.

So thank you. Yes, it's new this year and it's a very I don't know about taken off, but it's a pretty small little podcast still. But it's called For the Health of IT and it is just to have discussions with different people in our industry or at least people related to topics around mental health, physical health, just overall wellness for people in IT.

So it's been something that I've just kind of had in the back of my mind for a while and finally decided to pull the trigger on in spring, I guess, of this year. Yeah.

[Uncle Marv]
Well, the reason I say taken off, obviously, that is a topic that everybody knows we should talk about and people do it behind closed doors, but not out in public. And I think just getting somebody to, you know, make it public, open the doors for a lot of things. So I know that you've not had any trouble getting guests.

And it's actually a surprise to see some of the people that are on there. And some of the things that they have shared and all things that have been helpful and absolutely tremendous in serving the needs that we kind of, you know, throw under the rug sometimes.

[Diana Giles]
Right, right. And yes, we've had some very powerful stories. And it's really good to hear from other people about the struggles that they have had, because then other people we all can relate.

You know, we just don't always talk about it. And also some inspiring stories about, you know, things that have worked for certain people in, you know, getting their lives in order, either physically or emotionally or both. And, you know, everybody can see themselves maybe in a situation and go, hey, I could try that or, you know, that kind of thing.

It's one of those things where we really want to kind of take the stigma away from mental health, you know, just think about mental wellness. And, you know, consider that stress and the way you manage it or the way you try to cope with it, maybe people cope with it in a way that is negative. That is also a part of mental health.

It's not, you know, that you need to necessarily. I mean, obviously, some people do. If you have a serious mental health disease or issue, you may need to go to a psychiatrist and you may need medication and that kind of thing.

But that's not always the case. Sometimes it's just about how we handle stress. And are we are we coping with it in ways that benefit us?

Or are we coping with it in ways that are negative for us and our families? So just try to really focus not only on that, but also physical health. But I think particularly mental health is the one where there is just this stigma and this roadblock.

Sometimes people just can't get past that. You know, we don't think about that at all when people talk about physical health. We don't talk about, you know, don't there's no stigma associated with that.

[Uncle Marv]
Well, it's one of those things, you know, physical health. A lot of times it's something you can see and people can deal with something they can see. And it's easy to hide.

And the people that are good at hiding it assume that everybody else should be able to hide it. And the point is, we shouldn't be hiding it at all.

[Diana Giles]
Right.

[Uncle Marv]
So I think, you know, taking away that stigma, taking away that, you know, tendency for us to, you know, look strong and be strong. It's starting to take a turn.

[Diana Giles]
Yeah.

[Uncle Marv]
And, you know, I experienced a lot of that in sports, you know, where, you know, you were taught to just get up, rub some sand on it and get back in the game. You know, they're starting to see, you know, that change with looking at concussion protocols and stuff. I'm sure I had a few.

But I played in a time where you didn't have those. You can walk, right? You can run, right?

Get back out there. And we did that. But you're right.

The mental side of it is something that we need to pay attention to. You know, it's one thing to look at health from, you know, the body perspective, but body, mind, spirit is everything that we need to talk about it.

[Diana Giles]
Right. And they really are related. Like, for example, if you are in a high stress situation, your cortisol levels are going to go up.

That affects you physically. So, I mean, it's, you know, they really are related.

[Uncle Marv]
Right.

[Diana Giles]
So we're just trying to, you know, bring attention to that and have discussions with people that are for people in IT, but not technical necessarily.

[Uncle Marv]
So for people who they're just, you know, either watching this or whatever, where can they go and find your podcast? Is it on all the platforms or what's the best place for them to see it?

[Diana Giles]
Yes, it is on all the major podcast platforms, but probably the easiest way is to go to forthehealthofit.tech because that's the website for the podcast. And it also, you know, from there, you can link to everything. You could also get to it probably from my LinkedIn because I share each episode there.

[Uncle Marv]
Okay. All right. So back to the business side of why we're all here.

Let's see. Is this going to be your last conference of the year?

[Diana Giles]
Yes. I think yes.

[Uncle Marv]
Because I know Super Ops has got something they're trying to do in December. Everybody's trying to squeeze one last thing in. But I know that a lot of travel for you this year.

[Diana Giles]
Yes. Yeah. Quite a bit, especially in the fall.

[Uncle Marv]
Yeah.

[Diana Giles]
Busy September one. Well, not as much as you, but I had a conference in September, one in October and one this month.

[Uncle Marv]
Well, I have these great folks to thank for all of that. My sponsors in getting me to the events to cover as part of the media. What do you think of Media Row here?

How about this?

[Diana Giles]
It's very nice.

[Uncle Marv]
It's you'll be here next year.

[Diana Giles]
I don't know about that.

[Uncle Marv]
Get your little gear here. Get your little setup.

[Diana Giles]
Yeah, I'd have to get some gear. That's for sure. Because right now, you know, it's audio only, despite some encouragement from some people to do video.

So far, I just keep it simple audio and I use restreams. I don't have the equipment. I have a decent microphone.

Not even this good.

[Uncle Marv]
These aren't good at all. They're not as good as the in-studio ones. These are the portables.

All right. And business-wise, how are things going?

[Diana Giles]
Really good. I know it's going to sound crazy, but I've gotten rid of some endpoints and I'm going to be getting rid of some at the end of December also.

[Uncle Marv]
Getting rid of more?

[Diana Giles]
I know. And it sounds terrible. You think, oh, I'm happy because I'm getting rid of some.

But in this case, it's a good thing.

[Uncle Marv]
Well, I know some of the reasoning behind it. I think it was a good move, but I don't know about this phase B.

[Diana Giles]
Well, it's just because I decided to stop manage residential. And that'll end at the end of December. I gave my residential clients some time to adjust.

And then I got rid of a client who was a server client and not an ideal client for me. Not a cloud, Microsoft kind of client. So that was a good move.

So these things are positive, even though they may not sound like it. You talk about getting rid of endpoints. But in my case, it's a good thing.

And it's allowing me to focus on the things I need to focus on more.

[Uncle Marv]
Did you hand off that server client to a friend, a friendly MSP?

[Diana Giles]
No, because in this case, they did not want to go with an MSP. It was a sale. This is the kind of situation where the business was sold.

[Uncle Marv]
And then I don't care anymore.

[Diana Giles]
So it was different. Yeah, it was a unique situation.

[Uncle Marv]
All right. And how's everything going with the 365?

[Diana Giles]
Great. Great. I mean, I'm doing a Microsoft 365 Defender class right now just to really be able to, I mean, I already obviously knew some of that, but this is a deep dive into it.

[Uncle Marv]
So let me ask you this, because I think I just saw in one of the forums, there was all this. No, it was on another Zoom meeting. People were getting confused with the Defender as opposed to the regular Defender that comes with Windows, the Defender that comes with 365 Business Premium or associated things.

Is that some of what's happening in the class where they're teaching you what's the differences? Because if I remember correctly, 365 Premium is really strictly for email in the cloud stuff, right?

[Diana Giles]
Well, there's 365 Defender for Office.

[Uncle Marv]
Okay.

[Diana Giles]
And that is what you're talking about, like the email that used to be called ATP.

[Uncle Marv]
ATP, Advanced Threat Protection. Right.

[Diana Giles]
So there's that piece. That is in the 365 Defender piece. But then there's also the Endpoint.

[Uncle Marv]
Endpoint.

[Diana Giles]
Defender for Endpoint. Okay. Now, with the Microsoft 365 Business Premium licenses, you get a huge piece of that Defender for Endpoint.

There are some advanced, like threat hunting things that are not going to be there in that licensing that you could do an add-on licensing for. But what Microsoft offers for those sub-300 businesses is quite extensive. And it does utilize a piece of, you turn on pieces of the Windows Defender, the piece of it that's on the Windows machine already.

So it kind of works in partnership with that. And you turn on features within Defender for Endpoint to kind of activate more out of that.

[Uncle Marv]
Okay. Well, this sounds like a podcast we should have later just on that, because I've got a client we just moved to Premium. And then I've got another client that hopefully will be moving them from Hosted Exchange to 365 Premium, where we're turning all that stuff on.

So maybe we can compare notes.

[Diana Giles]
Yeah, yeah. And I'm looking at the possibility. I mean, right now I have other MDR and that kind of products that I use with a sock.

But that same sock that I already use also has an offering now for 365 Defender. And so since all of my businesses are on that, and it really does get excellent ratings, you know, I'm looking at the possibility of switching to that. But I haven't made that move yet, except for, you know, I do have a couple of clients on it because that's what they specifically wanted.

[Uncle Marv]
All right. All right. Well, if you wonder why it got quiet here, folks, I think it's lunchtime.

So we're going to go ahead and end off here and go eat and take some time away from Meteor Row and see if Steve wanders over. See if he's actually here.

[Diana Giles]
He'll be here later this evening. He has a guest pass, so he's going to get to experience a conference.

[Uncle Marv]
All right. Is he going to dance tonight at the block party?

[Diana Giles]
I doubt that. I doubt that.

[Uncle Marv]
All right, folks. Well, that is it. Thank you to Diana Giles for coming and hanging out.

And we are watching a football being tossed around in front of us. So there will be more here from IT Nation Connect. We're going to go off air now.

We'll come back after lunch, and you can watch the comings and goings, and I'll have more guests. So that's going to do it, folks. Thanks for watching.

Holla.