Introduction: MSP Consolidation Strategy
The Managed Services Provider (MSP) industry has experienced rapid growth and change, leading to an increasingly fragmented and competitive landscape. As MSPs navigate between traditional private equity strategies and consolidation approaches, a new collaboration model is emerging—one that emphasizes autonomy, independence, and long-term growth.
The rapidly changing world of MSPs demands innovative approaches to remain competitive and capitalize on new market opportunities. One trend gaining traction is the increased interest in private equity investments and consolidation. However, traditional strategies employed by private equity firms and holding companies may not always be the best fit for MSPs’ unique requirements. In this blog post, we will examine the need for MSP consolidation strategies that emphasize collaboration, autonomy, and long-term growth. We’ll explore the evolution of the MSP industry, the challenges of the “MSP Canyon,” the value of decentralization, and insights from industry leaders to help MSPs thrive in an ever-changing market.
The Evolution of the MSP Industry
In the early days of the MSP industry, companies typically focused on providing IT support and infrastructure management services to small and medium-sized businesses (SMBs). As technology advanced and became more critical for businesses, the demand for MSP services increased, and the industry expanded to encompass various IT services such as cybersecurity, cloud computing, and business continuity planning.
Over time, the industry has witnessed tremendous growth, with MSPs diversifying their offerings and venturing into specialized niches. This growth has led to increased fragmentation and competition among MSPs, driving the need for innovative strategies to navigate the evolving market.
Traditional Private Equity and Consolidation Strategies
PE firms have widely used traditional private equity (PE) strategies in various industries, including the MSP space. The focus of these strategies is typically on maximizing returns through financial engineering, cost-cutting, and exit strategies.
Consolidation strategies, on the other hand, involve acquiring multiple MSPs to create a larger entity with economies of scale, a broader range of services, and an enhanced market presence. The combined MSP can benefit from centralized management and shared resources, which may improve efficiency and profitability.
However, these traditional approaches may not address the unique needs and challenges of MSPs. The focus on short-term gains and aggressive cost-cutting can hinder MSPs’ ability to innovate, adapt, and grow in a rapidly changing industry.
Learning from Competitors and Pioneers
New Charter Technologies, a holding company for MSPs, exemplifies an innovative partnership model, emphasizing autonomy, long-term growth, and collaboration. By learning from pioneers and competitors, MSPs can identify best practices and avoid potential pitfalls. New Charter employs an MSP consolidation strategy model that maintains autonomy while positioning its partners to capitalize on the value of the group.
The MSP “Canyon”
The “canyon” metaphor highlights the gap between traditional private equity strategies and the unique needs of MSPs. Adhering to traditional strategies can stifle innovation and hinder the entrepreneurial spirit harming MSPs in the long run.
One aspect of traditional private equity strategies is the concept of ‘multiple expansion,’ which involves increasing the valuation multiple of a company. This is often achieved through aggressive cost-cutting measures and streamlining operations, which can lead to short-term gains but may stifle innovation and long-term growth.
Another aspect of traditional strategies is ‘multiple arbitrage,’ where private equity firms buy companies at a lower valuation multiple and sell them at a higher multiple. While this approach can yield significant profits, it does not necessarily promote the long-term growth and success of MSPs. (credit: to Abe Garver, leader of FOCUS Investment Banking’s MSP group)
The Importance of Autonomy and Entrepreneurship in MSPs
The value of decentralized management for large MSPs
Autonomy and an entrepreneurial spirit are essential drivers of success and innovation within the MSP industry. These factors foster creativity, adaptability, and a growth mindset, enabling MSPs to thrive in a rapidly evolving market.
As Steve Jobs once said, “Innovation distinguishes between a leader and a follower.” This quote highlights the importance of fostering an innovative culture within an MSP, which is best achieved through autonomy and an entrepreneurial mindset.
In his book “Antifragile: Things That Gain from Disorder,” Nassim Nicholas Taleb emphasizes the value of decentralization. He states, “Decentralization reduces large structural asymmetries…It is easy to see that a decentralized system, a system of smaller units, manages much better under stress.”
This quote highlights the importance of decentralization in creating resilient and adaptable systems, which is a key concept in fostering autonomy and entrepreneurship within organizations, including MSPs. By embracing decentralized structures, organizations can better navigate uncertainties and adapt to changing circumstances, ultimately leading to enhanced performance and success.
In a separate segment of Antifragile, Taleb further characterizes this dynamic…
“Decentralization is based on the simple notion that it is easier to macrobullt than microbullt. Decentralization reduces large structural asymmetries.”
Here, Taleb emphasizes the value that a decentralized organization has in creating resilient and adaptable systems. By breaking down large, complex structures into smaller, more manageable units, organizations can become more responsive to changes and challenges, making it easier to maintain stability and achieve success in the face of uncertainty. This principle applies not only to the military (more below on this) but also to the MSP industry, as the ability to adapt and evolve is critical to long-term growth and sustainability.
The term “macrobullt” refers to a system or organization’s overall strength and resilience, while “microbullt” refers to the strength and resilience of individual components within the system.
When Taleb wrote “it is easier to macrobullt than microbullt,” he meant that it is easier to create a robust and resilient system as a whole rather than focusing on the strength and resilience of each individual component within that system. In other words, a system can become stronger and more resilient even if some of its individual components are fragile or vulnerable, as long as the overall structure is designed to absorb and adapt to shocks and stressors.
This concept emphasizes the importance of considering the bigger picture and focusing on building a strong, adaptable system, rather than simply trying to optimize each individual component in isolation.
The Importance of Autonomy and Entrepreneurship in MSPs: Lessons from the U.S. Military
The U.S. military is a prime example of an organization that recognizes the importance of autonomy and entrepreneurship in achieving its mission objectives. There are several instances where military strategies have incorporated elements of autonomy and entrepreneurship to foster innovation, agility, and adaptability.
Decentralized decision-making: The U.S. military’s approach to decision-making often embraces the concept of decentralized command, which empowers individuals and teams at lower levels to make independent decisions within the scope of their responsibilities. This approach fosters autonomy and enables teams to respond more quickly and efficiently to rapidly changing situations, without being hindered by bureaucratic red tape.
Emphasis on adaptability: The U.S. military places a strong emphasis on adaptability, recognizing that evolving threats and technologies require flexible and innovative responses. Military leaders are encouraged to think creatively and experiment with new tactics, techniques, and technologies to gain an edge in an ever-changing battlefield.
Encouraging innovation: The U.S. military actively encourages innovation through initiatives such as the Defense Advanced Research Projects Agency (DARPA), which funds cutting-edge research and development projects. These projects often involve collaboration between military personnel, private companies, and academic institutions, fostering an entrepreneurial mindset that drives advancements in technology and strategy.
Cross-functional teams: The U.S. military frequently deploys cross-functional teams to tackle complex problems, bringing together personnel with diverse skill sets and backgrounds. This approach promotes collaboration, fosters innovation, and allows the team to develop creative solutions that might not have been possible within a more rigid organizational structure.
As Bill Gates once said, “As we look ahead into the next century, leaders will be those who empower others.” Fair, Microsoft is not exactly the most decentralized organization in the world; however, Bill’s comment here underscores the value of autonomy and entrepreneurship not only in the MSP industry but also in organizations such as the U.S. military. By embracing autonomy and fostering an entrepreneurial mindset, both MSPs and the military can adapt more effectively to new challenges, drive innovation, and ultimately achieve greater success. (And, no, I don’t think he was commenting on how he wanted distribution channels to work for the company he built.)
Ray Dalio’s Philosophy and Bridgewater’s Culture
Ray Dalio, the founder of Bridgewater Associates, has shared many insights and philosophies on organizational structure, management, and decision-making that are relevant to the importance of autonomy and entrepreneurship in MSPs. Some of these include:
Radical transparency: Dalio believes in creating an environment where all members of an organization can openly share their thoughts and opinions. This level of transparency can lead to better decision-making, as it fosters a culture of open communication and collaboration. For MSPs, this means encouraging open dialogue and knowledge sharing between team members, which can help them adapt and innovate in response to changing market conditions. Ray highlights his belief (which I subscribe to) when he states “I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are.”
Idea meritocracy: Dalio advocates for an “idea meritocracy,” in which the best ideas win regardless of the person presenting them. This philosophy values the input of everyone in the organization and encourages individuals to share their unique perspectives. In the context of MSPs, this approach can help drive innovation and maintain a nimble, entrepreneurial spirit by giving everyone the opportunity to contribute their insights. I’d argue any organization financed in any manner stands to benefit strongly by implementing an idea meritocracy. An idea meritocracy is a system that brings together smart, independent thinkers and has them productively disagree to come up with the best possible collective thinking and resolve their disagreements in a believably efficient manner.
Learning from mistakes: Dalio emphasizes the importance of learning from mistakes and using them as opportunities for growth. By fostering a culture where mistakes are seen as valuable learning experiences, organizations can create an environment where continuous improvement is the norm. For MSPs, this can help them adapt to new challenges and maintain their competitive edge in the ever-evolving tech landscape.
“Failure is a part of the learning process. What’s most important is your mindset toward failure. Do you run from failure? Or do you willingly embrace it, seeking the valuable feedback that will help you grow and improve?”
The importance of adapting to change: Ray Dalio believes that organizations must be able to adapt to changing circumstances in order to be successful in the long run. For MSPs, this means being open to new technologies, strategies, and market trends, and being able to pivot their business models in response to these changes.
“The individual’s incentives should be aligned with the group’s goals. Systems should be designed to get individuals to be intellectually honest and to see things through everyone’s eyes. Only when people know what’s true can they navigate reality effectively.”
These quotes and philosophies from Ray Dalio highlight the importance of embracing transparency, open communication, and a growth mindset in order to create a strong, adaptable, and innovative organization. Applying these principles can help MSPs maintain their autonomy and entrepreneurial spirit while navigating the challenges of an ever-changing industry. (Note: CyberNova’s typical deal structure is built on this principal.)
A New Approach to Private Equity and Consolidation in the MSP Space
This new approach emphasizes collaboration, independence, and long-term growth. Key components include:
1. Retaining MSP autonomy and fostering entrepreneurship.
2. Offering support and resources to fuel sustainable growth.
3. Aligning values and goals for a mutually beneficial partnership.
By adopting this approach, MSPs can enjoy both short-term gains and long-term success.
Case Studies and Examples
New Charter Technologies has successfully implemented this new approach, resulting in positive outcomes for the company and its MSP partners. By prioritizing collaboration and autonomy, New Charter Technologies has fostered innovation and sustainable growth within its portfolio.
Implementing the New Approach in Your #msp
MSP owners and executives should carefully evaluate potential private equity firms or holding companies before partnering with them. It’s crucial to align values, goals, and expectations to ensure a successful partnership.
Tips for MSP Owners and Executives Considering Private Equity Partnerships
1. Research potential partners and network within the industry.
2. Prioritize cultural fit, transparency, and trust in partnership negotiations.
The Future of MSPs and Private Equity
As the new approach gains traction, it could become the industry standard, transforming how MSPs partner with private equity firms and holding companies. MSPs that successfully navigate the “canyon” and embrace forward-thinking partnerships stand to benefit greatly.
Conclusion
Adopting a new approach to private equity and consolidation can unlock value and foster sustainable growth in the MSP industry. By carefully evaluating potential partnerships and emphasizing autonomy, independence, and collaboration, MSP owners and executives can ensure alignment with their values and goals, ultimately achieving success in the ever-evolving market.