MSPs That Become Software Companies: Big Risks, Big Rewards

Gary Pica is the latest MSP veteran to get into the software business. As CEO of TruMethods, Pica and his team are building myITprocess, a cloud-based service that seeks to transform managed services providers (MSPs) into virtual CIOs. Pica’s software ambitions aren’t unique. Numerous MSPs have marched into the software, cloud services and branded product markets. Examples include ARRC Technology, Compuquip, ConnectWise, Directive, inhouseIT, Nemsys and Network Depot. So, are you the next MSP to push into software or a specialized cloud service? Careful before you take that leap of faith.

During Schnizzfest, an MSP conference last week, Pica offered a humorous but dead-on observation: Software takes twice as long as you think to develop, and development costs are typically twice as much as you predict.

Still, there are numerous examples of MSPs and IT service providers building their own intellectual property. They include:

• ARRC Technology, which also owns CharTec. In some ways, CharTec is a BDR (backup and disaster recovery) provider to MSPs. In other ways, CharTec CEO Alex Rogers positions the company as a training house for MSPs. This week, CharTec is hosting its latest “academy” gathering, which offers a range of sales, marketing and technical training to MSPs. Though not exactly home-grown hardware or software, CharTec continues to make noise in the BDR market.
• Compuquip is an MSP whose founders also launched BrightGauge, a cloud-based service that allows MSPs to build customer reports. Current integrations include Kaseya, LabTech, ConnectWise, ConnectWise Cloud and Autotask.
• ConnectWise started out as an IT service provider in Tampa, Fla. That business still exists, generating roughly 40 percent margins. Around 1996 or so, ConnectWise began to explore the software market. CEO Arnie Bellini and brother David Bellini saw the opportunity to show peer IT service providers how to generate far higher margins. The strategy accelerated in 1998, when ConnectWise hired Linda Catrett Brotherton to write the blueprint for ConnectWise’s software. ConnectWise has since branched out with an investment arm (ConnectWise Capital) that pumped money into CharTec, LabTech Software and Quosal.
• Directive is an MSP in Oneonta, N.Y. Nearly 20 years old, Directive a few years ago launched JoomConnect — which integrates ConnectWise with Joomla, an open source content management system. The result: MSPs can link their websites to ConnectWise — to more easily gather, track and nurture business leads. I’ve reached out to CEO Chris Chase for an update. But he’s traveling this week at the CharTec Academy event.
• inhouseIT is an MSP in southern California. The company also has an interest in Spam Soap, a cloud-based email security provider that works closely with McAfee. While inhouseIT remains focused on its core market, Spam Soap’s cloud services have attracted thousands of MSPs. And there are signs that some bigger surprises are under development…
• Nemsys is an MSP in Toledo, Ohio. The company ultimately gave birth to LabTech Software — the RMM (remote monitoring and management) software provider. Nemsys began to write LabTech’s software because the company had grown frustrated with potential market alternatives. ConnectWise Capital invested in LabTech about two years ago, and the company has been in growth mode ever since. I believe LabTech CEO Matt Nachtrab and some peers still own stakes in Nemsys, which has lifted its own margins in recent years, according to Nachtrab’s recent keynote at Automation Nation in Orlando, Fla.
• Network Depot is a successful MSP in the Washington, D.C., area. The company acquired Evolve Technologies, a neighboring MSP, in late 2011. (Evolve CEO Dave Sobel has since joined Level Platforms.) At the same time, Network Depot has also continued to evolve and expand Virtual Administrator — which positions itself as an industry onramp for MSPs. Virtual Administrator’s key partners include Intronis (cloud backup), Kaseya (RMM software), Live Virtual Help Desk, Spam Soap and SonicWall. I’m overdue with a Virtual Administrator check-in, and will look to see how that business continues to evolve and adapt for the rest of 2012 and beyond.
• TruMethods: CEO Pica and CTO Bob Penland previously sold their MSP business to mindSHIFT (now owned by Best Buy). Pica and Penland now own a stake in a small Pennsylvania MSP, but their primary focus is TruMethods, an MSP coaching organization. TruMethods is now building the myITprocess cloud platform for its member MSPs. It sounds like a beta will launch soon, with general availability potentially arriving in time for ConnectWise’s IT Nation conference (Nov. 8-10, Orland0).

About Those Risks and Rewards

That’s just a sampling of MSP-oriented companies that have built their own software or launched cloud services for peer MSPs. (Whom did I miss? I’m all ears. Post a comment or send me email, joe [at] NineLivesMediaInc [dot] com.)

When you speak with some of those companies listed above, I often hear a common thread: Because they grew up in the MSP market, they are uniquely positioned to launch software or services that will appeal to peer MSPs. But that logic doesn’t always work out, and there’s a flip side to the conversation: Sometimes MSPs simply aren’t good at writing software or productizing cloud services for peer MSPs.

I’ve heard from quite a few MSPs that have their own software development shops right now, used mostly for customer integration projects. While not quite productizing their code, some MSPs are struggling with software project deadlines, developer staff retention, and the balance between IT projects vs. pure managed services.

Simply put: The software industry ain’t for the faint of heart. But there are examples of MSPs earning huge dividends in the software industry. Earlier this year, ConnectWise CEO Arnie Bellini predicted that his company and its peer investments could grow to $100 million this year. That’s 10 to 50 times the size of the typical MSPs. But remember: Big rewards involve big risks…