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Will Consolidation in the Channel End Well for MSPs?

M&A activity in the IT channel is at never before seen levels. How will it impact the table stakes for partners?

When we speak of evolution in this industry, we’re really talking about accelerated maturation. 2018 has brought us a level of M&A activity that the channel has never seen, and it’s one of the key factors driving the rapid change in the market.

OEMs of all sizes are acquiring one another in order to expand their product offerings so as to incentivize partners to keep all their eggs in one basket. Similarly, MSPs are buying other MSPs to keep their customers from gravitating toward competitors that have broader portfolios and more resources at hand. And investors, which have historically overlooked the channel, are suddenly rushing to capitalize on the IT services opportunity.

The VC Race for the Channel

There’s been an unprecedented amount of venture capital cash flowing into the channel this year as outside investors begin to recognize the market value that the channel brings. Most of these VCs are snapping up multiple MSPs and OEMs, combining them into one powerhouse. Compared with other, more mature markets, MSP consolidation is relatively simple. Most MSPs are bootstrapped, and therefore lean in terms of sales teams and account management, and the prospect of exponential growth is vast. Combined with the strong partnerships that MSPs have with their clients, it’s a perfect storm of opportunity for investors.

How will this all play out when the dust settles? It’s hard to say. The immaturity of the market means uncertainty about whether players in the channel have infrastructure sturdy enough to support massive growth. James Hwang is CEO of NexusTek subsidiary Cal Net, which has experience in both acquiring and been acquired. He says there’s a big question mark over the ultimate result of this M&A activity.

“As valuations are at all-time highs and access to capital continues to be relatively cheap, more consolidations will occur. The consideration will be the take rate of underlying consumers,” posits Hwang. “Most of these underlying providers such as Kaseya, Datto and even ConnectWise have not supported companies that garner valuation above $500 million. Can their underlying infrastructure and architecture grow to support the industry’s first $1 billion MSP?”

Will Vendor Consolidation Be Good for Partners?

MSPs gazing into their crystal balls are split on whether or not the industry consolidation will play out in partners’ favor. On the one hand, MSPs have been clamoring for better integrations between vendor solutions, and more consolidation means more open platforms for them to leverage.

Chris Sousa, vice president of solutions and strategy at MSP Dataprise, says that just as customers are interested in a single solution for managing their IT, MSPs are interested in a single solution that provides all of the critical features they need to manage their clients. 

“Just as we are seeing consolidation on the MSP sides through M&A activities and the consolidation of manufacturers [like we saw with] Dell and EMC, we expect that MSP tool providers, such as Kaseya, will also continue their consolidation in order to ‘own’ the solution from end-to-end,” Sousa predicts.

But other MSPs aren’t so sure. Open platforms and integrations might be convenient, but they’re sure to have an impact on partners’ bottom line.

“While the bundling of services can help smaller MSP partners manage service offerings and operational overhead, it can also lead to less advantageous price structuring and increase overall costs due to lack of competition,” says Kevin Clune, operations director at managed service provider Tech Please. “There is a very good chance that going ‘all in’ with a provider is a risk that may not pay off in the end.”

And when it’s all said and done, there’s a decent chance that the channel we wind up with will look a lot like the channel we’re evolving away from today. The difference will be that instead of the giant OEMs like Cisco and IBM calling the shots and refusing to play nice with one another, it will be channel-specific companies and MSPs themselves. If Kaseya and ConnectWise, for example, acquire the necessary elements to provide a complete, commoditized solution for their partner customers, where’s the incentive to keep an open platform?

“I am concerned that the consolidation is going to lead to solutions in a silo. I would prefer that the market stays open and interoperable,” admits Karl Bickmore, CEO of MSP Snap Tech IT. “[Players like] Datto and Kaseya seem to think the key is to have a big wide offering internally. I can see the advantages of this, but [I am more] concerned that I will have [fewer] options in the future, and that I will be forced into picking a lane that may not fit my business as well.”

Challenges in Buying to Build an MSP Powerhouse

In no way is the consolidation trend confined to vendors. As the VC money we mentioned earlier continues to pour in, and MSPs look to expand their markets and portfolios quickly through acquisition, we’re seeing more and more MSPs combining forces with other MSPs.

According to data from the 2018 Channel Futures MSP 501 survey, M&A is on the minds of lots of MSPs. Among the 501 companies on the list, 53 percent report they’re considering a merger or acquisition in the next 12-24 months. Their customers want a “one-stop shop” for their IT needs, and partners are increasingly feeling the pressure to provide that level of service or risk losing clients to larger MSPs that can.

As an example, managed service provider Reliam recently completed two deals that expanded its geographies, vertical markets, technological offerings and horizontal specializations. First, it merged with another Southern California-based company, Stratalux; shortly thereafter, it acquired Boston-based G2. The move strengthened its SoCal presence and gave it a foothold in the northeast market. It also expanded Reliam’s vertical markets, with G2 specializing in health-care and life-sciences competencies, and technological expertise since its solutions are primarily cloud-based through AWS. Because of G2’s industry focus on health care, the company had a robust compliancy practice, which provided a horizontal specialization as well.

Reliam CEO Simon Anderson says one of the biggest challenges was developing a combined brand identity, which launched last month. Individually, the three companies had well-established brands within their respective local markets, but none of them reflected where the new Reliam wanted to go. In other words, in order for the acquisitions to pay off, Reliam had to go back to the drawing board in order to adjust its messaging to compete in today's market. In order to develop that brand identity, it had to start at the beginning by establishing a branding committee that was comprised of employees with different roles, genders and other differentiating characteristics that created a persona for Reliam. 

“If you do that work well, with the right kind of mix of people around the table who have a lot of tribal knowledge of the company as well as new ideas,” says Anderson, “when you get that 'aha' moment, where all of a sudden you home in on particular words, brands, brand concepts, people really get behind it.”

Simon Anderson

Reliam has also focused on further developing public cloud core competencies by building upon its relationship with AWS. The combined company now has more individual and company certifications and specializations in terms of what it can deliver from a managed services and consulting perspective. It’s worked closely with the public-cloud vendor to articulate and understand its differentiation from a sales and account management perspective.

“We also need to invest in ensuring that our certifications are fully up to date, and we're ready to go through audits,” Anderson explains. “And then we need to invest in training … There's so much investment that's required, which I think is why you're seeing the consolidation because as a larger company, of course, you can afford more overhead for those kinds of investments.”

That's all well and good for Reliam, which has the resources to devote to overhauling its brand, which includes advertising, sales strategies and messaging with existing partners; and its product offerings, which necessitate either taking time away from existing clients or investing in growing its staff in order to devote human capital to acquiring those skills and certifications. What about smaller MSPs operating at full capacity? Will they be left in the dust as the Reliams of the world grow into the first MSP behemoths? 

Predictions Miss the Point

Analysts and channel experts from both vendors and partners have been loudly forecasting throughout the year that the M&A spree will only gain more ground, but it’s abundantly clear by now that consolidation in the channel is much more than a passing trend. The mystery is what the channel will look like when it’s reached its saturation point. Who will be left standing? What will the mainstream business model look like? How will it impact the structure of partner programs and vendor requirements? These are the real questions, and they’re also the ones no one is answering. 

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