By Jim Lippie 1

The data from the MSPmentor 501 indicates a growing disparity between many managed service providers.

While the average MSP in the 501 grew 24 percent in 2015, seven percent of the MSPs lost revenue on a year over year basis. The strong are getting stronger and the weak are getting weaker.

The results from the first annual State of the Cloud Survey to be presented at HostingCon in July, sponsored by Structure Research and Cheval Capital showed a similar pattern.

Nearly 70 percent of respondents classified themselves as either an MSP, VAR, hosting or cloud provider. Of these, nearly 57 percent saw an increase in business over the last year, but 25 percent saw at least some decrease in business.

This dynamic generally leads to market consolidation, which is something we have seen on the increase over the last 12 months in the service provider space and has certainly been going on for years in the hosting space.

If you have read some of my blogs in the past, you know I have referenced market consolidation in other industries as a predictor of what is to come for service providers. For example, if I asked you to buy a hammer, most people would immediately think to go to Home Depot or Lowes. If I asked you to buy a book, Amazon comes to mind and if I asked you to gather up some office products, Staples or Office Depot jumps into your head. But, 30 years ago, if you had asked our parents the same questions, the answers would have been the local hardware store, the corner bookstore and the stationary store on main street.

Market evolution and consolidation is inevitable, if you don’t believe me, please try and find a movie to rent from Blockbuster. However, market consolidation doesn’t have to be catastrophic, if you’re strategic and plan accordingly.

There are at least three different paths to evaluate when contemplating the future success of your service provider business. All of these are strategies you can learn more about HostingCon, the global event for the cloud and service provider ecosystem:

Companies like Mindshift and All Covered have been acquiring quality MSPs via a seemingly perpetual “roll up strategy” for several years and it seems to be paying off. Both organizations are highly ranked on the MSPmentor 501 with strong growth numbers and both are considered Tier 2 TSPs according to the Clarity TSP Index (which is very good based on their size).

However, they’re not the only ones making deals. Over the last 12-24 months we have seen other players, in some cases small and mid-sized MSPs acquiring other MSPs, as they plan for a future, where bigger could mean better.

If traditional and new acquirers are ramping up their deal making efforts, that means more companies are getting acquired. The companies being acquired generally fit two different profiles, providers who are just looking for the final payday so they can move on and those who want to team up with a larger player and be part of a bigger growth story. Both paths have their merits and it really comes down to ownership’s preference.

Traditionally, service providers have been horizontally focused. It’s very rare the find an MSP that works exclusively within a single vertical market. According to the MSPmentor 501 data most providers target a handful of vertical markets and 35% of MSPs are open to serving any and all vertical markets. The horizontal approach works fine in a fragmented marketplace, like the MSP industry has been since its inception. But as consolidation accelerates, it’s important to be either a larger provider with scale or to be focused on a niche, where the “big boys” can’t provide the same expertise and value.

All three strategies have their advantages and I am not advocating for either one of them, but I do feel strongly you can’t get caught in the middle without a plan. So, gather up your management team and talk through which path makes the most sense for your organization.

This topic and many more will be discussed at HostingCon in New Orleans next month. Join me on Tuesday July 26th at 2:30 to learn more about crafting a successful cloud strategy.