Q&A: ConnectWise CEO On Declining Margins, M&A Drivers And Where MSPs Should Invest Their Time

Pure-Play MSPs Are Feeling the Squeeze

Managed services can no longer be relied upon as the sole practice area for a solution provider due to greater competition putting downward pressure on pricing, according to ConnectWise CEO Arnie Bellini.

Bellini told CRN during a one-on-one interview at ConnectWise's IT Nation in Orlando, Fla., that pure-play MSPs need to get above 10 employees to be profitable, with mergers and acquisitions on the rise as partners look for economies of scale.

Bellini also highlighted how a help desk, network operations center, marketing campaigns and user-based pricing model can help partners avoid commoditization.

Read on to learn how partners can benefit from ConnectWise's new Cloud Console and a tighter alignment among its PSA, RMM, quoting and remote control tools.

How has the MSP business model changed over the past five years?

In 2010, managed services had only captured about 25 percent of the market. It was right about there, I'd say. In 2015, some surveys say as much of 70 percent [of solution providers are MSPs]. So that's the big difference. It has been a massively successful and profitable trend over the last five years.

Is that level of growth sustainable?

It is starting to run out of steam due to less market to absorb, more competition and alternatives such as cloud computing. The managed service space is still growing at a healthy rate, but there is also downward pressures on price because of a greater supply of managed service providers, so there is competition that is happening now at a higher rate. It's not a greenfield anymore. Its growth is slowing, and it can no longer be relied upon as a sole practice area in an IT solution provider business.

Why are we seeing so much consolidation among MSPs?

It is happening because there is less greenfield, and because larger managed service providers gain economies of scale that drive higher profitability. Because of this economic reality, mergers and acquisitions are on the rise. We see this clearly in the ConnectWise partner base. We think it is very natural and very healthy for our partners. In fact, we often play matchmaker. Many of our partners let us know when they're interested in growing, existing or exploring their options. We think that is an amazing testament to the community we have built, and we're happy to play matchmaker.

How big do MSPs need to get in order to survive?

Pure-play MSPs start to reach healthy profitability when they have 10 employees appropriately assigned and aligned. We see many large pure-play managed service providers, when they take advantage of the complementary service most often requested by their customers, which is help desk. Many have built large, highly profitable companies by adding even more complementary business services. At ConnectWise, we consult with over 200 partners a month and help them understand how to steer their managed service business toward greater profitability. There's some really cool things they can do -- the NOC is the number one thing. Managed service providers, they have to have a NOC, a network operations center.

What types of services can help MSPs avoid commoditization?

Pure-play managed service providers should add help desk, along with their NOC. Profitable managed service providers not only have a NOC, but have added help-desk services. They have added Office 365; they have resold Office 365. They understand how to execute effective marketing campaigns, targeted to their prospects. That is the number one factor that creates their profitability or lack thereof. As a result, we created ConnectWise Campaign Director to easily create targeted email campaigns that push leads to landing pages, which push landing page conversions directly into ConnectWise opportunities. We have created a closed marketing loop to enable managed service providers to effectively market, target, capture, quote and win new clients.

How will the shift away from on-premise computing affect MSPs?

The enduring trend that will affect managed service providers will be cloud computing. Contrary to what most people think, it won't be infrastructure moving from under the roof of SMBs into the cloud. Rather, it will be one application at a time floating into the cloud. Fifty percent of small to midsize businesses surveyed by Better Cloud said that by 2020, they will have all of their IT services in the cloud.

How is Cloud Console intended to play into that industry trend?

As applications float from under the roof into the cloud, it will present a complex problem for managed service providers to manage and maintain each client using four to eight cloud-based applications that all require unique user accounts in each cloud. This will be a complex mess to manage. Someone has to come to the rescue. ConnectWise has been anticipating this problem for the last five years, and in our R&D labs, we have been working on a solution. That solution is now available, and it's called Cloud Console. It will manage, monitor, bill and procure cloud-based software for all the managed service providers' clients.

How will this benefit MSPs?

[It will allows partners to] be seen as a 'cloud service provider' rather than a managed service provider – one pane of glass to control all your applications, transforming managed services providers into cloud service providers. ConnectWise's cloud console will give CSPs control of the cloud, and allow them to provide high-value services to their customers, preserving their recurring revenue that they will be losing from their managed service practice. … This will also enable all companies to instantly become a high-productive, highly profitable cloud service provider. We're there to make it happen, and we will be delivering this on every platform and every mobile device.

Why was this the right time to more tightly integrate LabTech, Quosal and ScreenConnect?

Each of those products has established themselves as best of breed, and we needed to let them take time to firmly establish themselves as market leaders in their space. And now, we are bringing the best-of-breed solutions together into our 'best of' suite, the ConnectWise Business Suite.

Have LabTech and Quosal become stronger since the ConnectWise investment?

The ConnectWise investment has enabled LabTech and Quosal to mature as market leaders, and the new, united ConnectWise Business Suite will allow us to create a seamless experience between our flagship products ConnectWise, LabTech, Quosal and ScreenConnect. We will blur the lines between a PSA, an RMM, quote and proposal and remote control. This will enable ConnectWise to combine our solutions in new and unique ways to solve more business problems for our customers.

Do you expect Autotask and Tigerpaw to follow your lead and offer more convergence?

We have been thought leaders in this unification, and are happy to see our competitors following suit. It is the right thing for the industry, and it will only benefit IT solution providers. We love to innovate, and we don't mind being copied when it benefits our partners.

What other trends are you see in the managed services space?

The new trend in managed services is a user-centric trend. Businesses are now more receptive to being billed per employee each month rather than per device each month. Every employee has two to five devices. It is no longer reasonable to charge for all of those devices individually. Customers see the value of having Sally be productive and up and running with her technology, but not her four devices. There's a paradigm shift that is happening rapidly where many managed service providers will be asked to show the value of keeping employees productive. After all, isn't that what it's all about?

Will this help MSPs avoid commoditization?

The beauty of the user-centric model is that it's a way for managed service providers to preserve their profitability, remain sticky with their clients and continue to provide productivity for every employee.

Why is the user-centric model so appealing for MSPs?

Customers no longer want to cover every device, and now that everyone has two to five devices, customers are looking at this long list of devices and saying, 'I don't want to cover that cellphone. I don't want to cover that iPad. I don't want to cover that notebook.' And therefore, the logistics of what is covered by the managed service contract becomes confusing. On the other hand, the value and logistics associated with covering every employee are evident. That is why ConnectWise has created the user-centric solution. It allows managed service providers to migrate their business model to a modern, more profitable method of supporting their end customers.