CRN Exclusive: Service Leadership Research Finds Continuum MSP Partners More Profitable Than Those Without Master MSP Relationships

Are managed service providers that partner with "master" MSPs better-positioned to succeed than solution providers that retain control of their own support capabilities?

According to a study published by Service Leadership, the answer is a resounding "yes" – at least when it comes to those working with IT management platform provider Continuum.

Service Leadership, an independent financial and operational benchmark firm that offers consultation services to MSPs and other solution providers, surveyed the performance of 140 Continuum partners over a five-year period and found that, on average, their adjusted EBITDA figures were 7 percent higher than non-Continuum MSPs.

[Related: Thoma Bravo Buys Continuum, Plans To Help Drive Security Acquisition Spree ]

Among MSPs within the top 25 percent of the S-L Index, which measures the industry's top performers on a quarterly basis, Continuum's partners attained managed service gross margins that were 8 percent higher than their peers.

"It was not what I expected," said Paul Dippell, CEO of Service Leadership. "When we do comparative population stuff for our own purposes internally, you rarely see that many check boxes in favor of one condition over another."

Service Leadership doesn't usually compare solution providers on the basis of vendor partnerships, Dippell explained, because the financial effects of vendor decisions are generally seen as "minute" relative to a company's Operational Maturity Level – how effectively and efficiently the business is run.

Continuum, however, proved itself an exception to the practice due to the Boston-based vendor's distinct business model, in which MSPs outsource expensive service capabilities such as help desks, network operation centers (NOCs) and security operation centers (SOCs) to the vendor for a flat fee.

The study showed that MSPs using this model can significantly reduce personnel costs and, in turn, more fully focus on sales and marketing efforts while ensuring all operations run smoothly.

"It's not a size and scale issue. It's a business model issue," Continuum CEO Michael George said. "Those that get the business model go all in. They're outpacing and succeeding against all other partners by significant measure. You put 8 percent to the bottom line in your business, that's outstanding additional capital to apply to the growth side of your business. Swing for the fences and go win the big deals. Go steal a customer you've never had the ability to go after before. All of those things become possible."

Dippell highlighted data revealing that the average $4 million MSP has 20 employees, and 12.6 of those people are infrastructure services staffers. By turning services responsibilities over to a company like Continuum, MSPs can trim roughly 10 IT employees from their payroll, reducing sales and administrative overhead.

"There's still some service remaining with the MSP," Dippell said. "But the big load of the day-in, day-out standing in front of the firehose support requirements are now on Continuum's shoulders rather than on the MSP. In that sense, the MSP management team then spends much less time managing the service business and can spend much more time on the sales and marketing side of life, and the general running of the company."

A natural point of hesitation for MSPs considering a master MSP partnership is the effect of splitting margins with the vendor, said Dippell, and whether the loss of that margin would outweigh any personnel-related cost savings.

But the data paints a clear picture: Continuum MSPs that generate $1 million to5 million in revenue had higher gross margins and higher profits than other MSPs. The same conclusions held true for $5 million yo 12 million MSPs, which also "clearly" featured faster growth than their counterparts.

"Hiring and keeping IT guys is not easy today," Dippell said. "I've got to build a service desk, which means I need to buy a bunch of software and space, computers, service, everything else. I've got to build a NOC, which means more computers, more servers, more screens. I've got to develop all the processes to run that, and continually evolve them – that's not easy, either."

For George, the Service Leadership research results become the "ultimate validation" of his company's long-term vision and investment. His company maintains more than 5,800 MSP partnerships, with an average of 200 new partnerships per quarter.

"When we talked to the pundits and the research analysts and all the different authorities in this space, everybody gave us a universal, 'Don't do it,'" George said. "There was a lot of anticipation that the cloud was going to be the panacea for the SMB market, perhaps instantaneously simplifying IT for small businesses and eliminating the need for an MSP. As a company whose strategy was going to be dependent on an MSP, it was going to be fool's work.

"We thought they were wrong. We thought the cloud was going to be one more modality of business services and technology. … The whole study was the ultimate validation that everything we had been building toward here was not only true – we never had any doubt ourselves – but that it was now true to the world."

With only 17 percent of MSPs worldwide currently working with a "master MSP," per Dippell, Continuum is staring down a massive growth opportunity. Just how big of a growth opportunity depends on how many MSPs are willing to buy into the master MSP business model.

Dippell cited a previous study that polled a wide swath of the MSPs that work with Service Leadership. When asked whether they would be more or less likely to use a master MSP in the future, 39 percent said "more likely" versus only 29 percent responding "less likely."

Perhaps more interesting is the 55 percent of current master MSP partners indicating that they'd be more likely to continue the relationship, compared with just 5 percent saying they'd be less likely to do so.

Will Service Leadership's data cause a shift in industry perceptions? That remains to be seen.

For the MSPs working alongside Continuum, however, knowing that an empirical study now supports their strategic positioning is understandably comforting.

"The response was: You're validating some stuff that I've been feeling, but I didn't have a way to validate it other than this," said Dippell, who did a webcast with the 140 study participants a few weeks ago. "There's a bit of a sigh of relief among these guys. That was the sense I got from how the audience responded."

Continuum, meanwhile, continues to ride strong momentum into the summer. The vendor announced last month that it had been purchased by private equity giant Thoma Bravo, which is on board with the company's ambitious 2020 growth plan. George said that influx of funding will allow his team to be "very aggressive" on the acquisition front.

But all of those hopes rest upon the success of Continuum's bets on the market's need for a master MSP to address the skills gap and the lack of skills to service this market, said George. Wednesday's study announcement certainly won't hurt those efforts.

"When I look at 140 guys and I see this kind of difference, my recommendation to those management teams that are not using the master MSP would be, you should look at this," Dippell said. "It's not a silver bullet. It's not a guarantee of success. It's still going to come down to your Operational Maturity Level and how well you execute. But I will tell you something's going on here."