Thursday, April 21, 2022

Widgetization, Homogenation, and Commoditization in SMBIT - A Primer on Private Equity

The SMB IT community may not have chosen the path we're on, but we have built it one brick at a time.

When I ask, "How large is your company?" how do you answer that question? Some people immediately think in dollars. Some think about the number of employees. Some count endpoints.

And while endpoints is not the first thing that pops into our minds, for most of us, it is no longer an unusual request. Fifteen years ago, we asked questions like how many clients you have, or how many clients you have under contract.

Now, the measure is endpoints. Why? Because it's a great surrogate measure for how large your company is. With a little calculation, I can guess a lot about your company based on whether you service 250 endpoints, 500, 1,000, or 10,000.

The number of endpoints also gives me an excellent idea of how many RMM agents you have deployed, how many Microsoft licenses you have deployed, and how many anti-malware agents you have deployed.

This I call the widgetization of our industry. How many widgets do you support?

But this is also the language being used to homogenize and commoditize our industry. Unfortunately for me, I have to accept some of the responsibility for this. So many people have adopted the basic model laid out in Managed Services in a Month that it has become a blueprint for the modern MSP.

Standardization has the advantage of creating an industry. It allows us to compare companies. It allows us to know where we stand. It also allows others (perhaps buyers) to know where we fit in the big puzzle. Good or bad, the widgetization becomes a shorthand for measuring the worth of a company.

So now, we can use endpoints as a rough measure of worth. It's not exact, and almost no one treats it as if it is. But in a very relative sense, it tells us quite a bit about a company. Now potential buyers can look at companies and determine whether to make offers on companies that are 1,000 endpoints or more. Or 5,000. Or 10,000.

Licensed from Sketchplanations

I love to remind people of Goodhart's Law: When a measure becomes a target, it ceases to be a good measure.

In this case, the surrogate measure will always be a basic, imprecise measure. Again, "everyone" knows that. But a key piece of commoditization is to strip away the details and focus on one or two things you CAN measure. Then pretend that the measure has meaning.

This is how Private Equity sees our industry.

Companies are bought when a deal can be swung for enough endpoints. Valuation has to be agreed upon, but the conversation begins with the number of endpoints. Until money becomes the commodity of choice, endpoints are the commodity of choice.

PE - Private Equity - is different from VC - Venture Capitol. VCs fund a number of projects, often taking a chance on wild ideas, hoping that one in ten becomes a massive success. This causes some odd behavior we're not here to talk about today.

PE is almost the opposite: They are not interested in gambling with their money. They want a return of "X%" where X is often twenty or thirty or forty percent. This leads to a different kind of odd behavior.

PE funding works well if you can gather up a bunch of companies and merge them all under one  holding. The holding might be invisible to outsiders, or it might be a new company brand. You've probably seen this behavior. It goes something like this: 

- I'll buy your company as cheaply as possible, and tie you into it for a period of time. You might do well if the company thrives. I will limit my risk if it doesn't.

- I'm most interested in companies that fit the operating model I like (e.g., managed services), and use the toolsets I prefer. RMM. PSA. Widget, widget, widget.

- Your uniqueness and individuality are irrelevant.

- Once I gobble up enough companies to reach my target number for endpoints, then I can engage in other activities.

- The new entity can now be "managed" to reach revenue/margin targets. 

 - - The easiest place to cut is personnel since they are the most expensive. Duplicate roles across companies are first. This includes customer service and administration, primarily. In some cases, it includes the bookkeeping and invoicing staff.

 - - If there is a subset of clients who represent a specialty, they might be bundled together and sold off as a unit. Similarly, other bundles of specialty clients might be bought as a unit. I'm buying and selling based on widgets.

- Eventually, larger collections of companies will be merged into even larger collections of companies. More endpoints and more endpoints, and more endpoints. It's all about the widgets!

What's missing in this wonderland of widgetization? Uniqueness. Customer-centric support. Personalized anything. Best practices. Employee-centric culture.

What's missing is the people part of small business. The relationships. Employees you care about. Clients you care about. Like it or not, life is different when it's all about the widget.

And the good news is . . .

The endpoint-obsessed MSP of the (not so distant) future will be easy to sell against. They will not give good service. In fact, the larger they are, the less capable they are of providing good service. They will not spend energy or money maintaining culture. Customer loyalty will have disappeared after the first sale.

The sale of a company inevitably results in a period of confusion and chaos. With a tiny company, this can be short. In a small company it can be relatively short. But the period of confusion grows as the size of the companies grow.

Whose SOPs will be used? Generally, the larger company wins this one. But when the company grows to a certain point, no one is responsible for keeping the SOPs good and up to date. Customer service is no longer delivered by every employee: Now it's a department. Customer service is now just another expense to be managed - and cut when necessary.

This is one possible future for our industry. It's one you can certainly compete with. You need to maintain personalization, culture, and a focus on service. And, yes, there will always be clients who only care about the dollars and the pennies. And you might sign those clients. But you will still make a good living on clients who want the personal touch and want good service. 

As large "MSPs" begin to act with the personal touch of Google, Facebook, and Microsoft, there will be plenty of room to be a very successful IT consultant with a strong focus on your clients and employees.


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