Giant MSPs will Never Dominate Our Industry. Here's Why.

How will YOU thrive in a world of Giant MSPs?

Technology consulting is a fragmented industry. As such, it will never be dominated by a small handful of major players. In that sense, we're much closer to accountants than rental car companies. Why is it so fragmented, and why will it never be consolidated? There are three primary reasons.

First, the barriers to entry are very low. In fact, if you can spell IT, you can call yourself a computer consultant. Our industry needs higher barriers, better standards, and even some licensing. But even when that's achieved, the barriers to entry will be as low as barbers and restaurants. 

Second (following from the first), tens of thousands of people enter this business every year. They "try their hand" at computer consulting, and many stay. And with five or ten clients, they can make money, but the growing mega-MSPs have no interest in buying them out. So they stay and grow.

Third, as a service business, high quality service can only excel in smaller shops. Larger companies can't help themselves. They tend to centralize control, centralize customer "service" lines, centralize buying, and are incapable of understanding individual clients or the needs of individual local business environments.

Large MSPs, ironically, are also financially less profitable and less stable. We'll come back to this point.

Fragmentation in our industry cannot be overcome. Consider the strengths of the very small IT businesses and the weaknesses of very large businesses, especially in light of what we're seeing right now in the IT consulting space.

The "promises" of large, consolidated businesses is that they'll bring efficiency of scale. The reality is that the generic building blocks of centralization create a kind of false efficiency that demoralizes the workers, alienates the growing middle-management, and dramatically reduces service delivery to clients.

Small(ish) local businesses excel at personal service, the ability to build a strong local reputation, close control of internal operations, and controlling costs when needed. Plus, they literally live in the local market and know how to react to it.

Small businesses, especially owner-operated consulting businesses, are subject to far fewer regulations. There's a somewhat magic line that gets crossed when a company exceeds fifty employees. Massive amounts of employment law and other regulations kick in. There are some barriers at twenty-five employees, but fifty is a major transition point.

When small companies are closely managed by the owner, it's easy to improve response time or address other specific strategies that need improvement. In fact, it's easier to see these areas for improvement - without fancy KPIs that measure all kinds of meaningless variables that are not "key" and are rarely related to performance.

As companies grow, it's easy to say that they'll add efficiency by centralizing billing, for example. This virtually guarantees more client unhappiness with bills that no one can explain. Why? Well, the alienated workers get paid whether they do a mediocre job or a great job. So ticket notes are sloppy. 

The person creating the invoices has no idea whether they're accurate. The person in customer service knows nothing about the client, the technician, or the work that's being doing. All they have is the notes in front of them. Long cycles of arguing about invoices simply do not exist in small companies.

Another promise of centralized control that can never come true - especially when the company is funded by private equity - is that larger companies will lower prices due to economies of scale. But service-based businesses are not at all like manufacturing businesses. We're not making bester, faster, cheaper cell phones with more features than last year.

As companies grow and centralize operations, all the pressures are to increase costs due to internal pressures and operational realities. The largest internal pressure is simply that investors want their money back. In some cases, they've actually been promised a specific return on their investment. The easiest way to increase revenue is to charge more. The easiest way to cut costs is to fire the people who deliver service.

The investors don't care about a shortage of talent. They don't care about inflationary pressures, tariffs, or local conditions. Last year they squeezed 20% profit from the bottom line. So this year it's 21%. Next year it will be 22%. How? No one cares. The number has to be the number. Sell more, cut costs, fire people. No one cares as long as you get that extra 1%.

“If management sets quantitative goals and makes people’s work dependent on achieving them, they will probably do so – even if they have to destroy the company to do it.” – W. Edwards Deming

Operational realities increase expenses because local control is directly related to client satisfaction, employee satisfaction, client relationships, culture, and responsiveness. When these things become centralized, there are no pressures that keep prices low except an arbitrary command-and-control top-down edict that limits prices. But that can't happen when the stronger internal force is to get one more percent of profit.

Larger operations also introduce waste because the time lag between local actions and centralized response is greater. If billing is wrong, or you're being charged for the wrong number of licenses or widgets, that is very visible in a company with fewer than fifty clients under contract. 

It's nearly invisible in a centralized organization with a thousand clients under contract - especially when no one from the technician to manager to central billing has an incentive to care about how many widgets are being reported to the big, nameless, faceless corporate overlords in another state. Waste is the order of the day in large companies.

Wait. Stop! Michael Porter says that Strategic Discipline might be able to combat the forces of industry fragmentation. (See Competitive Strategy, chapter 9. https://amzn.to/43Uvr6f)

Strategic Discipline simply means focusing the organization's attention and efforts on specific areas of the business. Again, this sounds great in theory, and it does work in manufacturing. But what does it look like in the real world of service delivery?

Strategic discipline in IT service delivery means that you can get everyone on the team to agree to fix problems on the first attempt. You can get them to put in quality notes. You can get everyone to learn some soft skills and make clients feel like they're getting personalized attention. And if you have great culture, you can do all of these at once.

In other words, strategic discipline in service delivery looks exactly like what small companies do really well and large companies do very poorly.

Here's the good news/bad news of being one of the 500,000 small IT companies in a market where all the money seems to be flowing to ever-growing mega-MSPs. The bad news is that they will go after many of your clients. And, primarily, they want your larger clients.

The good news is that they love to revel in their bigness. Because of this hubris, you will win the market for clients who value excellent service in the long run. It won't be easy, and probably won't be much fun. You'll have to lure back clients who were promised better service at a lower price and got neither. 

You will need to build a strategy to compete in a world where mega-MSPs have all the marketing money but deliver substandard tech support and just plain bad customer service. 

The really, really bad news is that, if you don't like competing in that market, you need to get out now. The good news is that, if you stay and fight, you will win. You won't take all their clients and kick them out of town. But you will have all the clients who appreciate you, appreciate your level of service, and provide you with a very comfortable living. And you can make a nice profit doing that.

Comments welcome.

:-)