Managed Service Providers are fragmented. I hear that phrase quite frequently. What does it mean?
Most of the time, people say it to infer that MSPs don’t really have a clear market presence with their solutions. That might be true. Other times, it’s just to convey a sense that no single MSP or group of MSPs has a percentage of market share that would considered significant. That also would be true.
The majority of times I hear the word fragmented being used it is from an investor and they are describing what they believe to be a vulnerable marketplace to M&A activity.
As I have said before, the managed services (and now cloud computing) landscape is very different from the VAR days of yesteryear. The investors are not stupid. Their view of the MSP profession is based, in my opinion, on one fundamental misinterpretation. The misinterpretation happens to be very important and could be an explanation of why the M&A activity within managed services has not been particularly consistent over the last decade.
I have always looked at the MSPs as professional services firms. That simple distinction informs much of what I believe about MSPs today. Viewing MSPs as professional services firms, in contrast to commodity providers (product or services), will help put these companies into perspective and allow anyone to easily make sense of how they operate.
More importantly, such a perspective will also greatly help inform investors and M&A candidates on how to effectively analyze and effectuate an investment, merger, or acquisition within this profession.
As to the question about whether MSPs are fragmented or not, I will simply say this. No single MSP or small group of MSPs dominates the marketplace today. Furthermore, I do not believe this will ever happen. The reason is simple.
Customers demand high touch and intimacy from their MSPs. The larger the MSP gets the less likely that intimacy will be delivered. Therefore, there is a natural size limit at which managed services can be effectively delivered and appreciated by the customer before it becomes a commodity. Generally, once the MSP reaches this size threshold, their customers will demand more attention and may even leave if they do not get it.
MSPs, like other professional services firms, thrive on delivering high value, profitable services Once that primary purpose becomes subjugated to size, commoditized services, and impersonal customer service, the customer will likely seek their services elsewhere.
This simple concept is what makes even the smallest of MSPs so valuable to their customers.