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DattoCon 2018: Focus on MSPs poised for SMB growth

The MSP industry has good prospects for growth in the SMB space as company valuations increase, but the firms with the greatest focus are more likely to reap the rewards.

AUSTIN, Texas -- Managed service providers stand on the cusp of explosive growth in the small and medium-sized business market, but they must focus their sales and look for points of differentiation to cash in.

That's one takeaway from this week's DattoCon, Datto Inc.'s annual partner conference. The three-day event attracted about 1,650 service providers, a record for the Norwalk, Conn., data protection, networking and managed service provider (MSP) business management vendor. The event concluded June 20.

"The SMB spend rate is climbing really fast," said Austin McChord, CEO and founder of Datto. "The opportunity is absolutely massive."

Austin McChord, founder and CEO, DattoAustin McChord

Citing research from MarketsandMarkets, McChord said SMB IT spend will grow from about $40 billion in 2017 to nearly $72 billion in 2022. He estimated half of SMB transactions currently involve MSPs -- so while the SMB market is already large, there is still room for the MSP industry to capture more business.

"Small businesses will be scrambling to rethink their IT infrastructure [and will] need to turn to managed service providers," McChord said during his DattoCon keynote address.

Valuations climb

While demand expands, MSP market valuations are also growing.

Paul Dippell, CEO of Service Leadership, a company that benchmarks the financial performance and operational maturity of solution providers, said the arrival of private equity investment firms is one force driving valuations. IT services companies, such as Reliam, are partnering with private equity firms to do deals.

"Private equity groups have found the MSP industry," Dippell said during a DattoCon presentation.

The equity investor's typical target -- MSPs with $5 million or more in annual profit -- are rare, which makes those companies more valuable. Meanwhile, MSP owners looking to sell to such buyers may need to acquire another MSP to boost the bottom line and be deemed desirable, Dippell noted. An MSP with $3 million in profit, for example, may look to acquire an MSP with $2 million in profit. But even MSPs at the $2 million profit mark are unusual.

Deals have been rampant in the MSP and cloud consulting sectors of late, including Green House Data's merger with Infront Consulting Group in May.

Chart showing recent mergers and acquisitions in the IT services industry
New buyers in the MSP market, such as private equity groups, are driving up service provider valuations.

MSP industry execs: Focus is key

High growth and ample valuations, of course, are not guaranteed. Industry executives suggested several factors that could improve a service provider's ability to make the most of these trends. Among those factors is focus: Pick a target market and stick to it. That target can then become a point of differentiation.

"They have got to differentiate themselves -- just figure out what they are best at and sell that," McChord said.

That approach could mean only selling services to dental practices or biomedical research companies, he said. The idea is to understand an industry and its lingo, cultivate vendor partners to serve that space, and develop a differentiated business model. Indiscriminate and opportunistic selling, on the other hand, may backfire, McChord suggested.

Work in a fishbowl, not an ocean.
David Pencefounder and CEO, Acumen IT

"Just taking any revenue that shows up almost always puts you in a bad spot," he said.

David Pence, founder and CEO at service provider Acumen IT, based in Greenville, S.C., echoed McChord's sentiments.

"Work in a fishbowl, not an ocean," he told attendees during a DattoCon presentation on MSP selling strategies.

He suggested MSPs create a dream 100 list of customers to pursue rather than buy a mailing list and trigger an email blast to 100,000 companies. And when service providers call on their dream list, they should focus on delivering a superior customer experience rather than providing technology.

"It's not technology and blinking lights," Pence said. "When you are talking to customers, be consultative. Don't be a tech engineer."

Key attributes

Dippell cited focused selling as one of five key attributes of the top performing service providers. Companies that have a well-defined target customer profile tend to outperform their peers who don't.

The other attributes, he said, are whether the service provider charges for technology assessments, drives technology standards across customers, conducts quarterly business reviews and cross-sells the breadth of its service portfolio to all customers.

A yes on those counts can help service providers join the ranks of best-in-class companies.

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