On the Front Lines with IT Managed Service Providers

Duane Jackson

Feb 1, 2024 | Insights

Author IoI Series: On the Front Lines with IT Managed Service Providers

This is the first in an ongoing series highlighting Author Capital Partners’ industries of interest (“IoI”)

While Fortune 500 companies have armies of internal IT resources to fend off an astounding number of cyber-attacks and manage an increasingly complex technological landscape, the ~8 million small businesses in the US are often left to navigate with limited internal resources. Against this backdrop, Information Technology Managed Service Providers (IT MSPs) have emerged as critical partners to small businesses seeking specialized expertise to manage their IT infrastructure.

The IT MSP sector is a mission-critical service sector filled with bold entrepreneurs serving the broader IT services market. These often-founder-led businesses—remarkable in their technical acumen, grit, and responsive customer service—embody many of the key business attributes that Author Capital aims to support and scale with its flexible capital and strategic advice. We find IT MSPs particularly attractive whose offerings center around sticky, recurring revenue services—like cloud, cybersecurity, SaaS, and AI—over project-based, one-time services or sales.

Market Dynamics and Growth

The IT MSP market is a rapidly growing and highly fragmented industry with recurring revenue and strong tailwinds. MSPs’ capital-light model with moderate fixed costs allows for sustainable growth, while the ongoing shift to cloud-centric infrastructure, AI-enabled automation, and the adoption of hybrid work models all further fuel the demand for reliable and secure IT services.

Research indicates a $70bn+ current market size in the US, with more than 20,000 IT MSPs and a forecasted 13% compound annual growth rate from 2022-2030. Taken in totality, we believe this is indicative of an attractive industry ripe for organic growth and consolidation.

Risk Mitigation

There’s a saying in the cyber community that there are only two types of companies in the world: those that have been hacked and those that don’t know they’ve been hacked. Whatever the empirical accuracy of the adage, companies in the digital age confront an endless array of cyber threats and operational challenges, all of which can pose substantial risk—not the least of which is to your business’s reputation. IT MSPs play a pivotal role in risk mitigation and ensuring business continuity by offering advanced cybersecurity measures, proactive threat detection, and rapid incident response.

In addition to the ongoing cyber onslaught against businesses, US data privacy laws are set to enter a new era with more states adopting EU GDPR-like regulations. As businesses respond to this unfolding regulatory maze, IT MSPs can play a strategic advisory role and offer appropriate compliance and regulatory solutions. The ability of MSPs to earn trust and enhance the resilience of their customers often provides the opportunity to land and expand their service offerings across multi-year relationships.

Cost Savings and Operational Efficiency

Business owners face a constant tradeoff in evaluating whether to in-house or out-source services, and the IT function can be especially perplexing. MSPs offer an efficient alternative to in-house IT teams, allowing businesses to access a broad spectrum of services without the costs of managing dedicated personnel. Leveraging economies of scale, MSPs invest in cutting-edge technologies, delivering high-quality services at a lower cost than internal IT management. The best IT MSPs not only offer cost savings but also become a source of value creation. They are able to seamlessly adjust their offerings to accommodate rapid growth, allowing clients to efficiently scale their IT infrastructure in alignment with business objectives.

Technological Expertise and Innovation

In the dynamic world of technology, staying abreast of the latest developments is imperative. Take the advent of Generative AI, a watershed moment for Artificial Intelligence and step change in the evolution of workforce productivity. According to McKinsey, Generative AI’s impact to all industries and business functions will result in annual economic gains of up-to-$4.4 trillion globally. Major developers of AI products, like Google, Microsoft, and Meta, have already begun to infuse essential business tools with AI—like Microsoft’s Co-Pilot. MSPs serve as trusted advisors in navigating this complexity, helping their clients remain competitive by providing technological expertise and investing in innovation and security.

Client Relationships and Service Differentiation

Client relationships are paramount in the service-oriented MSP industry and a key differentiator in their individual success. MSPs, through ongoing interactions, gain insights into unique client needs and challenges. This not only allows them to land and expand within a client account, but also allows MSPs to tailor services and provide a level of customization. Further differentiation is achieved through specialized services, industry-specific expertise, geographic density, or innovative solutions, positioning individual MSPs to capture market share and build lasting client relationships.

Final Thoughts

Of the ~20,000 IT MSPs in the US, most will never reach sufficient scale.  Accessing flexible capital for growth and finding a trustworthy strategic partner are often limiting factors. As thematic investors in the lower middle market, Author is keenly focused on the IT MSP sector, drawn to the mission-critical nature of the sector and the commitment to excellence driven by visionary founders and exceptional IT professionals.  For ambitious IT MSPs gearing up for the next phase of growth, and those IT MSPs wishing to facilitate a transition, we would welcome getting to know you and your company better.  Together, we can maximize long-term value and help you author a meaningful legacy.

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