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The reality of starting an MSP and what to know before launch

People should understand what the reality is around the technology business and what to expect when starting an MSP and how the messaging often ignores how hard it really is.

Dave Sobel is the host of the podcast The Business of Tech and co-host of the podcast Killing IT. In addition, he wrote Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business.

For this week's video, Sobel looks at the discussion around starting an MSP and how the messaging around the market opportunities are often rosier than reality. Those considering an MSP startup should understand what they're getting into, and Sobel has advice for fledgling technology solutions providers.

Transcript follows below.

I've titled my video this week, 'Don't start an MSP.'

Now, let's address something to start. It's a damn good clickbait title. If you are watching this because of that, know that isn't my intention. I did not write this to generate clickbait. I don't actually write anything because of clickbait, but this piece is not because I'm trying to draw in clicks or views. Seriously, there are way easier ways to get crazy, meaningless traffic as a sugar high. If you're interested in my business model, there's a video on my YouTube channel that describes what I'm doing, and I'd be compromising long-term trust for that.

Getting that out of the way, I mean it, don't start an MSP. Why, you ask? Because it's really hard. Like, seriously, truly hard now.

There are a ton of vendors out there that are whispering in your ear to go for recurring revenue. To take their software or hardware or widget or whatever and sell it to your customers on a monthly recurring basis and it's going to be the best thing ever and you're going to make tons of money.

But you know what they aren't telling you? That their gross margins are around 70%. Software companies have really fantastic margins. Writing and selling software is a rather awesome business. Pretty great! You make something that you don't have physical components to handle, and the more people use your software, the more your margins increase, because you're selling the same thing over and over and it becomes better and better.

Sure, you have those pesky management costs and your infrastructure and all, but you're selling the same thing over and over! The more sold, the better the you do.

Thus, of course they want you to sell their stuff. Just remember, their business is not yours. Services businesses and product businesses are built differently. They don't have the same cost structures.

I'm not saying any of the people at these organizations are out to get you. I'm also not saying they are bad people, nor am I saying they don't want to align their business goals with yours. You can get a lot of value out of close relationships with vendors.

Just remember the company financials are not the same as yours. They just aren't, and the economics of adding a customer are different for those selling products than those selling services.

Let's talk about starting a computer services business

Lots of long-time experts in this space -- including me -- have a similar background story. Love technology, love helping people, come from a technical background -- and some event pushes you to consider being on your own.

And when I founded my business in 2002, I could 'make computers work' and I was not assuming that much risk. The biggest risk I had to worry about was data loss due to corruption, hardware or user error. I really am becoming 'old man shaking fist at clouds,' because I'm waxing poetic about the good old days. Cut to now.

If you're taking on technology for any customer, it's not good enough to just protect against data corruption and help with printer problems. Not by a lot. You have professional criminal organizations that target companies every day, incredibly well-financed operations, running even as much as franchise models of operation, breaking into those potential customer businesses and holding hostages.

And, you're the one who is taking on the risk to protect them. You. If you're doing any kind of IT support now, think of the risk you take on. You have to protect against all of those adversaries, who only have to win once, and you have to be perfect every day. You have to protect against users who click things, who will rebel against security, who will be asked to do unnatural things.

So that's all the risk you're signing up for.

How to mitigate risk as an MSP

To mitigate that risk, you need some great contracts. You're going to need insurance. You're going to need a proper business structure to protect you. There's regulation coming for this industry, so expect you will be in regulated industry in the next five years, and probably sooner. Stepping into this world even today you're bound by a long list of data privacy regulations, both broadly and in whatever industry your customers are going to be in.

Besides all that, you're going to compete not based on any actual qualifications but entirely based on marketing. There's no industry certification you can hold up like a CPA or a lawyer would to prove you and your business are competent as compared with Jimmy Joe Bob down the street. You may not want regulation, but it would certainly make that entry-level competitor stand out.

Labor, tools and technology -- what to consider as an MSP

Your biggest expense will be labor. You love the tools and the technology, right? Yeah, you're not spending your time there. If you hire people to grow the business, you're managing people. Culture, process, HR -- those are all things you have to think about.

Remember those margins of 70% for software companies? That's not even best in class -- a bad software business can do that. Good ones are in the 85% range. Did you know that one quarter of all technology services companies run at break even, or worse, even lose money? You are not a software company, and even if you productize your services, you're still a services company.

But it's a sellable asset, right? You'll build this up and sell it off for big money? Think again. You need to get to significant size to do that, and you had better be profitable when you do in order to have an asset to sell. And remember, you're going to be selling on a services multiplier, not on a product one.

Got all that?

You may have noticed I didn't even mention technology tools. Those are the least of your problems, and they don't have much of the things we've talked about so far. Yeah, don't start an MSP.

Why do I work in this space if I'm down on it?

Oh, I'm not. I love this space. I love working with small businesses, both the technology companies and their customers. There is money to be made here. There is opportunity. In fact, there are ways to do it.

Let's just be honest about this -- it is not easy.

And all you established companies that are watching this and being thankful you're over it? Don't be smug. The floor is raising quickly here. All of those insurance, regulation and business challenges are there for you, too.

Here's some data. IDC predicts that 'At least 30% of SMBs will fail by 2021, leading to a new wave of microbusiness-powered and ecosystem-first disruptors by 2023. These microbusinesses will be single employees that leverage the power of a digital platform to obtain and fulfill work.'

A big mistake established technology companies make is that they assume yesterday's revenue will also be tomorrow's revenue. Sure, we all build monthly recurring revenue (MRR) and recurring revenue is fantastic, but don't assume it's the same MRR next year it was the last time. I'd expect you to be examining roughly a quarter of your revenue sources every year, so that on a rolling four-year basis you're retiring or addressing legacy services out. This allows you to be agile.

Think of that 30% failure rate -- you'll want to be making sure you're considering the services the new companies will need in those coming two to three years, and now is exactly the time to be planning. [And] 2023 is far enough that this is a transition you can address.

Recognize the challenges of starting an MSP

So, you have to meet the challenge of the changes in the regulatory landscape, you have to meet the challenge of the business environment of now, you have to watch these rapid transitions. This is not easy.

That's why I called this piece Don't Start an MSP. Not that I don't believe in it, or love it, or think there is no opportunity, or that it isn't a fantastic area to be. I love this space.

I just recognize it for what it is. It's very, very, very hard, and it's getting a lot harder each and every day. Just as you don't assume the MRR of the past is the MRR of the future, you should make sure you understand the challenges of the past are not the challenges of the future.

About the author

Dave Sobel is the host of the podcast The Business of Tech, co-host of the podcast Killing IT and authored the book Virtualization: Defined. Sobel is regarded as a leading expert in the delivery of technology services, with broad experience in both technology and business. He owned and operated an IT solution provider and MSP for more than a decade, and has worked for vendors such as Level Platforms, GFI, LOGICnow and SolarWinds, leading community, event, marketing and product strategies, as well as M&A activities. Sobel has received multiple industry recognitions, including CRN Channel Chief, CRN UK A-List, Channel Futures Circle of Excellence winner, Channel Pro's 20/20 Visionaries and MSPmentor 250.

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