Mapping the Next Golden Age of Managed Services

Predictably, it involves AI, especially for smaller MSPs. Plus: Cisco takes a big step on a long march to prioritizing MSPs.

I want to make clear up front that most of what analysts at investment bank William Blair & Co. said in MSP Market: Entering the Golden Age, a prescient report published five years ago, has withstood the test of time impressively well. Not so true for the very first sentence, though:

“The Managed Service Provider (MSP) Market Is Large but Underappreciated.”

I mean, it’s still large for sure. Way larger, in fact, than in 2020 when William Blair estimated total managed services spending at about $200 billion. Today, it’s more like $595 billion, according to Omdia, and soaring toward $950 billion by 2030.

But underappreciated? Not so much anymore.

“You have some of the smartest investors in the world continuing to put money to work in the sector,” says Robbins Taylor (pictured), director of William Blair’s technology practice. “More people just know the power of MSPs.”

Indeed, and those people extend beyond private equity, which has been aggressively acquiring MSPs for years, into venture capital these days. Collectively, buyers of all kinds were responsible for 108 transactions with a disclosed value of $2.6 billion in Q3 alone this year, according to M&A advisory Drake Star Partners. That’s a 17% quarter-over-quarter uptick in deal volume, and Taylor sees plenty more coming.

“There’s a ton more consolidation left to do,” he says. “We still see quite a bit of fragmentation.”

Despite, needless to say, a lot of earlier mergers and acquisitions resulting in some pretty big MSP rollups. According to Taylor, few of the investors behind those deals have come away unhappy so far.

“You have really big-scale platforms that are proving that the consolidation plays do work,” he says.

As a result, expectations among buyers about what distinguishes good acquisition targets worthy of respectable multiples from best-in-class companies worthy of huge multiples have shifted. Good MSPs, for example, grow ARR 7-10% these days, according to William Blair. Best-in-class MSPs grow recurring revenue north of 15%. Good MSPs earn 35-40% gross margins. Best-in-class ones exceed 50%.

I could go on, but I’d rather ask a question instead: what becomes of the many smaller companies in the long tail of managed services as investors combine good and best-in-class peers into genuinely enormous competitors? The answer, according to Alex Stanton (pictured), isn’t pretty.

“The ones that aren’t desirable and the small guys are going to have a much harder time,” says Stanton, who’s chief strategy officer at consultancy ThinkPurple today and was mega MSP New Charter’s CIO before that. “Much fewer of the one-, two-, three-person MSP shops are going to grow into $10 million machines than in the last 10 to 20 years.”

The upshot, he continues, is that a vendor with 25,000 MSP partners today is likely to have more like 15,000 five years from now, but with more users and endpoints under management.

“The market’s still going to keep growing. You’ll just have a lot less MSPs to work with,” predicts Stanton, who points to a forthcoming “silver tsunami” of exits by retirement-age MSPs and unfavorable market dynamics for a lot of smaller firms as the chief culprits.

There’s a difference between unfavorable and impossible, however, and a way forward for smaller MSPs resides in that gap, according to Stanton. Ironically, he notes, the same golden-age investor fervor responsible for shrinking the MSP community is responsible for that path to continued prosperity.

“Five or eight years ago, you just had buyers, and they didn’t deeply know the industry,” Stanton says. “Now these PE firms have guys like me on their team doing analysis.” The result being the emergence of a new, more informed understanding of what good and best in class mean for MSPs that digs beyond ARR, margins, and even EBITDA.

“I can look at the big shiny number, and the big shiny number doesn’t matter to me,” Stanton says. “What matters is two layers deep. What’s the quality of those earnings?”

He has a picture in mind of what an MSP with high-quality earnings looks like right now, too, and it’s characterized less by numbers, shiny or otherwise, than by a seriousness of purpose about cultivating next-generation, solution-oriented skills in AI and beyond.

“The owner is literally coding on the weekends,” Stanton says. “They’ve got everybody on their team dedicating time in their week to building things. They’re doing app building competitions. They’ve got their client experience people in Claude Code.”

And yes, they’re taking a hit on the top line and sacrificing billable employee utilization in the short term as a result, but they’re also preparing themselves for the kind of longer-term, innovation-powered profitability that savvy acquirers increasingly want.

“I would much rather as a PE group be investing in a company that’s deeply building R&D and has built muscles for the future,” Stanton says. “That business may not look best in class today, but it will five years from now.”

Stanton isn’t the only one thinking that way. Many of the people Taylor speaks with are as well.

“What the actual operators tell us is that you have to have a really good external delivery AI strategy and a really good internal AI strategy,” says Taylor. “If you’re not investing in an AI strategy, you’re way behind the game.”

Of course, not everyone can afford to play that game. “You have to be over $5 million,” Stanton estimates. “Below that, it’s a distraction.”

But there are a lot of MSPs somewhere between $5 million and best in class at present who can and will do very well in the next golden age of managed services if they make the right moves now.

Cisco steers hard toward MSPs

Turning an ocean liner, per a familiar metaphor, is a long, slow process, and in tech industry terms Cisco is a very big ocean liner. Bigger than ever, in fact, as far as market cap goes.

So it comes as no surprise to me at least that steering the company toward managed services has taken some time. I caught my first glimpse of that process in 2022 when an executive outlined a series of investments the company was making in its MSP partners to capitalize on what it projected would be a $113 billion TAM by 2025. And I noticed a decided change in direction some 17 months later when CEO Chuck Robbins spent precious main stage time at the 2023 Cisco Partner Summit declaring managed services “a huge opportunity” worth a potential $161 billion to the company by 2027.

I knew for sure that the course change was all but complete a few days ago, however, when I interviewed Tim Coogan, Cisco’s channel chief since August, and Elisabeth De Dobbeleer, the SVP in charge of Cisco’s partner program, for an episode of the podcast I co-host.

The main topic of conversation, naturally, was Cisco 360, the next-gen partner program Cisco will put officially and entirely into effect on January 25^th. A lot about that offering is new, and this is not the place to get into the details about that. What stands out about Cisco 360 to me, however, is that the many changes incorporated in the program build off of what the company says are three design principles: lifecycle value creation, ecosystem power, and—yes—managed services. According to Coogan, the last of those made the list of core priorities in response first and foremost to customer input versus giant TAM numbers.

“More and more we hear from customers that they want to buy things differently,” he says. Five years ago, he explains, end users were content to purchase a switch or a firewall. “Well, they don’t want to buy a switch or a firewall now. They want to buy a solution that supports secure AI infrastructure.”

That requires a lifecycle’s worth of contributions from an ecosystem of partners before, during, and after the sale. Especially, Coogan (pictured) emphasizes, after.

“We apply too much of the value that we bring to our customers to the sale,” he says. “That’s not where we deliver value. Value comes from using what we’ve sold.”

And no one’s better at helping customers realize that value, De Dobbeleer adds, than MSPs. “[We’re] very excited about the opportunity with managed services because that precisely drives more customer value, more stickiness, and hence profitable and durable growth as well,” she says.

That’s not a recent realization, De Dobbeleer continues. Cisco began designing Cisco 360 some 18 months ago. “We made a very deliberate decision to embed the MSP motion in the program.”

But not just the partner program, Coogan insists. Early in the turn toward managed services, he notes, Cisco looked for targeted opportunities to accommodate managed offerings.

“I think the posture that we have now is different,” Coogan says. “Quite honestly, I don’t know that I see any part of the portfolio that isn’t a part of the managed service conversation over time.”

Should that require future course shifts, De Dobbeleer promises, partners can expect to see them incorporated in Cisco 360 quickly, no matter how big a ship Cisco becomes.

“The world changes so fast that whatever you do, it needs to build in enough flexibility so that you can keep adjusting and keep iterating and keep improving, because whatever you do will have to be adjusted,” she says.

Listen to the whole thing for yourself

The podcast episode with Coogan and De Dobbeleer is available here. More interviews with industry thought leaders and decision makers can be found here. Become a subscriber, and we’ll tell you about the latest one as soon as it drops.

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