Service Leadership Takes on Two MSP Mysteries
Is AI why top-tier MSPs are suddenly making more on services and no one else is? Are fully integrated MSPs better than semi-integrated ones?
There’s a mystery embedded in Service Leadership’s recently published 2026 Annual IT Solution Provider Industry Profitability Report.
It’s not why the industry’s top quartile MSPs grew EBITDA 25% last year, versus 10% for their median peers and 5% for the lowest quarter. That’s a long-standing pattern for which Service Leadership has a long-standing explanation: Top-ranked MSPs sell end-to-end packages of standardized services across all accounts in a targeted client base while consistently employing rigorous, disciplined operational processes. What’s different in last year’s data is the advantage top performers enjoyed in service margins, and the degree to which that advantage appears to be mounting.
Service margins are my shorthand for a metric Service Leadership calls service multiple of wages. To calculate it, you total up all the money an IT provider makes delivering services and divide it by all the money they spend on salary, bonuses, benefits, and beyond for everyone on their service delivery team. Higher SMWs correspond to higher profits and growing numbers suggest growing profits.
That top-quartile MSPs do better than others on SMW is nothing new. Service Leadership has long advised clients to target 2.5x on that metric, and best-in-class clients have been averaging 2.7 for a while. The mystery is why that number is rising so fast right now.
“In the most recent three quarters we’ve seen that marching up to 2.8-ish, 2.9-ish, and in Q1 it was 3.01,” says Peter Kujawa (pictured), ConnectWise’s EVP and general manager of Service Leadership and IT Nation. “The only other time we’ve seen a 3 on that was at the bottom of the Great Recession when wages tanked.”
Except that everyone’s SMW presumably rose that time. This one is much more limited in scope. “The median is just barely going up,” Kujawa says. “The bottom quartile is flat.”
Service Leadership’s new report, as thorough as it is, offers no explanation for either why service margins are increasing sharply for top-tier MSPs or why they’re not rising for anyone else. But Kujawa has a theory.
The last three quarters correspond very roughly with the period of time in which MSPs have been adopting service desk automation software in meaningful numbers, he notes, and it’s reasonable to think best-in-class MSPs were among the earliest and most effective adopters. The upshot, Kujawa believes, is that top-quartile providers are growing measurably more productive and hiring more slowly as a result.
“What the data is showing us is that the best in class are starting to be more disciplined in their backfilling,” he says, adding that the bottom-line impact is just beginning.
“I think personally in a year, the best in class will be at somewhere between 3.25 and 3.4 on a service multiple of wages,” Kujawa predicts.
A cynic might note here that ConnectWise, which just launched a new platform with built-in AI functionality, has good reason to speculate without evidence that AI functionality is making MSPs more profitable and productive. ConnectWise, however, hopes to provide that evidence soon when it publishes the first results of its “Automation Index,” a new measure of AI readiness, adoption, and financial impact based on six inputs, including SMW. Watch for it in Q3.
Automation security matters too
Mythos, Fable, GPT-5.6, and models like them are generating a lot of fear, uncertainty, and doubt in the security world right now. Arve Kjoelen, Barracuda’s CISO, brings reason- and experience-based insight to the topic on the latest episode of MSP Chat, the podcast I co-host. Check it out here, and check out our many, many other episodes here.
An answer to the loosely integrated versus tightly integrated MSP rollup debate
Service Leadership attempted to resolve another mystery in its latest report and did, but not in a way that’s likely to satisfy any of the parties most directly invested in it.
Those would be the private equity firms and other investors buying up MSPs in big numbers. Broadly speaking, they have two philosophies about portfolio building. One (The 20 is a good example here) holds that your best bet is to align everyone around a single brand, identical tool stack, and shared operating processes. The other (think New Charter) believes in letting acquired companies retain their brand and culture while sharing resources in areas like sales, marketing, and finance. Service Leadership calls platforms in the first camp fully integrated and those in the latter one semi-integrated.
Which approach is better? Literally billions of dollars are riding on the answer. And having crunched the numbers, Service Leadership can now say the correct answer is … both.
“The [revenue] growth rates are in fact faster for the semi-integrated folks, but the service gross margin and EBITDA are better for the fully integrated folks,” Kujawa says.
And indeed, per Service Leadership’s latest data, semi-integrated platforms grew revenue 26.3% last year, versus 20.6% for fully integrated ones. On the flip side: fully integrated platforms recorded 19.1% gross margins versus 16.8% for semi-integrated ones and came out ahead on EBITDA as well, at 19.5% versus 18.6%.
Those numbers reflect a trade-off between disruption and efficiency, Kujawa believes. Semi-integrated platforms do less onboarding after acquisitions, resulting in less churn and more time for revenue building. Fully integrated rollups, by contrast, collect the longer-term benefits of standardization and economies of scale.
Which outcome is better? That’s a little like asking whether a Roth IRA or a traditional one is better, Kujawa argues. “It depends on what your tax bracket is and what you’re trying to achieve.” Same goes for building MSP platforms.
“It depends on what you’re trying to achieve,” Kujawa says. “Both models can be successful if properly executed is our conclusion.”
One last note for any MSP reading this and thinking I don’t care what works for private equity because I have no intention of ever working with it. Like it or not, you will have to compete with PE-backed providers, and the data says they’ll have an important edge on you.
“Generally speaking, private equity companies outperform the non-private equity companies on EBITDA by about three to five points,” Kujawa says.