Coronavirus damage hangs over Datto 2020 State of the MSP report

Datto’s new annual MSP study indicates that the pandemic has led many MSPs to downgrade their growth expectations, but it also illuminates some positive trends in the industry.

Rob Rae, vice president of Business Development at Datto

Datto had intended that the 2020 installment of their global State of the MSP report would break new ground by focusing on specific behaviors of high-growth MSPs. Unfortunately, they did the research for the study in January and February, just before the pandemic threw the MSP business – and most everything else – into turmoil. So they then did a smaller, follow-up survey specifically on the coronavirus and its impact. And of course that becomes the key theme of the study, in providing some statistical verification of impacts which have until now largely been based on impressionistic evidence.

A key takeaway is that the impact varies wildly by region and by the segment the MSP serves.

“Those which have been impacted the hardest are ones who serve verticals like retail and hospitality, while the ones which are doing well focus on markets like SLED and medical where demand has been more stable,” said Rob Rae, vice president of Business Development at Datto. “More broadly, the first 15 days of the pandemic were great for many MSPs, and it fell off for many after that. Other MSPs benefited though because the pandemic caused many businesses to realize their IT wasn’t ready to withstand this kind of crisis. The pandemic caused a better understanding of the value that MSPs provide.”

The overall data indicate that the pandemic has had a negative impact across the MSP business measured as a whole. The January-February data showed MSPs expected 17% growth on average over the next three years. The second survey indicated MSPs believed the pandemic would reduce their 2020 growth. Nearly 40% said they expected to reduce their growth projection by between 10% and 20%. 23% said they expect to remain on plan or reduce their plan by less than 10%. Interestingly, 11% said they expected to increase growth because of the pandemic.

One attribute the study found around high growth MSPs was that they generate a higher portion of revenue from managed services. Over half [53%] of all MSPs generated more than 50% of revenue from managed services. 26% of MSPs reported over 75% of revenue coming from managed services and 2% said all their revenue comes from managed services. Rae said that the growth in this recurring revenue business has kept many MSPs in business despite the pandemic’s effects.

“We’ve been through a few of these – the dotcom bust, the recession in 2008,” he said. “I’m not seeing as many MSPs going out of business this time, which speaks to the value of monthly recurring revenue [MRR]. The one-time project stuff is the stuff that gets cancelled in bad times. Recurring revenues will help MSPs survive the pandemic. The 2008 recession was when managed services took off. The US recession was worse than anywhere in the world, and those with MRR survived. Those with less reliance on project work will survive COVID.”

One trend here that Rae noted was co-management with in-house IT teams.

“We are seeing this in the midmarket and even the enterprise, as in-house IT teams realize that they aren’t prepared for these types of things. The channel is in a much better position. This brings MSPs into larger organizations than they were working with before.”

The second trend of the most successful MSPs noted in the study was setting specific growth goals, with 71% overall setting growth goals for their business. It concluded that being strong in both MRR and planning let MSPs roughly double their rate of growth compared to the baseline.

“I was surprised how this trend came out as a leader, but we have seen the whole planning idea going back to a lot of discussions about peer groups and collaboration,” Rae said. There are MSP Facebook groups with 15-25 MSPS where they talk about what’s working and what’s not working. That’s more of a thing than ever before. That’s where the planning and structure comes from, rather than just having heads down doing tech. There’s more collaboration in the channel.”

Another manifestation of this collaboration shows up in 43% of MSPs offering managed security in partnership with an MSSP or other vendor.

“I’m not surprised by that number,” Rae said, acknowledging that an industry trend several years back of encouraging MSPs to progress to MSSPs on their own  wasn’t a sound one. “Pre-COVID, we had conversations about MSPs about their being a target for hackers, and we made a ton of recommendations. One was to find a good partnership with an MSSP to test their own defense. Many have good relationships with MSSPs. Some of these MSSPs, like Huntress, and Arctic Wolf, are now a strong part of the MSP ecosystem with MSP partners.”

The chief obstacle to these threat hunting services among MSPs’ SMB base has been their cost. That’s still an issue, Rae said, but not as much of one as before.

“Most SMBs are not quite there yet in terms of accepting the cost,” he indicated. “But today, everyone is doing a better job at portraying the value of security, even to SMBs. It’s still not something that everyone can afford, but with the accelerated amount of attention on ransomware, hackers, and breaches, it’s in the news every single day. That allows it to be top of mind. It’s not inexpensive, but for MSPs, that means it’s not commoditized, so it’s a sound strategy.”

The study noted that 57% of MSPs expect the use of on-premises servers for critical applications to decline over the next three years. Rae said that while the pandemic will reduce the number of on-prem servers somewhat, the decline still won’t likely be dramatic.

“When I joined Datto seven years ago, people talked then that companies would throw their servers out. It just hasn’t been that way, and we are shipping more hardware than ever before. In North America, there just hasn’t been as much of a need to migrate to the cloud for speed, ease of use and cost. COVID will change that somewhat – but it took something other than speed ease and cost to do that.”

Another interesting trend in the survey is that the ‘greying of IT’ trend the industry has been talking about for a decade seems to be ebbing somewhat. While 39% of MSPs have been in business for over 16 years, 18% have been in business less than 5 years.

“There is a handing-off taking place,” Rae noted. “I’ve been in this space over 20 years and a lot of the people I dealt with were my age. Many are now starting to retire. I just met a $6 million dollar MSP who just turned 30. While there was a concern about our aging partner base, MRR has helped to change that too. It’s not quite recession-proof, but its close. That has attracted a younger crowd.”

Most MSPs remain relatively small. On average, MSPs have 122 clients, but that’s skewed a little by a small number of very large ones. 69% of MSPs have fewer than 100 clients. 50% of MSPs have an average annual contract of less than $15,000 annually and 89% said that the majority of their clients are micro or small businesses.

“The sizes are interesting to me,” Rae said “69% have less than 100 clients, and are happy with that. These MSPs get called lifestyle MSPs, or boutique MSPs, and I don’t think that’s fair. Many make good money, and are very solid businesses, who choose not to accelerate growth. The trend to co-managed will let this kind of MSP find even more profitable customers, rather than those who cant afford premium products.”

Finally, 84% said that now is a good time to be an MSP.

“That’s been impacted by the pandemic compared to last year, but I’m pleasantly surprised the number is still so high,” Rae said. “I personally believe its still a great time to be an MSP.”

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