MSPs need solutions and not products from vendors in the AI age

The disconnect between vendors, distributors and managed service providers (MSP) in the IT industry is hampering collaboration, limiting the opportunities to improve service delivery, innovation and customer retention in the age of artificial intelligence (AI).

According to research from Ernst and Young’s Hitting the reset button on tech investment global study, which queried 1,200 CEOs in 60 countries and found technology disruption would drive the the highest level of change in the next 12 months compared to other factors.

This ranked higher than geopolitical instability, changing customer expectations, supply chain pressures, the elevated cost of capital, sustainability and climate change, new regulation and access to talent.

What this tells the channel is the old rules and foundational assumptions of business no longer applies. Traditional approaches to billing, loyalty, problem-solving, engagement, decision-making and even innovation will no longer suffice in a world digitally disrupted world because these have shifted.

Fundamentally, there needs to be better understanding to improve service delivery and customer retention, said business advisory service provider The TSP Advisory’s chief strategy officer, James Davis.

“Vendors and distributors, often large corporations, operate on quarterly targets and thin margins, while partners, typically small businesses, focus on long-term client relationships and services,” he said to ARN.

Davis also said partners face several challenges ranging from inconsistent vendor billing models to fluctuating margins on software-as-a-service (SaaS) and hardware as well as dealing with the operational strain caused by frequent vendor strategy changes.

“Vendors and disties are big corporate businesses,” he said. “Partners and their clients are small business, so they operate differently.”

For end users, partners are the only consistency in the channel, Davis noted. Some MSPs have been operating for up to 30 years, which naturally creates “dynamics and disconnects” within the industry.

“A vendor has a very myopic view of their segment,” said Davis. “They have the world’s best solution in what they deliver and everyone should use it. The disties are stuck in between partners and the vendors.

“They run on razor thin margin, so they’re juggling the balance of vendors that provide a lot of the funding.”

Davis explained that for some MSPs generating around a million dollars in revenue, roughly 20 per cent of that typically comes from software-as-a sales (SaaS).

The chief strategy officer said even the top performers in the industry are only making about 30 per cent margin on SaaS and 25 per cent on hardware. Meanwhile, around 30 per cent to 35 per cent of an average MSP’s revenue comes from selling products, with only about 10 per cent to 15 per cent from hardware.

For most, the average margins are lower – typically 18 per cent to 20 per cent on SaaS and around 15 per cent to 16 per cent on hardware.

“When you look at an average partner, if they’re doing high performance, at most they’re making $80,000 of product sales between SaaS and hardware,” he said. “It’s not their core business and they do it because it provides outcomes to the clients looking for them.

“[Clients] don’t want to do all the individual procurement [themselves so] there’s value for [partners] doing the procurement for them.”

What this means is that any changes to partner programs, margins and prices affect these MSPs because they’re not making the money off that, explained Davis.

“For a lot of them, it’s a burden,” he said. “For a lot of partners, they’ll talk a lot about how hard it is and … complicated it is and how they want it very streamlined and easy because they need it.

“They’re desperate for that streamlining of procurement because it impacts them so much.”

Partner responsibility

Davis noted that what partners haven’t done is adapt to the modern IT world and relook at how to price and package.

This creates friction from both vendors/distributors and customers.

“The average MSP back in 2011 when I started only really resold three core monthly recurring SaaS subscriptions: Office 365, backup and anti-virus,” he said. “Now, it’s likely that the partners are dealing with, like, 17 things that they need to manage.

“Then every vendor has a different billing methodology whether it’s by user, tenancy [or] device. They’ve got different pricing models [and] different contract terms.”

Davis noted there’s no consistency and it’s falling on the partner to navigate all these different billing methodologies.

“Some disties have done their best to try and standardise this as much as possible, but vendors are still doing their own thing without realising how partners actually operate,” he said.

“We’re just in this constant mess because [vendors] keeps changing and partners are copping the brunt of it [and] they’re struggling with client retention as a result.”

Having all of these things line up nicely provides small business client with understanding about how they are billed for all their SaaS products, said Davis.

“That pressure is building up on partners [and] it’s one of the main conversations and points I’m having with partners a lot,” he said.

Partners want to understand how to price and package services, as well as “actually operationally manage it and present” it to their clients.

“That’s such an under-talked-about thing in the industry – not by partners, but by everyone else,” said Davis.

Challenges faced by MSPs

These sentiments are echoed by tech consultancy MTP Services’ general manager of Queensland, Luke Melonas.

He told ARN the removal of perpetual licenses for software and shifting vendor strategies are challenges that he has personally dealt with in his 20 years in the industry.

Melonas said all the larger vendors moved to SaaS because they were solving a problem.

“What was their problem 20 years ago? Their problem was that people bought a Windows Server version and just aged it out as long as they could and paid the maintenance and didn’t pay the upgrade,” he said. “Then the vendor had this lumpy revenue line.

“Over time, they matched it to what was maybe three and a half years [in] costs and then they would just divide that by the months.”

This strategy, Melonas continued, would create a “nice, beautiful revenue flat line and those vendors would go up over time”.

However, that strategy came with the “disconnection” from owning products.

“Perpetual licenses all got abolished, so you could never own anything anymore,” he said.

Broadcom is a classic example of this, explained Melonas.

“They come in and completely shake up the VMware landscape,” he said. “They’ve lifted prices in one year up 30 per cent to 40 per cent.

“Now, every conversation that I’m in with anyone is like, ‘What’s our strategy to get off this?’”

Melona also said MSPs are very keen to go as deep as they have capability, but as broad as they possibly can across as many customers as they can possibly get hold of.

“When you look at the data, you see that friction and slowness and harder to support all comes from the layer above that commoditised layer,” he said. “If they’re starting to introduce newer capabilities, they must then support it.”

However, Melonas noted that support comes at a cost, and that “cost impacts their profitability”.

“That’s the stick for them [and] I think the carrot is too small in that equation,” he said.

The AI confusion

This then creates a situation where, Melonas noted, innovation in emerging technology like AI is left up to the fringe, side conversations and niche areas.

He explained that AI-related services and policies often operate on best efforts, where service providers are marking their own homework.

“It’s a bit of a wave you don’t really know which angle to take,” he said. “We’ve all got our own use cases and the pathways that we take, and I just feel like we’re all doing our best.”

For Melonas, MTP Services is using AI tools for customer impact externally which includes working on large-scale sentiment analysis, optimising infrastructure for major industries and helping customers to make smarter decisions based on insights.

“You’ve got to focus on those ROI [return on investment],” he said. “That’s what’s going to move the needle and de-risk it for the people sticking their necks out on the client side.”

Better collaboration and understanding between all parties is fundamental to improving service delivery and client retention. This is key to ensuring MSPs have the right packages, pricing, and strategy to go out to customers with AI and agentic AI products.

Arcanum AI CEO Asa Cox told ARN customers have a “fear of being hoodwinked” when it comes to emerging technology like AI.

“There’s a bit of a fear that’s happening in AI right now,” he said. “There is this [feeling of], ‘I could have been here before and somebody promised me the earth and gave me nothing, cost me a fortune, didn’t get me anywhere’.”

New Zealand-based Arcanum AI develops AI-powered productivity tools tailored for small- to medium-sized businesses.

Its platform, Numa, offers AI assistants designed to automate repetitive tasks and leverages a number of Amazon Web Services (AWS) technologies to power the platform.

“MSPs and vendors need to recognise that there is this scepticism on one hand, tempered with a huge amount of enthusiasm,” he said.

Trust needs to be established, and that AI, agentic AI can be trusted and that it’s “not just a whole bunch of cowboys trying to monetise this enthusiasm for it”, noted Cox.

There needs to be consulting-led engagements around this technology because, unlike any other technology in the past, there’s multiple flavours of AI, there’s multiple vendors, he explained.

“As an MSP, you’ve got to guide your customers through that process somehow,” Cox said. “Then you also have to be able to deliver a solution when a customer says, ‘Okay, now what have you got to give us?’”

While there is an element of education and consulting, however the challenge MSPs have is they’ve got to figure out what the vendor landscape question looks like.

“It’s been every day, literally every day, there’s something new, and MSPs can’t keep up with it,” he added. “They want to find the right vendors to work with, but they fall back on the major vendors they know.”