MSPs Achieve 19% Profit Margins; Google’s AI Search Rollout; Arctic Wolf’s $3M Security Warranty

[00:00:02] It's Thursday, May 8th, 2025 and I'm Dave Solt. Four things to know today. Top MSPs lock in record profits despite slower growth. Stealth AI usage and weak governance raising red flags. Google's redefining search again threatening inbound strategies. And Arctic Wolf ups the ante with a $3 million warranty shaping security narratives. This is the Business of Tech.

[00:00:30] Service Leadership has released its 2025 Annual IT Solution Provider Industry Profitability Report, revealing a record fifth consecutive year of over 19% adjusted profit margins for top performing IT solution providers. The report highlights that while revenue growth for managed service providers slowed to 7.1% in 2024, adjusted earnings before interest, taxes, depreciation and amortization grew at a stronger rate of 13%.

[00:00:58] Peter Kujawa, Executive Vice President and General Manager of Service Leadership, noted that despite a slowdown in revenue growth, the profitability of IT solution providers demonstrates the industry's maturation. The report assesses trends across 104 countries showing that valuation multiples for best-in-class providers reached near record highs in 2024, reflecting a 22% increase from the previous year. Why do we care?

[00:01:26] Efficiency is the new growth engine. With only 7.1% revenue growth but 13% EBITDA growth, the data shows that smart cost control, process maturity and service optimization are driving profit. Premise P's, this is a reminder call to invest in operational maturity rather than chasing top-line growth at all costs.

[00:01:50] Sustained high profit margins of 19% point to a disciplined, scalable business model. It isn't a one-time fluke, it's the fifth consecutive year. That type of performance tracks investment, strengthens valuations and creates a clear playbook for smaller or mid-tier providers trying to level up. Valuations are rising, selectively. A 22% increase in valuation multiples for top performers is significant.

[00:02:18] This is evidence that investors are paying a premium for quality, especially for firms that demonstrate high EBITDA and mature repeatable processes. Providers not in the top quartile, they're likely seeing flat or compressed multiples, racing the stakes for standardization and scale. This episode is supported by Synchro.

[00:02:41] Synchro, the integrated remote monitoring and management and professional services automation platform, is designed for mid-sized and growing managed service providers. Its latest innovations include an AI-powered smart ticket management system with automatic ticket classifications, guided resolution steps using pre-approved scripts and a natural language smart search function. These tools streamline ticket handling and improve response times. Discover more at SynchroMSP.com

[00:03:13] Almost half of office workers are utilizing artificial intelligence tools not provided by their employers, with nearly a third keeping their usage a secret, according to findings from Avanti's 2025 Technology at Work report. The report reveals that 36% of employees believe these tools give them a competitive advantage, while 30% expressed concerns about job security.

[00:03:35] Notably, 42% of employees reported using AI in their daily tasks, a significant rise from just 25% the previous year. Avanti cautions that this covert use of AI tools poses serious risks to organizations, including potential breaches of company policies and data privacy regulations.

[00:03:56] A recent article from the New Stack emphasizes that artificial intelligence will not resolve data modeling issues, highlighting the crucial need for organizations to prioritize data quality at the operational level. As generative AI applications require real-time data, the traditional approach of cleaning data after it has been collected is no longer viable. Incorrect or poorly structured data leads to faster but misguided decisions.

[00:04:22] The article notes that the responsibility for data modeling is shifting from analytics teams to operational layers where real-time decisions are made. According to Microsoft Research, using structured knowledge graphs can significantly enhance the performance of generative AI systems, improving response accuracy from 16% to over 72%. This trend underscores the importance of having robust data models to ensure that AI-driven decisions are both reliable and aligned with business logic.

[00:04:52] A recent study by Giscard, an AI testing company based in Paris, revealed that asking AI chatbots for concise answers can increase their tendency to hallucinate. The researchers found that prompts requesting shorter responses, especially for ambiguous questions, negatively impact the factual accuracy of AI models.

[00:05:15] The study highlights that models like OpenAI's GPT-4-0 and Anthropics CLAWD 3.7 Sonnet exhibit reduced accuracy when instructed to be brief. The researchers noted that when models are limited in their responses, they often prioritize brevity over factual correctness, making it challenging to address misinformation effectively.

[00:05:37] Giscard's findings suggest that seemingly innocuous instructions, such as be concise, can undermine an AI's ability to clarify false premises in user queries. Giscard's findings Oh, and those discussions about energy use of AI? A recent analysis reveals that using ChatGPT has a minimal carbon footprint, challenging the notion that artificial intelligence tools significantly harm the environment.

[00:06:01] For instance, data suggests that a single query to ChatGPT uses approximately 3 watt hours of electricity, which represents only 0.00007% of the annual electricity consumption per person in the United Kingdom.

[00:06:20] Moreover, the carbon emissions associated with a year of daily ChatGPT usage amount to just 11 kilograms of carbon dioxide, a negligible increase compared to the average individual's carbon footprint of 7 tons.

[00:06:34] The analysis, conducted by Andy Masley, indicates that even if ChatGPT is 10 times more energy-intensive than a Google search, the overall environmental impact remains small, especially when compared to other lifestyle choices that contribute significantly to carbon emissions. The data underscores the argument that individual use of ChatGPT is not detrimental to the environment, suggesting that users can engage with AI tools without guilt. Why do we care?

[00:07:02] AI is outpacing governance, data readiness, and user expectations. This is also a roadmap for where AI support needs to mature fast. Policy and ethical use training, governance over shadow AI use, data structure validation and modeling, responsible AI UX design, and long-term sustainable planning. Many organizations still lack any AI policy.

[00:07:29] If that continues, shadow usage will outpace governance, leading to breaches, hallucinated outputs, and trust breakdowns. This is a moment for IT service providers to step up, not just as tool implementers, but as AI stewards who understand risk, structure, and human behavior. That's the path to relevance and resilience.

[00:07:54] Google has announced the upcoming public rollout of its AI mode search engine tool, which will allow a select group of users in the US to test this feature in the upcoming weeks. This tool represents a shift from traditional search engines by providing AI-generated responses instead of just links to websites. The AI mode will be accessible through a dedicated tab in Google search, positioned alongside existing categories like images and videos.

[00:08:20] Unlike previous AI overviews that offer its summaries of search results, this new mode will facilitate more interactive and direct responses to user inquiries. Google has launched a new feature in its iOS app that leverages artificial intelligence to simplify complex text for users.

[00:08:38] The Simplify feature, which uses Google's Gemini AI model, generates easier-to-understand versions of highlighted content, helping users comprehend technical jargon without needing to navigate away from the current webpage. This feature is designed to assist users in grasping complicated concepts, such as medical terminology, by providing clear definitions directly within the app.

[00:09:00] Google's testing found that users reported the simplified versions to be significantly more helpful than the original text, although the company acknowledged the limitations of their study and the need for continued monitoring for potential errors. Google is nearing an agreement with Apple to incorporate its artificial intelligence system Gemini into the iPhone. At a recent search monopoly trial, Google Chief Executive Officer Sundar Pichai confirmed that the integration is expected to be finalized by mid-2025.

[00:09:30] This collaboration could enhance Siri's capabilities, allowing the voice assistant to respond to more complex inquiries by leveraging Gemini's technology. Apple's senior vice president, Craig Federighi, previously indicated intentions to integrate Gemini into the company's Apple intelligence feature. Chai also mentioned discussions with Apple CEO Tim Cook regarding artificial intelligence development and the anticipated distribution of third-party AI models on Apple devices later this year.

[00:09:58] Signs of this integration have already emerged, references to Google appearing in the beta version of iOS 18.4. Google shares fell over 7% following comments by Apple's senior vice president of services, Eddie Q, who indicated that artificial intelligence could soon replace traditional search engines.

[00:10:17] During his testimony in a U.S. Department of Justice lawsuit against Google, Q highlighted that Apple plans to integrate AI-driven search options alongside conventional web searches in its Safari browser. Q's statement reflect a growing concern about the competitive landscape of search engines as AI technologies gained traction.

[00:10:37] He noted a decline in Safari search volume attributed to the increasing appeal of AI alternatives, suggesting that the dominance of Google as the default search engine may be challenged. Why do we care? Well, this wave of Google announcements signals more than product evolution. It's a foundational re-architecture of how users access and interact with information. And it raises some high-stakes questions for IT services, vendors, and content creators all alike.

[00:11:05] AI mode in search isn't just a UX tweak. In the way, it replaces linked lists with AI-native conversational answers. It marks a pivot away from Google as a referral engine toward a destination in itself, which deeply threatens content discovery models and SEO strategies. For IT service firms that rely on inbound traffic, like via blogs, knowledge bases, or search-optimized tools, this is an alert.

[00:11:30] You may no longer own your funnel if users get full answers inside Google's AI shell. And neither will your customers. Q's testimony puts it bluntly. Apple may back multiple AI engines, including Gemini, and no longer default to Google. If Safari deprioritizes Google search, Google's distribution moat erodes. And that means the fight over AI-native discovery is just beginning.

[00:11:55] We're entering a post-search era where AI-native responses reshape how people discover, understand, and trust information. For IT services firms, this means navigating platform fragmentation, AI governance, and content strategy in entirely new ways. I'm dropping a bonus episode this weekend, and I'll dive further. A sponsored webinar by SysCloud.

[00:12:20] Arctic Wolf has increased its security operations warranty to $3 million for customers utilizing its Aurora-managed endpoint defense and security operations bundles. This enhancement positions the warranty as the largest of its kind in the industry, aimed at supporting organizations that rely on Arctic Wolf's endpoint security technologies. Currently, over 3,000 organizations across more than 60 countries use Arctic Wolf endpoint security to safeguard their digital assets.

[00:12:47] Dan Shippa, president of technology and services at Arctic Wolf, emphasized that doubling the warranty reflects the company's confidence in the effectiveness of their Aurora endpoint security. In addition to the warranty expansion, Arctic Wolf introduced a new artificial intelligence-enhanced behavioral detection engine designed to improve threat detection accuracy and reduce unnecessary alerts.

[00:13:09] The company also signed the cybersecurity and infrastructure security agencies Secure by Design pledge, reinforcing its commitment to secure software development practices. The watchguard technology has announced a planned leadership transition, pointing Vats Shravastan as interim chief executive officer effective May 14. This change follows Prakash Pajwani's decade-long tenure, during which he significantly increased the company's annual recurring revenue and expanded its partner ecosystem from thousands to tens of thousands.

[00:13:39] Under Pajwani's leadership, Watchguard Technologies executed six strategic acquisitions and tripled its workforce, positioning itself as a leader in unified cybersecurity solutions. Why do we care? Well, the doubling of Arctic Wolf's security operations warranty to $3 million is significant, not just in the size but in one in signals, a vendor putting skin in the game. For customers, this warranty is a form of risk sharing. It says, if we fail, we'll help cover the cost.

[00:14:08] Arctic Wolf's warranty is likely loaded with exclusions. SPs may overpromise risk coverage to clients if they don't understand the fine print. But let's be clear, warranties aren't payouts, they're positioning tools. Arctic Wolf is leveraging this to build trust with risk-averse buyers, positioning Aurora as enterprise-grade and distancing themselves from competitors in a crowded MDR and XDR market. For providers, this creates competitive differentiation leverage.

[00:14:35] Selling becomes less about explaining product specs and more about conveying shared risk, high assurance and liability alignment. Thanks for listening. Today is National Animal Disaster Preparedness Day, National Coconut Cream Pie Day and National Give Someone a Cupcake Day. I do love some cupcakes.

[00:14:59] The Business of Tech is written and produced by me, Dave Sobel, under ethics guidelines posted at businessof.tech. If you've enjoyed the show, make sure you've subscribed or followed on your favorite platform. It's free and helps directly. Give us a review, too. If you want to support the show, visit patreon.com slash MSP Radio and you'll get access to content early. Or buy our Why Do We Care merch at businessof.tech.

[00:15:27] Have a question you want answered? We take listener questions, send them in, ideally as a voice memo or video to question at MSP Radio dot com. I answer listener questions live on our Wednesday live show on YouTube and LinkedIn. If you've got a comment or a thought on a story, put it in the comments if you're on YouTube or reach out on LinkedIn if you're listening to the podcast. And if you want to advertise on the show, visit MSP Radio dot com slash engage.

[00:15:55] Once again, thanks for listening and I will talk to you again on our next episode. Part of the MSP Radio Network. FT Radio Network. Let's go to the MSP Radio Network.