Navigating Shrinking Seat Counts: How AI Pressures MSP Revenue Streams and Security Operations

[00:00:01] While I'm off hosting the SMB Online Conference at smbonlineconference.com, I wanted to share with you this episode of the SMB Community Podcast, where they dive into the changes in regards to the way the MSP model is being delivered with AI. Will it change your pricing model? Amy and James dive in on this episode of the SMB Community Podcast, available in your podcast feeds.

[00:00:30] This is the SMB Community Podcast, the longest running MSP focused podcast in the industry. Dave Sobel, my background is IT sales, marketing and leadership, and most recently M&A Advisory Services. Amy Babinchak, I help MSPs run stronger, more profitable firms from a tech first perspective. Anne Weiss, keviti Heng, Medina, MSP Re cups, MSPs MoB saint, MSP signals tests and airJA hostess, MSP 903-HоLED Fast-Minute SMB is a best ہ Eine ASE Paulver.uard

[00:01:00] Pretend divorce gak evidence International were some reasonable conversation inần-chineal Hungary Pavick earningania experience from Western earth Okay, Amy, what are you doing? Amy Babinchak, who can rush the summer anniversary? Amy Babinchak, how are you lo kinds of issues in front of 1974 chega Optimal Accetion to rallyazo? Amy Babinchak, hello 라� caraff Zoarado van Laudio H Korps, MSM AshWathe trading on this episode of the precis 안�你的聲ICE島 collard money Amy Babinchak, competition. And then, of course, your new and exciting book on M&A. There was a question I

[00:01:29] grabbed off that. I want to talk about the emotions of selling your business and then how AI is transforming security operations. Another topic about things to talk to your clients about when you go meet with them. But let's kind of start off with the question of the week that came in. It was really interesting one. How do you see AI impacting the per seat model?

[00:01:53] Yeah, it's really, I think it's going to be dramatic, potentially. There was an article that I read today where the author says, hey, you know, if AI meets its promise and all of the AI models are telling us that they're going to replace 30 to 50 percent of all jobs. And a lot of those are white

[00:02:19] color jobs that it's going to replace. Then what happens to the pulse per seat model? And they've, you know, couched in the context of Microsoft, right? What's Microsoft going to do? Well, it's easy for Microsoft, right? They've got kind of a lock on the enterprise. And they have a new product out called Agent 365, which allows you to license all of those agents

[00:02:44] to access all the enterprise materials and manage them and all that stuff. And that's all great, but it got me thinking about MSPs. I mean, James, MSPs, you know, we sell per seat services. Yeah, per seat, per user, all day long. All day long. And if your client has half of the seats that they used to have,

[00:03:08] we got to find a way to replace that revenue, right? That MMR. What are we going to do? What do you think? Yeah. Well, that's an interesting point. Jokingly, I'd say, well, let's just switch to per device. You price per device, right? And right. All of us have 10 devices. Yeah. So that's one way of trying to trick it. But the point really, I think that you're bringing up is we need to look for new

[00:03:36] revenue streams and we need to charge more for what we're doing. You know, those are all really important. I think it's important. And it's some of the topics that we're going to talk more about. Do you need to have that professional, trusted IT advisor relationship with your clients where they're leaning on you for everything technology related, right? Yeah. That they trust you and you're involved

[00:04:01] in their annual budgeting and so forth. But yeah, certainly licensing sales will go down. And then the pricing model of how we sell managed services needs to change. What's the timing that you think MSPs are going to start seeing this? I think we don't have much time. I think we've got two to three years, which for an MSP may as well be tomorrow. We need to start thinking about selling what we know

[00:04:27] rather than what we do. And it's a whole different sales model to do that. You know, but there are certain things that you still can do, right? There's AI management, there's data protections and data management, there's identity, right? So there's still the whole security angle and the compliance and governance angle. And I think that's got to be the majority

[00:04:55] of what we do as the MSP. And then like you said, bring in that part of having an IT department that a lot of MSPs really ignore, right? We talk about having those regular meetings with them to give them new advice, to keep them up to date on what's happening in IT that's relevant to their business. I do think that

[00:05:20] the first thing that's going to fall off is that help desk role, because not only do we have AI replacing jobs, but we have all of our vendors looking to replace our help desk. Well, I see this as an opportunity, you know, not a problem. It's an opportunity for everybody. Focus on educating your client. Education is really important about what they should be doing. And then focus on that security framework, you know, the compliance. I mean,

[00:05:47] that's a great vertical to go after. And I think just security and compliance in general is going to cross all industries and be more and more important. Well, I was at a meeting recently and they said, how many of you, how many, how many people are members of peer groups? And every single hand went up. So there is no shortage of peer groups. I run them, you run them, everybody runs them these days. The question that your peer group should be,

[00:06:14] should be asking you to think about is what happens if your client has 50% of the seats that they have today? Yeah. What does your MSP look like now? How are you going to make money? We'd love to hear from you guys on what you're going to do to pivot. So reach out to us on the SMB community podcast. We'd love to hear your feedback on that. So Capterra had a really interesting, I think this,

[00:06:40] this survey was a couple of years ago and it was saying that in 2024, 100% of the respondents of the survey said that they are dealing with significant local competition, right? I mean, what do you think that looks like today? 120%? 120%. Yeah, definitely, definitely no better, right? Right. This is some government math. Maybe it's 600%. We've always been friendly competitors

[00:07:07] in the MSP industry, but we have to also recognize that we've got serious competition and add that to what we just talked about in the question of the week about reshaping your business for fewer seats. And it's a really big deal. This is a big deal. Local competition hurts. You've got to differentiate. Yeah. I mean, that should be the basis of your, the foundation of your business,

[00:07:33] your elevator pitch, you know, how are you different or better than the competition? We need to differentiate ourselves to make us more unique, to stand out. So you're not just a commodity like everybody else. That's, um, that's so important. Um, and more and more MSPs that I talk to, I always like asking marketing questions. I go, how do you guys get out and market your business? Um, what, what do you do? Well, we don't really do anything. James, we don't do anything. We just

[00:08:00] get, we get referrals. I go, okay, well that's one campaign. I go, do you, do you meet with your clients ever? Do you, do you ever send them email communications or, you know, cause that's, that's a campaign, you know, so you're doing that as well. Right. Uh, but you know, you need to market that differentiator. Uh, so simple ways of, of marketing yourself, you know, number one, campaigns. And that's what most MSPs say that I don't do any marketing at all, but we'll take

[00:08:29] referrals. You know, I said, that's campaign number one. And then you meet with your customers. Those are two fundamental, uh, marketing campaigns that you can use, but you've, you've got to get out there. Marketing is the oxygen of your business. You really need to be doing it every day. Um, you know, to be effective and to stand out. Yeah. Boggles my mind. Sometimes I'll hear from MSP, same thing that you said like, Oh yeah, we don't really advertise, but we get enough

[00:08:56] referrals and we're still growing. And they wear that like as a badge of honor, but it's an, it's an impending disaster. Yeah. It's a disaster waiting to happen. Absolutely. The SMB online conference is June 23rd through 25th and registration is open. Now three days of practitioner focus sessions, pricing, M and a AI, private equity, service delivery,

[00:09:19] no vendor speakers, no fluff. The theme is profitable is enough. If that resonates, you should be there. Small Biz Thoughts community members get in free. Everyone else, $399 at smbonlineconference.com. So, Hey, I wanted to talk about your new book for just a moment. I

[00:09:45] the, the 20, uh, questions that every MSP should know when they're selling their business. And I just grabbed one of them. Uh, but I love this one. Elaborate a little bit on, on, from your perspective of the emotions, what's it like selling your business? Well, um, it's way more emotional than you expect it to be. Right. It's, uh, you think maybe it's like selling your car or, you know,

[00:10:12] maybe even selling your house, right? Some asset that you're getting rid of. But the reality is you're, you're selling off something that you built that you, you know, raised up from nothing and now it's successful and somebody, somebody wants to buy it from you. And that has a lot of, uh, emotions attached to it, right? Your, your personal self-worth is in there. Um, your friend groups

[00:10:41] are sometimes in there, you know, with the employees, uh, family responsibility for those employees is a, is a big deal. Um, I am working with an MSP now and he left a million dollars on the table for security for his employees in exchange for that. That's how important, you know,

[00:11:04] and how much we're emotionally attached to the, the people, the, the business that we created from zero to, to success. It's a big part of our lives. And this is a dramatic life change moment too, right? It's as big as, um, you know, getting married, getting divorced, you know, having a death in

[00:11:28] the family, all of these things are really highly emotional and can even be threatening to your health. I mean, it does come to that level. And when I sold my MSP, I was blindsided by it. I was quite shocked. I'd never heard it talked about before. Everybody hears, oh, there's emotions about selling your business. It not, it's not real until it's you first of all. And then it happens

[00:11:53] kind of towards the end for most people. Um, and I'll, I'll just say, let's just say it's a 90 day process to market, do due diligence and then close. To me, I see people running for the hills. It seems like the last two weeks of, you know, when the purchase agreements are, are in front of all the attorneys and you're like, wow, this is really going to happen. It's really, it's really happening. Yeah. This is, this is real. Yeah. And, um, what are you going to do with the rest of your life?

[00:12:23] Yeah. That's a, that's another big, that's another big, huge question that suddenly occurs to you. People are retiring out of their MSPs a lot of times in their, in their fifties or early sixties. Um, you've got another 20, 25, 30 years ahead of you. What are you going to do for the next 30 years?

[00:12:46] Right. So all of this stuff starts crushing in on you. And I, I remember at the actual closing day, you know, it should be happy to happy times, right? Right. Your bank account just inflated. Um, but there's this weird sense of loss when you're, you know, expectantly handing over the keys and you've got that 90 days afterward where they're just, you know, you've, you've done it. Now you've

[00:13:12] got 90 days of a billion questions coming from the new owner of, you know, all the little minor details and the settling up of accounts and the closing of all your revender relationships. And there's a huge amount of closure that happens in that 90 days after the sale. And all of that keeps that emotions high when you're from that, that feeling of selling your business. So I may,

[00:13:37] yeah, I made that chapter number one in the book because I just thought it was that important. It is important. And, uh, every, every prospect or client I talk to about selling their business, I tell them this is going to happen somewhere in the process normally towards the end, but it's going to happen. And when you feel like that, call me, let's just talk through it because people react differently to their emotions and, but it's a real thing.

[00:14:02] So it is, it's real. So, Hey, another topic I wanted to bring up, how is AI transforming security operations from, from your perspective? What are you seeing with that, Amy? Uh, um, I wrote an article about this over at third tier in my blog and, um, security is really weighing on MSPs. It's the heaviest workload that they've got. And it came in to MSPs pretty rapidly.

[00:14:32] That change means that you mostly just put these new security tasks onto teams that you hired to do backups and patching and help desk work. And now all of a sudden they're supposed to be security engineers, um, and they're, they're not. And the employees feel the pressure and the MSPs themselves are feeling the pressure on that. Um, so I feel like it's weighing really heavy on MSPs that,

[00:15:02] that level of responsibility without the, really without the background to, to maintain that expertise. Yeah. Yeah. That, um, that's a big hole in a lot of MSPs, uh, teams is really the security operation team and the response team. In some cases you can outsource that. Uh, Amy brought up the importance of being part of some community like, like the small biz thoughts community or peer groups.

[00:15:31] You know, it's the same thing. Um, it used to be 10, 20 years ago that, you know, you were frowned upon if you were part of more than one community, they wanted you just to be loyal to that one community. Now that's insane to think that way. I, I encourage people to be part of half a dozen or a dozen communities because it's all knowledge. Mm-hmm. And, um, but they focus on different, different things, right? That's about

[00:15:59] business growth and a lot of accounting stuff and all of that. And of course, using Kaseya's stack to better your business. Mine is really about optimizing operations. That's a lot of what our conversations are around. So different groups, different, different emphasis. I imagine yours has a lot of sales and marketing in it because that's your expertise area. Yep. Yeah. It's, you know, growth oriented. It's the go giver spirit. You know, we've specifically

[00:16:27] looked for people that, that want to help other people grow and are willing to share not just takers, but givers, but it's a growth group. So sales, marketing, uh, culture, uh, incentives, motivation, positivity. And we do focus at our events on fine wine and cheese, uh, as well. We do fun things like that. That's important. Yeah, that's important. It's important. So one more thing I want to, I want to add to that though, we've got the weight of security to deal

[00:16:56] with. We're going to have the weight of AI to deal with. And that's why we went off on this tangent because the way that you deal with that is to get involved with groups of people to help, help you through it. Cause we've all got the same problems out there and together we'll find those solutions and keep your business moving forward. Yeah. Yep. Excellent. All right. Uh, another topic that came up, I wanted to talk briefly about, and we've talked about this for a couple

[00:17:26] of weeks in a row now, but we've frequently run into MSPs that are not meeting with their clients because they don't know what to say. You know, uh, you know, what, why am I going to go meet with them? What's the topic? And one, one of the topics that came up were maybe speaking about, uh, your client's email threats. Business email compromise is still the number one way that the bad guys get into your, into your client. And so it is, it should be top of mind for your clients.

[00:17:54] And these attacks have changed and they change so rapidly. Um, whatever tools you're using are not going to keep up with it. Right. I promised that I would start to write these ideas for what you can go and talk to your clients about. So, um, over on my blog, the first one is out and it is about talking about email threats. And all I say in there, it's really simple, right? These are going

[00:18:19] to be really simple things to do because I don't think these conversations should be hard to have with your clients. So, right. Tell your clients email threats have changed. We're seeing a lot more credential harvesting techniques and then explain an example and what that looks like. So they know what credential harvesting means and tell them, Hey, we're doing everything we can do on our end. Um, but we need your employees to be really diligent and I need, you know, we should talk to them about

[00:18:49] this. When's a good time that we can talk to everybody about this and make sure that we're protecting your company completely. Tales from the field. So something else that came up in, in the field this week, I wanted to talk about, um, and I'll just kind of ask the question cause I I'm seeing more and more MSPs exiting. Okay. We've had

[00:19:15] statistics of why that's happening. You know, people are aging out. The majority of MSP business owners are all over 55 years old. And the majority of those are over 60. When somebody contacts me and they're like, Hey, I'm interested in selling my business. I was, why, why do you want to sell your business? And what are you going to go do? But the, the why is what spooked me? Cause I've heard this three

[00:19:38] times in a row now. And this gentleman said, look, with all this AI stuff coming into the channel, it's not just with us MSPs or, or, or, uh, you know, the vendors, but I'm most concerned about what my customers are doing. And then when I go in and I tried to talk to my customers about, Hey, what are you doing with AI? Uh, and they're like, Oh, well, we're doing this and that, you know,

[00:20:06] they're opening all sorts of security holes that, that I'm responsible to, to manage, to back up. And, you know, who knows what data is, is out there. And a lot of these recording tools that are all free that you're on zoom or teams, you know, that data is all being collective. And we talked about this same topic week in and week out on the, on the podcast, but it was just this week.

[00:20:33] I heard from someone looking to sell their business, big MSP, uh, you know, younger person, they weren't aging out, but they specifically said they're terrified about AI and the liability in the years to come about what's going to happen. Have you run into that? What, what are you, what are you thinking about that, Amy? Yeah, I've run into that too. And I will say, you know, in some ways it's similar to when cloud became introduced and there weren't going to be

[00:21:01] servers on premises to manage anymore. Certainly not as many, a ton of people exited right then. They were like, no, you know, servers is what I do. If there's not going to be servers, this is a good time for me to get out. So, you know, people make that decision to retire on some basis. And I am seeing that same thing. Now the basis is that they're making that decision based

[00:21:25] on AI, right? I, I don't want to become a shadow AI, you know, regulator. I don't want to get into this. The security stuff is bad enough. And now they want us to manage AI and, and, you know, the employees are going off and doing their own thing and they feel like there's nothing they can do to control it. Then the top of the show, we talked about, you know, the real thing of maybe

[00:21:51] there won't be as many seats. So this is a whole restructuring. And if you're not up to restructure MSP from the ground up in the next few years, maybe it is time for you to exit. But, but yeah, we're seeing it's, we're seeing it happen. It's real. What will replace that is, right? We had those born in the cloud MSPs. We're going to have the born in the AI era MSPs.

[00:22:17] They will figure it out. People will start businesses and they'll do it well. But yeah, there's a lot of people up there that aren't sure they're, they're up to the task and they're seeing themselves through the door. There's a lot of great AI tools out there, AI assessment tools, AI security management tools to monitor and protect those customers that are doing those things. So educate yourself on those.

[00:22:44] All right. Well, I think that's a wrap for this week. Hey, we'd love to hear from you. If you want to submit a question of the week, or you have any comments on anything Amy and I have talked about, send me an email at james at kernanconsulting.com, or you can hit us up and record the audio and submit it through the SMB community podcast website. We'd love to hear from you. Take care, everybody.

[00:23:08] Thank you for listening and or watching. Dave breaks down the IT news of the day on his show, The Business of Tech with bonus content on the weekends. Watching this on YouTube? Be sure to like and subscribe so you always know you've got our latest episode. We'd love to hear from you. So feel free to use the contact form on the SMB community podcast webpage. That's smbcommunitypodcast.com.

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