Episode 208 - Botnet Battles, the State of AI, and M&A Activity in SMB

[00:00:01] Welcome everybody to episode 208 of the Killing IT KILLINIT Podcast, Karl W. Palachuk This is Karl and I'm joined as always by Dave and Ryan and it is so good to be back. Doing this quarterly cadence is kind of a fun thing. Karl W. Palachuk

[00:00:42] It does give us a chance to percolate on ideas and then come back with things that have changed a little bit. Now we shall discuss it. Karl W. Palachuk Plus we have the 40 minutes that we all sit and talk and bullshit with each other before we start.

[00:00:55] Karl W. Palachuk Exactly. Karl W. Palachuk And it is always good to recognize that there's 10,000 news stories every single day but that doesn't mean that the world actually moves that quickly.

[00:01:07] Every now and then you step back, you look at what's changed in the world and you go, huh, that didn't make as much progress as I told everybody it was about to. Good perspective. Karl W. Palachuk

[00:01:18] We'll get back to that Dave. Do we have a question of the day? Dave Palachuk We do. So there's an Indiana judge who made a ruling and I think we need to double check this ruling. The judge ruled tacos are sandwiches. What say you gents? Are they?

[00:01:33] Dave Palachuk We've had this discussion before and I'm okay with it because you hold it in your hand, it's got bread on two sides and it's sort of like everybody in the world has a little triangle shaped thing they stick food inside of.

[00:01:45] Well everybody in the world has a thing with breaded material on the outside and juicy goodness on the inside so that makes tacos a sandwich. Dave Palachuk

[00:01:55] So on board sandwiches is a larger class. Tacos is a subcategory within the larger class. I like to put things into that sort of computer science terms you're allowed to do those things.

[00:02:05] I agree with you that meets all the criteria. It is in fact a sandwich and I'm on board. Dave Palachuk

[00:02:10] Well and again food delivery mechanism is the question at hand right? Well how do you get the food from the plate into your mouth? Well if it is between two things that are not quite as sticky as the stuff that's in the middle, that's the purpose of being a sandwich.

[00:02:25] And I believe tacos are sandwiches, hot dogs are sandwiches, anything that is two forms or two sides of a non-sticky material that holds it in there.

[00:02:37] So I will go so far as to say you can even get a bunless sandwich right? As all of the low carb people in the world will tell you doesn't always have to be a bread.

[00:02:48] It could be just a less sticky thing that transports the food into your face. Dave Palachuk I'm going to move us on. That's not a sandwich but that is a different argument altogether. Dave Palachuk

[00:03:02] So just a quick reminder that we do three topics on each show and we're now doing them once a quarter. If you don't want to miss anything you have to subscribe to us on Apple or Spotify or whoever your favorite podcatcher is, I listen on iHeartRadio. Dave Palachuk

[00:04:20] I'm glad to see that the FBI, which we reported last time and Interpol are making some big advancements and inroads into taking down the bad guys. Dave Palachuk

[00:04:39] There's so much in law enforcement and I think that's the interesting piece for this is the ramping up of law enforcement and governments moving on this. Dave Palachuk

[00:05:19] And I think the big takeaway for small to mid-sized providers is you need to just simply know that there's an engagement with law enforcement portion of your job. Dave Palachuk

[00:05:32] That most importantly around breaches you should make sure that you are notifying the authorities turning over the right kind of material so that they can go forth. Dave Palachuk

[00:05:41] That isn't going to solve your immediate problem if you are breached. You're going to need to do that bit yourself but giving them the evidence to go after the criminals that is part of your job now. Dave Palachuk

[00:05:53] See I like that part of the job description because it does too if everyone out there is familiar with some of the things that Carl is doing in professionalizing the business of being an MSP or an IT solution provider. Dave Palachuk

[00:06:09] We shouldn't just be a couple of guys in a room trying hard to keep the computer systems going. There should be standards. There should be expectations. There should be commitments that are legally enforceable and that brings me to the level of the analysis on this particular story.

[00:06:25] Dave Palachuk I think it is Dave. I think you might have been the one six or seven years ago who was the first one to say in a public venue that the bad guys had business models that were just like the other guys. Dave Palachuk

[00:06:38] They were just as structured and perhaps more lucrative than the good guys. We need to stop thinking of them as the guy in the basement, the random actor and start recognizing that there was a business model. There was a marketing channel. Dave Palachuk

[00:06:52] There was an actual payment program. All of this stuff is going on in the world. Dave Palachuk

[00:06:58] We are not just defending against random activities. This is organized crime. Another Dave ism that we always want to pay tribute to. This is organized. It is professional. And if we are not equally professional in the way that we approach these things, we don't stand a chance.

[00:07:18] Dave Palachuk This is the side of the report around this particular story. Again, the guys who got taken down, they are not the ones sending you all of that phishing email. They are not the ones sending you all of the malware. Dave Palachuk

[00:08:02] If my customers are breached, that is exactly what I am saying. We should all rise to that level and say, don't you say, yeah, we do some cyber stuff. Either you are in that business or you are a professional. Or you shouldn't be in that business because this stuff isn't kidding.

[00:08:22] Dave Palachuk

[00:08:23] We talked about this just when we were warming up, I mentioned. I am going to say it on the air because I think this is an idea that I have been starting to gel around that I think is important for me and I think we all ought to be asking. Particularly those of us on the provider side and on the end user side.

[00:08:36] Dave Palachuk Why is the only version of buying the internet connection the one that is intensely dangerous and has no free form and I get everything? Dave Palachuk The whole enchilada. Dave Palachuk

[00:08:48] I don't need that. For the vast majority of us, what we actually want is a version that does not include, I don't know, certain countries we could name that we really should never do business with. Or by the way, in the US, they are illegal to do business with in some ways.

[00:09:08] Dave Palachuk

[00:09:09] Or why is it only that I only get the complete raw one and I can't check the check box of, yeah there's a bunch of known groups like domains and subsections and filters that you should just automatically turn on. Like they just never allow my network ever to go there.

[00:09:24] Dave Palachuk What's interesting is we have something like that with the world of adult entertainment. I could check a box and say don't show me this stuff, don't show anybody in my house this stuff. Dave Palachuk

[00:09:38] Why not have a thing that says don't let my business see China, Russia, you know, North Korea, right? And then you could opt in like oh but I need to do some research so for this, I fill out a form and check now we have access. Dave Palachuk

[00:09:54] Right, it's completely Dave Palachuk

[00:09:56] I've been thinking about the fact that some of this just ought to move all the way, we talked about it in the network layer. Like I wanted to go all the way out to the ISP level. Like just the, give me a safer version of the internet and I can opt in.

[00:10:06] If it's opt in that's fine. I probably could make a pretty good argument that it should be the default and you have to like sign over the I want the unfiltered version like and you've assumed some risk, but you know, I don't I think we ought to be asking this question of where should it live.

[00:10:23] And some of it is I think it needs to be in the network and it probably goes all the way out to my provider. Dave Palachuk

[00:10:34] What an irony. The VPN would be into the unsafe world, right? You could you could say shut up all the unsafe stuff unless I VPN into, you know, the dark web. Dave Palachuk

[00:10:46] Exactly. Unless I put on my protective suit of armor and go there on purpose, right? Now, Dave, you're getting to a key concept that I think should, should govern the behavior of the technology industry in general, right?

[00:11:00] The concept is security designed in. We should not be taking servers and making them secure in the aftermarket. We should not be taking networks and restricting the domains to which they can travel.

[00:11:14] What we should be saying is you are not allowed to sell a product in our industry unless it is itself inherently secure. If it does not have that capability, it's like the think of it this way.

[00:11:28] We sell cars for the purpose of going places, right? You buy a car because it's got an engine and an accelerator and a steering wheel because it can get you places.

[00:11:37] But it also has the don't get you places feature, you know, the brakes. We wouldn't be okay selling things that didn't have brakes. Dave Palachuk It would be fun for a quick moment. Dave Palachuk

[00:11:47] But I'm going to move us on because we are running out of time on this and inevitably I've got to bring up AI.

[00:11:54] But the reason I wanted to bring up AI today is I want to actually ask the question, are strategies emerging? Because we've been at this for a little while longer. We're right on the heels of Apple and their WWDC announcements and Apple intelligence and their approach to it.

[00:12:10] We've got a pretty clear vision of where Amazon is going with brokerage for models and the way they've talked about pulling it out. Microsoft, of course, has been very clear of their strategy with co-pilot.

[00:12:20] We've got open AI doing a bunch of stuff. Cisco now embedding it in features and all like we're starting to see patterns of strategies.

[00:12:29] And I thought I would get this group to sort of weigh in and say, like, what are you seeing as the strategies of the way that it's going to market? And thus, what do we need to know as providers to be smart about helping our customers?

[00:12:43] I would say Apple's announcement aside, we appear to be in the trough of disillusionment. So is Apple the last little bit of overhyping? Or will they actually deliver in a reasonable amount of time?

[00:13:00] That's kind of the problem we have. Right now I think we legitimately go to our clients and say, OK, we've been telling you about this for a couple of years,

[00:13:09] but it really is going to be cool and it'll really be here any minute. And like, please engage with us.

[00:13:17] You know, it's one of those things where I see the promise and I see the future as being incredibly bright and I think Apple and Amazon are the two that will bring AI into our lives more than anybody else.

[00:13:31] It's really making progress in some places, but in the stuff that our clients, that end users touch, it's a harder sell because it does right now.

[00:13:40] There's more to be made by training people on how to make good prompts than anything else. And to make it so usable, I mean Apple wants me to be able to say, hey Siri, solve this problem.

[00:13:52] And then without saying OK, I'll get back to you in a week, it says, oh, have you tried this? Have you tried that?

[00:13:59] That's where I'm at, right? I think the question is never what is the capability of the technology, but what is the problem we are trying to solve and does it solve a problem that's interesting enough, entertaining enough, valuable enough that people will seek it out.

[00:14:16] Well, the seeking is the problem. If I have to go to a different device, use a different application, go out of my way to access a tool that gives me a new capability, there is an inherent behavior change that's required in order to get people to consume this thing.

[00:14:33] As a result, I think push product manager hat on. I think what we're starting to see, Dave, from a strategy point of view, there are device providers, there are operating system providers, there are application providers.

[00:14:47] If you look at the industry at large and you go back to the level of well, who owns everything and controls everything? It is the people who own the devices that we use and control the operating system that gives guardrails to or gateways that allow in or prevent access for applications.

[00:15:10] That's why if I go to Apple, if I go to Microsoft, those are the two that I would put money on. I think at an aggregator level of Amazon will be the one place you can go to use all of the different chat models.

[00:15:25] That's a model and they've proven that that can work. But I would look at Microsoft for the operating system question and I would look at Apple for the device system.

[00:15:35] Whatever it can do, if I can use the device I already use, if I can just do it the way I already do it, don't sell me AI as a product.

[00:15:46] Tell me AI as a feature of the products that I already own and use. I would start to use that stuff much more readily as an end user. The three of us, we're not normal end users, we're using it more extensively than others are in the marketplace right now.

[00:16:05] But to get mass adoption has to be easy. We can't change human behavior just like that. You said something that I want to build on because so AI is a feature and it is very much a feature of products and the way technology will be used.

[00:16:22] But unlike this discussion many times prior, it's a feature that requires a lot of prep for end users to understand,

[00:16:32] to make sure that they have certain things like the boundaries of what it's capable of and not capable of, the ethics and legal compliance about how it should be used and how it should not be used.

[00:16:43] The training to be effective in using the feature, those criteria are among the highest I've ever seen about talking about something that is a coming feature and then will be useful.

[00:16:57] The requirements for your end users to be effective with it are pretty high and your organizations because you've got to make some decisions. For example, I was talking with somebody last week where it literally said all governments are going to be slow to use this.

[00:17:11] Yes, they will actually because of the things I just said, the prep level of the user base of the organization is really high, governments have lots at stake, they will be among the last to use it.

[00:17:24] But I think that is why I like the opportunity so much because typically in this kind of case, small agile businesses tend to be the ones that adopt this kind of stuff first.

[00:17:34] But to do it well, you'd better lean into that prep because that's where we're seeing so many versions of it where it did get to the trough of disillusionment so fast because a lot of people are just using it wrong.

[00:17:48] And I don't like blaming users but they're literally thinking like, oh it'll just be perfect. And I say this by the way, somebody who's like really leans into AI.

[00:17:58] Like I am a heavy user of it but does it ever just pump stuff directly to my end customers? Absolutely not. But I'm using it intensely and I have built a structure and set of guidelines that help me be effective with it.

[00:18:14] Well, and I said in this forum and other places that Dave you are one of the the premier examples of somebody who does it the right way. But you also have a computer science degree and you can do a little bit of coding, right?

[00:18:27] The average person running the average business is doing something else for a living, right? So getting an interface that works, you know, and maybe the Siri interface or even Alexa is the future. The question is how do we train people to use that?

[00:18:48] Because right now if I go in and I type in a question, right, it gives me an answer and I can sort of browse through it and like say, okay well no change it this way that way.

[00:18:57] If I ask that same question in a voice interface, is it going to give me eight paragraphs of stuff that I then have to say, okay, how do I know how to ask it the right questions in the right order, right? With the right modifiers.

[00:19:13] Because the way you get good at this is you keep modifying until it you narrow down the answer to something usable, right? That's a skill that has to be trained. It is a skill and Carl, you are correct on this one.

[00:19:26] The more powerful the tool, the more necessary it is that the user is trained carefully and well to use it effectively, right? My cliche is always, you know, the more powerful tool in the less qualified hands is more likely to do damage than it is to do good.

[00:19:42] Give me a very powerful woodworking machine and I'm more likely to cut off my fingers than I am to build you heirloom quality furniture because I don't possess those skills. This is a tool that requires advanced skills. What I'm saying is more organizations forbidding it than enabling it.

[00:20:01] So this is still early, Carl. I appreciate the reference to the trough. I let Ryan transition. I'm going to say one thing. I like spaces with friction like this because you can make money there. You make money reducing the friction. Absolutely. It's complicated. Therefore, it's valuable.

[00:20:22] All right, let's transition into our third topic guys and for this one less of a technology conversation, more of a business conversation. We observe that there is an ongoing frenzy in the market of IT solution providers for mergers and acquisitions, right? There's exit strategy conversations.

[00:20:40] You can't go to an event, a conference, a trade show anymore without somebody talking about M&A strategies and the service providers for evaluation and for dressing up your business and making it attractive are all over the place.

[00:20:55] But the question that we should be discussing I think is are we actually valuing businesses correctly? And are we actually measuring assets that should be purchased as opposed to just it's for sale? Therefore, let's put a value on it and somebody should buy this thing.

[00:21:16] I think there's a really deep conversation to be had here around the conversation of business exit strategy as well as business acquisition strategy for growth. What do you guys think about the topic of M&A in the SMB IT world these days?

[00:21:33] I have to weigh in because I got to set one set of expectations around this that I think is important to start. The reason there's such noise from my perspective around all of this and the let's talk M&A and prepping your business for M&A

[00:21:48] and getting all that ready, there aren't enough companies to buy. The private equity folks, the investor class in this space has recognized that there is not enough targets for them to buy of size and maturity that are of interest to them.

[00:22:03] And so they are leaning into trying to create those by educating business owners and starting them down the path of preparation. The reason that this is all happening is they want to buy more than is available on the market.

[00:22:18] And I don't think enough people say that because that's important. That is really important. They are making a lot of noise about this because they want there to be more targets.

[00:22:30] Well, I'm actually writing a blog post that will come out very shortly about the difference between running your business at the end to maximize sales price

[00:22:43] and running your business for 20 years before that because we've always said, oh, you know, you should run your business like you're going to sell it. Well, that's true if all you care about is good management. If what you care about is maximizing it at the last minute.

[00:22:56] Well, there are certain KPIs that the people with the big money come in and they say, oh, what's your revenue per technician? So now everybody comes to me and says, you know, oh, we need to measure revenue per technician.

[00:23:07] I'm like, why do your technicians sign contracts? Do they adjust pricing? Do they make sales? Do they know what the tax rates are? Do they have any idea about anything that's involved in delivering that? Oh, no. Okay. Then why are you measuring that?

[00:23:25] Oh, because it helps my sale price. Okay. The things that make a good sales price may not be the things that make you a good business.

[00:23:34] So if you're selling today, you should go to those things and talk about it and double down. If you are not selling today, there's other things you should do that are standard ways of running a successful business.

[00:23:47] And that's where you should put your energy. So right now we have people focused on like, oh, how do I maximize this and that? But the truth is most people, if you're under a million, this conversation does not involve you. It's true.

[00:24:02] Well, you see you're correct there, Carl. And to put both of Dave and Carl's points together there, there's not enough professional caliber assets available on the market to purchase because most of us are under a million dollars in total top line

[00:24:18] and not managed as a professional entity. Therefore, it's a group of people who do some stuff and generate some revenue. And that's not exactly a viable asset in the classical sense of things.

[00:24:32] I'll go back to, it was one of the very first business seminars that I ever went to as a business kid. Stephen Covey taught us that if you wish to run a successful organization, you need to begin with the end in mind.

[00:24:47] In other words, not just the definition of exit strategy, but what is the form that you believe will be most valuable and then start building towards that now and go in that direction every day as you are running your organization.

[00:25:02] I take that to mean that people should be managing their margins every single day. They should be aware of their cost of goods as well as their cost of sales.

[00:25:12] The P&L calculation is something that we are entirely unfamiliar with in the technical world, and that's a problem. And it's one of the reasons why I think people don't get the multiples that they could be getting if and when they decide to pursue this actual exit strategy.

[00:25:32] I look at it from most of the time from the other side of things, from the growth strategy. I see many solution providers who are growing at rates radically faster than typical in the IT channel.

[00:25:46] And I look inside of them and I say, well, how are they doing that? Well, almost none of them are getting organic growth on existing assets and customers and sales capabilities that are in the triple digits.

[00:26:00] If I see somebody growing in the triple digits, it's probably because they bought somebody, integrated them into their operation and now count themselves as twice or three times or whatever larger than they used to be.

[00:26:14] What should you be buying? Well, from a buyer's point of view, I have extremely detailed criteria about what is and is not a good asset that you should be purchasing

[00:26:27] and then trying to manage the integration of cultures back into your organization. And I think, Dave, to circle back to your original point, I don't see a ton that I would actually put my money into and purchase because they are not run that way.

[00:26:45] I advocate, run it like a business, run the business like a business, and you'll be surprised at how good it gets every day along the way.

[00:26:56] And by the way, don't necessarily assume that private equity is doing everything incredibly right. If you missed it, Rich Freeman did a really good analysis on Channel Holic just recently that he compared that while there are differences between the two.

[00:27:12] Private equity backed MSPs have a higher net promoter score compared to the smaller ones, however providers without private equity funding still have higher gross margin percentages and faster growth in those percentages.

[00:27:25] So it is, you know, that so don't necessarily think that this is like, well, P is going to outperform or I got to get sold by P.

[00:27:32] They are slightly different and the performance metrics are different. Again, the hype is because they're looking for people to buy. I get all that. I'm not against it.

[00:27:41] I just want to be aware of it. But what I'm also pointing out is that just don't assume that that is the perfect solution to everything.

[00:27:48] The other thing is we're kind of we're almost out of time, but we're in this era right now where there's so many people with so much money that we have a lot of people who are shopping their bottom feeding, right?

[00:27:59] They're like, Oh, I'll give you 10 cents on a dollar for your business. You know, if you happen to be distressed, right? A lot of people don't go to sell their business until it's too late and they've got problems and they need to fix stuff and right.

[00:28:10] And they're not a primary target. And they're being under priced where other people who have got the right metrics and whatever are being overpriced.

[00:28:21] So we have this really odd market. You know, those signs that say I buy ugly houses. I've literally thought about putting up a promotion that says, Hey, we buy ugly MSPs, right? Because that's what's going on.

[00:28:32] Happily, we have come to the end of yet another spectacular show. Thank you both for joining me. This has been episode 208 of the Killing It Podcast. Join us next week and help us keep killing it in the technology business.

[00:29:06] And now we're going to do that one more time because it's episode 208. Oh!