Why Do Managed Service Provider Businesses Fail?

A reader asked me: “Gaidar, you spoke to thousands of MSPs, and you share best practices and tips, but what about those who fail? Why do they fail?”

It is a fascinating question. When I was working on market intelligence at Acronis for a few years, we found out that there are around 300,000 companies that offer or resell managed services worldwide. About 10% of them shut down or are acquired every year, yet new MSP businesses appear every year, quite often to be shut down in the same year or the year after.

The question about the reasons for failure inspired me to do deep research in my notes from the last ten years to find comments about previous business failures. The topic became so engaging that I contacted a few former MSPs who joined vendors and channel companies to get their perspectives on reasons for failure. The list started to grow, and completing this article took over four months.

This article can be helpful for MSPs suffering through the same issues, knowing that others experience the same issues and that thousands of companies were able to pull through. We will discuss this at the end of the article.

So, why do MSP businesses fail?

Don’t believe in success anymore

The business is not growing and is hitting a rough patch. Customers are leaving, tickets are piling up, and there are not enough people to manage the workload. The future does not look bright; there is no business stability, and returning to a corporate job does not seem like a good idea.

In another situation, business is going okay, yet there are no new customers, the margin is small, and the lifestyle could have been better in the corporate days. Earning money is tough, and getting up for work daily gets less exciting.

Fail on expectations of fast results

IT professionals start an MSP business expecting to get a scalable business yet getting themselves just yet another job. Instead of working a 40-hour workweek for a corporation, they get themselves a 120-hour workweek with the same or sometimes lesser pay. Savings are running out; bank account looks grim as they don’t change their spending pattern, expecting the business to grow fast and pay them back.

One US-based MSP noted that they were working long hours, paying themselves about $80,000 a year salary, establishing processes, and after they were ready to onboard an employee to do the work, they found out nobody wanted to work such long hours for $80,000, and paying more would reduce the margin the owner takes. They expected to acquire new customers quickly but could land 1-2 contracts a quarter merely to balance the churn of customers that were going out of the business.

Focus on mistakes and failures, getting stuck in the past

Bad things happen. Customers have downtime, tickets get incorrectly handled, and customers get upset and leave. This is the nature of business; there is almost always a churn of customers. Proposals are always rejected. There are times when you must let the customer go when the cost of maintaining their contract is too high, and there is no potential to get more value from the account.

The ability to move on and keep driving the business despite the failures is essential. Yet, some MSP business owners focus on their mistakes and waste time and effort on retaining customers who are about to leave and stop selling after being rejected many times.

Instead of thinking about the future and creating opportunities, owners get stuck with their past mistakes, repeatedly reliving them and being afraid of the future.

Fear of changes

Changes are scary. An ancient Chinese proverb goes, “When the winds of change blow, some people build walls, and others build windmills.” This really applies here. Working against the change leads to failure.

Technology changes, customer needs evolve, employee performance changes. Trying to work against the change takes away tons of energy and prevents us from investing in the future. MSP service offerings should constantly evolve. Today, you offer anti-virus, tomorrow, you offer EDR, the day after XDR. Now, you have your customers using backup and tomorrow, you will offer disaster recovery. Yesterday, your customers were using on-prem servers, and they moved to the Cloud today. The situation in the lives of employees changes, and top performers can become toxic and destructive, and there is time to let them go.

Give up easily

Good things are rarely easy. If you start marketing and fail with a few first campaigns, it is not the time to give up—you must push it consistently. If customers reject your proposal, you must adjust it and go after others. Giving in to the feeling of hopelessness and resignation leads to the end of the business.

A UK-based MSP told me they were chasing a large customer for over three years until they had a chance to land a deal. They also failed miserably during onboarding because they underestimated the complexity of the infrastructure and the lack of resources to fulfill the SLA. And they gave up to learn that even smaller MSP was able to take over after them, and those guys kept pushing, provided discounts, worked extra hours for free but managed to retain the account.

Believe that relationships will retain customers

The MSP world is highly competitive. Your customer of many years may be approached by somebody offering new services at a lower price or, even better, painting the picture of a much more efficient and effective IT infrastructure driving their business. Business leaders value relationships, yet when the value of a new proposal is too attractive, they tend to move on. If the MSP business doesn’t evolve, doesn’t address technology trends, and does not become a partner for the business leaders – good relationships won’t retain the account.

No amount of excellent work in the past overcomes savings and higher earnings in the future. The goal of any business, including MSPs, is to make money for its stakeholders. Thus, you have to perform on a daily basis and show a bright future to keep the customers.

Focus on loss, not on gain

Instead of growing a customer base, MSPs that focus purely on retention eventually fail. Customers leave—sometimes they go out of business, sometimes priorities change, or they are acquired, and the services of an MSP become unnecessary. Customers leave, and it is just a fact of life. Thus, focusing on retention will ultimately cause MSPs to lose in the long run.

Overwork and burnout

Working hard is good; it gives excellent results. Yet, working hard all the time and running yourself into the ground has negative consequences. You burn out as a leader, lose interest and drive, and influence your team in the same way. You start from rejecting new projects –to avoid more work. You stop investing in developing your team and try to maintain the status quo. Then you become toxic – saying “no” to every employee initiative, forgetting to take care of your team. And then, you, as a leader, make the whole team appear to burn out to the outside world. Customers and prospects start talking about your company as slow and not innovative and look for another partner.

Thinking their challenges are unique

The customer was down for a few days due to a faulty update by a cybersecurity vendor and a failure to recover from a backup due to storage misconfiguration. Another one could not fail over to the Cloud due to complicated network configuration. One more had significant losses due to a malfunctioning VPN preventing them from working during the active trading session. And so on, you name it. Every issue or problem may have happened somewhere else, and somebody might have found a way to deal with it. Without looking for best practices from others or solutions applied in similar situations, it is easy to reinvent the wheel every single time and waste enormous resources.

The antidote

This list looks scary and relatable for any business owner, not just the MSP. Bad things happen, energy may be low, and things are not going well. It occurs in business, in life, and relationships. Yet, many successful companies managed to survive despite facing the same challenge.

So, what solution helped those successful business owners? They believed in their strength and skills, believed in the positive outcome, and believed in success. Believing gives hope in the future, making changes less scary, and it helps to keep working to get the results. Play the game of belief.

Here is the same thought delivered with passion by Sir Philip Anthony Hopkins.