Host Dave Sobel welcomes back Peter Kujawa from Service Leadership to discuss the latest trends in managed service provider (MSP) revenue and profitability for Q3. Peter shares insights from a new analysis that reveals a slowdown in organic managed service growth, which has been trending back to historical norms after a significant spike during the COVID-19 pandemic. While the organic growth rate peaked at around 25% during the pandemic, it has now settled back to approximately 10-10.5%. Peter reassures MSPs that this return to historical levels is not a cause for panic, as it reflects a more stable market environment.

The conversation delves into the impact of inflation on revenue growth, highlighting that much of the previous growth was driven by price increases rather than new client acquisitions. Peter emphasizes that while MSPs have been raising prices to cope with wage inflation, this has also led to downward pressure on gross margins and profitability. Despite the cooling labor market, the overall outlook remains positive, with expectations for a solid year ahead, particularly for value-added resellers (VARs) who experienced high growth in product and project revenues during Q3.

As the discussion progresses, Peter shares intriguing data correlating MSP revenue growth with U.S. presidential election cycles. Historical data from previous election years indicates a pattern of decreased growth during election cycles, followed by a rebound in the subsequent year. With the 2024 election approaching, Peter anticipates a similar trend, suggesting that MSPs may experience a bounce-back in growth post-election, provided there are no significant unforeseen events.

Finally, the episode touches on the current state of mergers and acquisitions (M&A) in the MSP space. Peter notes that there is a notable disparity in the market, with many small MSPs and larger platform MSPs, but a lack of mid-sized firms. This has created a seller's market, where private equity buyers are particularly interested in acquiring smaller MSPs to consolidate and scale their operations. Peter advises smaller MSPs to develop a value creation strategy and consider merging with others to enhance their market position and achieve greater profitability. The episode concludes with a look ahead to upcoming reports on compensation and wage inflation, which will provide further insights into the evolving landscape of managed services.

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