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I recently had a great conversation with Jay McBain, Principal Analyst for Channels and Partnerships at Forrester, about how the economic downturn caused by COVID-19 will affect the channel – specifically the MSP Channel.

There was a lot of territory to cover: from looking at the current state of the channel to how many in the channel may (or may not) survive the economic hardship to examining the real opportunities the pandemic has created for MSPs.

I’ll recap our conversation below and you can watch the full interview as well, but long story short: while many in the channel will struggle to survive, there are also tremendous opportunities ahead.

Current state of MSPs

We started with a quick overview of the current state of the channel. Today, we have 600,000 service providers around the globe, with 160,000 in the U.S. alone. As for MSPs, there are 50,000 worldwide. But shadow channels have risen to exert significant influence on how we define the channel today.

Jay points out that almost every modern company is a tech company. The implication for traditional resellers is that between all 27 industries globally, there are tens-of-thousands more companies selling tech services today. For example, there are 300,000 accounting firms, and 81% of them deliver tech services. Of the 200,000 digital agencies, 78% are delivering tech services.

Trifurcated Channel

That led us to dig into what Jay calls the Trifurcated Channel, which I find fascinating. For decades we’ve built channel programs around our transacting partners. We’ve incentivized and categorized them utilizing the traditional Gold, Silver, Bronze Channel program approach. But today, we have Influencer and Retention Channels showing up on both sides of the transaction – either influencing the purchase or providing critical retention layer services like implementation, configuration, continuity, etc.

That means that about 80% of the channel now is non-transacting, which forces us to shift the way we think about the IT Channel as a whole.

To quantify this, Jay said, “It’s $2.6 trillion that actually gets transacted through the channel, and almost all $3.6 trillion [of business and governmental technology spending globally] gets influenced and serviced by the channel.” In managed services, this translates to $186 billion globally, with just under $100 billion of that in the U.S.

COVID-19’s impact on the channel

Before COVID, the channel overall was growing by single-digit percentage points. Today, Forrester predicts that around 25% of the channel will go away due to “unrecoverable financial distress.” This culling is similar to the numbers we saw in the Great Recession of 2008.

Right now over 60% of partners are in “revenue delayed mode.” Projects are being put off, upgrades canceled, contracts being renegotiated, late or no payments on invoices, etc. Even with our government stimulus packages, there will be a good portion of the channel that simply cannot survive. This might look like early retirement, mergers and acquisitions, or simply forced bankruptcies.

But Jay points out that even during great economic times, about 25% of the channel struggles to break even. That 25% will be most affected during this recession, while others who have more cash reserves, some creativity, and astute cash flow management skills will fare a little better.

Learning from the downturn

The economic crash of 2008 gave us a bunch of learnings and the COVID-19 recession will give us a bunch of learnings as well.

In 2008 we learned that the government didn’t act fast enough with the stimulus and those stimulus dollars were spread too thin to have a positive impact on crisis cash flow management across industries.

In response to the COVID-19 pandemic, the government acted more quickly and is even teeing up more stimulus dollars – yet that still may not be enough for the cash flow crisis, which is the immediate need during this triage phase of the pandemic.

The other part was that vendors started to step in with monies available for their partners. These were great PR moves, but they didn’t really give MSPs cash to bridge this crisis gap – especially since most of these credits have to do with buying something new.

Before the COVID-19 crisis, Jay predicted that 2020 would be the first year in history that direct outpaces indirect: the pandemic simply accelerated this. Azure and Google reported 59% and 51% growth in Q2 2020. SaaS companies, in general, reported 30% growth. Only 20-30% of that business is going through the channel.

Good news for the MSP channel

The good news is that in all of this decline, managed services are only seeing a drop of about 1.9%, which shows that this business model is somewhat protective. As we pass through the triage phase of the crisis, end users will be looking for automation as they come back. That demand creates a perfect opportunity for MSPs who have the skills to help organizations of all sizes to keep their remote workers working easily and productively.

In the end, Jay outlined three ways that the COVID-19 crisis has actually created opportunity for MSPs:

  1. The channel’s brand has improved. Clients saw that most of the channel rolled up their sleeves and went above and beyond to get people working remotely. The channel’s brand will have a legacy here for when we start to recover.
  2. The channel is much more agile, responsive, and cross-functional than ever. These skill sets are critical to meet the future needs of clients, which will all center on emerging tech projects, automation, operational efficiency, etc. – so MSPs are more prepared than ever.
  3. Change always causes opportunity. In mystery, there is margin. Client to cloud created a lot of apprehension back in the day, but MSPs picked it up and made money. It was a strong move and strengthened and deepened their relationship with clients. With this current transition to remote work, MSPs have to defend against different threat vectors, and consumer products being used in home offices. Coupled with mid-market and departmental opportunities upstream, MSPs are poised to deliver more line items than ever before. MSPs and MSSPs are in a perfect position for this work-from-home revolution.

The bottom line

The entire 45-minute discussion was fascinating and Jay provided a lot of insights and food for thought. I encourage you to listen to the conversation, but for this recap, I will give Jay the last word with this quote:

“I think the world is going to open up, and MSPs are going to come out of this much stronger than they went in.”

About Acronis

A Swiss company founded in Singapore in 2003, Acronis has 15 offices worldwide and employees in 50+ countries. Acronis Cyber Protect Cloud is available in 26 languages in 150 countries and is used by over 20,000 service providers to protect over 750,000 businesses.