Dave Cava on Why Operational Maturity, Not AI, Determines MSP Survival

[00:00:00] Dave Sobel here reporting from the floor of ChannelCon in San Diego, sitting down with Dave Sobel. Now Dave is owner of PeopleSharp and the co-author of The Pumpkin Plan for MSPs. Before that, 12 years as COO and CFO of Proactive Technologies, a New York MSP, Inc. 5007 times sold in 2019. He sits on GTIA's Workforce Advisory Council and his session here is AI Readiness for TSPs, What Actually Matters. Dave, welcome to the show. Dave Sobel Thank you.

[00:00:31] Dave Sobel So you published a piece in July under a really blunt headline, AI isn't coming to save your MSP. So make the argument, what are MSPs getting wrong right now? Dave Sobel The fact is that it's over 50% of MSPs that are less than 5% profitable. And the long and the short of it is that AI will help to bury those MSPs if they don't worry about that issue.

[00:01:00] Dave Sobel More than they worry about the technology that's here and coming. There is no substitute for operational maturity. You have to have it. Profitability is going to drive R&D. It's going to drive the ability to be out in front on AI.

[00:01:23] Dave Sobel And the largest MSPs that are the best funded are just making leaps and bounds in the area of AI. And it's like 27% of MSPs that are actually losing money. There is a quiet crisis going on in the industry where the rich are getting richer and the poor are getting poorer.

[00:01:50] Dave Sobel And I kind of see it as part of my mission to save the savables where I can, you know, just try and wake people up. If one out of 10 people listens and says, hey, I need to become a business person and not just a technologist. Dave Sobel That's a win. Dave Sobel Say a little bit more about the savable group because it sounds like if you think the big guys are doing it, they're crushing it, right? And how do you view the difference between like the ones that aren't making any money and maybe the savables? And where does that overlap? Like, think about it.

[00:02:19] Dave Sobel You don't need to be big to be profitable, right? Dave Sobel You didn't mention I used to co-own a company called Encore Strategic. They're still going. They're here doing a great job, just did a great session. But one of our mottos there was profit, grow, exit. And we used to talk about how it's important that it happens in that order.

[00:02:41] Dave Sobel That if you have an unprofitable business and blow it up, you're just going to have a big, unwieldy, unprofitable business, right? And people who found MSPs are mostly technologists, generally. They're not coming out of Wharton or Harvard Business School.

[00:03:00] Dave Sobel You know, they're coming out of, you know, being nerds who like technology like you and me. You know, they don't think about things in terms of business fundamentals until, you know, they need to, for the most part.

[00:03:14] Dave Cava I think that's starting to change with some of the people that are starting MSPs today. But for the old crusty guys like me that had been around 15, 20, 30 years, you know, they got into it because they love the technology. And some of them just never picked up the business. And they never learned how to create a business that really has increasing value, becomes a saleable asset, and is consistently profitable.

[00:03:38] Dave Cava It resonates with me. I ran a conference literally with the theme of profitable is enough. Sometimes like that is enough to get started on the rest. Now, I want to ask a little bit, your model is the farm system. This is really interesting. Entry, higher entry level, develop, promote up. But last October, you wrote, and I'm quoting this, will automation and AI lessen the need for these kinds of resources in the future? Yes.

[00:04:03] Dave Sobel So if AI eats the bottom rung, where do those L3s come from in 2033? That's a great question. It's one that I've been asking myself. First of all, I like that you said 2033. You know, there is a cottage industry in and around the MSP world that is always chatting the next big thing. And, you know, for a while it was cloud. You know, now it's AI.

[00:04:32] Dave Sobel And the fact is, AI will change everything, but it's not going to happen in six months. If it was going to happen in six months, it would have already been a completed process. We're still just starting to scratch the surface there. So we'll be gradual.

[00:04:45] Dave Sobel And I think 20 years ago, I was talking about the concept of concierge IT support. I saw what was coming and that it was less about, you know, being the best engineer ever and more about understanding your client's business and being able to connect them with the right products and get those products to play together nicely.

[00:05:05] Dave Sobel And I think that that's just snowballing in a sense that understanding your client's businesses and workflows, it's not going to be optional anymore. Dave Sobel And I don't really think that AI is going to eat that first layer entirely for a long, long time if it ever does. I think those level one positions, the soft skills are going to be more important. They've always been important.

[00:05:34] Dave Sobel They're going to be super duper important to the point where somebody that doesn't have them just doesn't belong in that job. Dave Sobel The idea is to keep the friendly face, the human element, the helpfulness, the I'm on your side, and make what that person is doing on the back end to get the tech to work a lot more efficient and repeatable,

[00:05:57] Dave Sobel And take all the complexity out of simple level one tasks. Dave Sobel Gotcha. Now, so let's put a bit of a direction on it, right? So the 20 person MSP three years from now, more level ones, fewer, the same doing different work? Like, what are you thinking about three years out for that kind of work? Dave Sobel I do think there's a challenge in the industry of where the level threes come from, you know, because traditionally you have this,

[00:06:27] Dave Sobel progression of L1 to L2 to L3. And if that entry level layer is eliminated or minimized, what happens? How do people get the experience they need? That's a real problem. You know, the prognosticators say that it will start with needing more L3s.

[00:06:56] Dave Sobel And by investing in process and systems and automation, you know, those L3s will be focused not on client engineering, but on leveraging AI, creating repeatable processes, you know, templating things and doing things so that less L1s are required.

[00:07:18] Dave Sobel So yeah, the long term forecast is certainly for less L1. It's not going to happen right away. And I do think that in general, staffing MSPs has become the wild, wild west.

[00:07:35] Dave Sobel That 15 years ago, if you had a 10 person MSP, I should tell you exactly what every position in an MSP should be. If you had a 25 person MSP, I could tell you what every single position in that be. Everything was in office.

[00:07:51] Dave Cava You know, nowadays, you have offshore, you have near shore, you have outsourced third party services, you have some need for local support, you have other where you can have direct hires that are remote. Dave Cava Everything is figuring out the formula that works good for your MSP, which is going to look completely different in downtown San Francisco than it does in Podunk, West Virginia.

[00:08:18] Dave Cava You know, like that. It's it's every owner now has to figure out their own custom recipe to stay for their company. This episode is supported by Halo. If you run a managed service provider, your PSA sits at the center of everything tickets, billing, contracts, workflows and reporting.

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[00:09:11] Dave Sobel Your core advice is know your true cost of delivery and price on value. PeopleSharp publishes no fees anywhere, just affordable fees paid over time. Like, how does how do you balance that? Having successfully exited my MSP, you know, I went through some stuff.

[00:09:32] Dave Sobel Personally, it's part of the reason I sold the MSP and, you know, I lost a child and then COVID hit and I had sold my business and it was very much a who am I now and what am I doing now, you know, crisis. And it was the middle of COVID. It was all crazy. Dave Cava So I decided I really love this industry. I love entrepreneurs. I love MSPs. I know a lot of people. What could I do that would help MSPs? That's something I would enjoy doing anyway.

[00:10:00] Dave Sobel And the recruiting occurred to me because we had gotten really good at it. We had bought it in house. We'd figured out. We had researched, you know, what the companies that were growing as fast as we were, but were making a lot more money, what they were doing differently. Dave Cava And I was really surprised to find a lot of it came down to the way they built teams.

[00:10:20] Dave Cava And so when we got into recruiting, I kind of already made my money, you know, like it was not a lot of pressure to, to succeed immediately. It was, well, there's things I like about recruiting. There's things I hate about the industry.

[00:10:40] Dave Sobel Why don't we just try doing and doing it this other way. And if it doesn't work, we'll, we'll pivot. But, you know, if, if there isn't some good reason why all recruiters I know are mercenaries and sharks, you know, why don't we just change that and not, not do it. Dave Cava So, I mean, we don't hide the ball when it comes to our pricing, you know, basically our contracts start with a commitment to make one higher in the course of a year.

[00:11:07] And if you do that, we charge 14% of salary and you could spread it over the life of the contract. Dave Sobel So, we're trying to get a, get away from those large one time, you know, nobody likes to get in the $15,000 fee. And we're trying to get away from transactional relationships where, you know, somebody says, you know, I just need this impersonal thing from this impersonal company. I'm going to hold my nose and pay for it to, you know, we have a real partner here.

[00:11:34] They function more like, like an outsourced internal recruiting department. So, you know, we, we had to figure some things out along the way in terms of the business side. But yeah, there's no hiding the ball there. And it's, it's just worked. And I, you know, I don't need 2000 customers for it to, it to work. You know, right now we're working with 20 MSPs or so and, and it's just going great. It's humming along. Dave Sobel So, I want to get your sense on the market a little bit.

[00:12:00] Because Sayas says MSPs are struggling to hire skilled techs and that number double, right? From nine to 16% who are struggling. But we also see employment numbers being low that, or, or the, and that there's a soft market. What's your read on the hiring market right now? A lot of MSP owners tend to be head down. You know, it's, it's why they can go 20 years without missing pretty obvious strategic things that need to change in their, in their business. They're worried about their clients.

[00:12:29] They're worried about paying the bills. They're worried about their staff. Um, and there's been some really significant employment trends that, you know, MS, a lot of MSP owners just haven't noted. You know, some 25 year old MSPs still look at the market and think it's the way it was 25 years ago. That it's an employer's market.

[00:12:53] And, you know, if I had a dollar for every MSP that said, I need a really great level three engineer who can mentor the other people in my company and they have to be in the office every day. And, and I go, you know, you realize you're asking me to, to look for the albino unicorn, you know, and, uh, if you want, we'll look for the albino unicorn, but we're probably not going to find the albino unicorn, you know?

[00:13:17] And every MSP I know is looking for level three engineers with MSP experience. And every MSP in a city is looking for level, level two engineers that are willing to run around all day to their clients. They don't realize, you know, that COVID took some trends that were steadily moving in a certain direction and just accelerated the tipping point in a way that no one saw coming.

[00:13:46] And all of a sudden it's like trying to get a level three engineer will come to your office every day. Like, you know, the play devil's advocate. It's just like, why would they do that? Someone else will hire them to work remotely and pay them the same amount of money. Like the, the, you're not in the, in the, uh, uh, the driver's seat here. You have to be creative. Uh, and more than ever, I believe that MSPs need to become talent factories.

[00:14:16] They need to build the people they want, not, not go out and try and buy them on the free agent market. Make the strongest case for the MSP that buys the AI tooling first and fixes process later. Like the best version of that. Then tell me why it's not right. Well, I mean, you substitute an AI for, for any technology. You know, the, like I said, there was, there was companies that focused early on cloud.

[00:14:46] You know, there was companies that put out great backup offering. Uh, you know, back when I was getting into the industry, you know, PSA and RMM was the, was the savior of the, of the universe. And for companies that had solid business fundamentals and knew which levers to pull and how to price their offering and, and how to manage a P&L, all those things really helped their businesses. They're certainly not unimportant.

[00:15:15] You know, uh, they're just not going to create a good business. A good business is, is fundamentally about math. And if the math doesn't work, it doesn't matter. You know, if, if you make the greatest cookie in the world and it costs you a dollar to make that cookie and you sell it for 80 cents, you could have the greatest cookie in the world and you're still going to lose money every day. And the more you sell, the more you're going to lose.

[00:15:43] I mean, that, that's an oversimplification, but that's what's going on with a lot of MSPs. They price based on, uh, uh, a commoditized offering that's based on trying to price things lower than the guy down the block. They don't really understand their costs and they, they got into business cause they liked the technology and, and they, they come here.

[00:16:07] And, you know, if I were to talk about operational maturity, it's going to sound the same last year as it did the year before and the year before that. And no one's going to go, well, Hey, that's really sexy. Put him up on a stage. You know, they want to hear about space lasers and, you know, and, uh, you know, robots. And they want to hear all, that's why every session's about AI. It's the big sexy thing.

[00:16:30] And the session I did here, you know, basically I, I baited the hook with AI and then hit him over the head with the operational maturity hammer, you know, and, and it was received well. Every tool you bolt onto Microsoft 365 is another console, another login, another thing that eats your team's time. Proofpoint 365 total protection gives that time back.

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[00:17:23] Learn more at proofpoint-total-protection.com. Now I want to, as we wrap up our time, I've kind of got a question about your numbers, right? So you talk 18 days to present the winning candidate, but 48 days to an accepted offer. It's a 30 day gap. You measured it, right? Tell me about what's going on in that 30 day. Why isn't it the price? Cause they didn't, they accepted the offer. What's going on in that 30 days?

[00:17:50] Um, it's not that they accepted, accepted the offer. It's that even if people sharp is taking on the first three quarters of the recruiting process, which we are, you know, even if I've taken away 75% of the work and making a higher, a lot of MSPs are just still inefficient in, in closing the deal.

[00:18:12] You know, it's like, it's like if you were trying to make a sale and, and I found the prospect for you. I had the meeting with them. I presented the proposal to them. They said, I'm ready to sign it. And all you had to do is bring them into the office and, and, and have them sign it. And you're like, oh, I'm on vacation next week. I'm kind of busy. You know, this other person needs to be there too. Um, it is a terrible statistic to me.

[00:18:42] Um, and I can only beat up my clients so much, you know, the fact is that I tell people time kills all deals, recruiting is sales. It's making deals and you're going to lose out on some of the best deals. If you're slow, like I preach, be really thorough and as fast as you possibly can. Don't half as it. You need to be thorough.

[00:19:10] You need to be gather all the data you can and be as sure as you can that you're making the right decision. But that process needs to go as quickly as possible because the best candidates just aren't going to stay on the market. They're not going to wait for you. Well, there's the advice right there. Dave, thanks so much for joining me today. Thanks for having me. The hardest part of running an MSP? Doing it alone. The Small Biz Thoughts community has been the room where independent operators compare notes for nearly 20 years.

[00:19:38] Real peers, real numbers, real answers from people running businesses just like yours. Pull up a chair at smallbizthoughts.org. Interested in advertising? Head to mspradio.com slash engage. The Business of Tech is written and produced by me, Dave Sobel, under ethics guidelines posted at businessof.tech. Thanks for listening. I'll see you on the next episode.

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