What’s Next for MSPs in the AI Era? AI-Driven Managed Services Explained | Jay McBain

What’s next for MSPs in the AI era?

On the latest Talk Tech with Rob Scott, Jay McBain, one of the top voices in the channel, breaks down:

• The massive shift from cybersecurity to AI-driven managed services
• How MSPs can thrive by combining consulting, automation, and outcome-based delivery
• Why now is the moment to rethink your business model before the next 20-year cycle begins

Watch Jay’s full conversation with Rob Scott to learn how to stay ahead of the transformation.

Transcript

SPEAKER_00 0:03

Welcome to Tal Tech with Rob Scott.

SPEAKER_02 0:08

Jay McBain, welcome to the show. All right. Well, thank you so much for having me. Jay, I know of you because I'm in the channel as one of the leading analysts and IT managed services and beyond. I see the maps of the great infographics that you publish on um LinkedIn and elsewhere, and have heard you speak many times. And it's a pleasure to have you on the show with me today. And what I want to start with is a little bit more about your background. I think a lot of people like me know you professionally as Jay McBain, the analyst, but tell us a little bit more about Jay McBain, the person.

SPEAKER_01 0:46

Yeah, uh, I mean, I used to be a Jay McBain, the corporate citizen, trying to drive managed services in a company that did a lot of it, IBM, trying to drive managed services into Lenovo in the very early years. I got to work at Autotask in the very early years with Bob Godgard and, you know, the early challenges with ConnectWise. So I've been able to watch this industry for over 30 years. What we used to call outsourcing and low-cost jurisdictions turn into managed services and then, you know, obviously turn into this wonderful conversion of many VARs and integrators and other types of businesses, really building their recurring revenue. But the great thing is I get to count it. I get to count the 341,000 companies who have at least one managed contract, where they are in their journey. I get to count the $608 billion that we all drive as an industry, which is one and a half times bigger than the SaaS industry. So for all the love Salesforce, ServiceNow, Workday, HubSpot, get in the stock market, we're one and a half times bigger. Also, the hyperscalers for the trillions of dollars of love, the the you know, big three plus Alibaba and Oracle and everybody else, we're one and a half times larger as well as an industry. Just nobody knows that. So I'm happy to be the person that stands up on mountaintops and shouts and tries to get people from outside our industry to recognize how important this is and why 82% of all customers outsource more of their IT this year than they did last year.

SPEAKER_02 2:16

Well, that's amazing, Jay. Tell us a little bit about your childhood.

SPEAKER_01 2:19

Oh my goodness. Uh, born in Edmonton, uh up in Canada, got to live through the Gretzky years and the Stanley Cups, got to move to Calgary just in time for their Stanley Cup. So when you're Canadian, you measure your childhood by Stanley Cups. And so I had eight straight years of getting to the final, and now I've got six years in Florida of getting to the Stanley Cup final, so life is good. But um I joined IBM right out of college, um, had a chance to um you know spend 17 years there between that and Lenovo, but um, and an accountant as a father. So if you wonder why I count everything and why I'm a systems thinker, you know, how does this all work? What do people read? Where do they go? Who do they follow? And creating this list is more about explaining how our industry works. Now that's an accountant as a father. My mom was a librarian, became a principal. So between the two, um, you know, kind of had a great life and was always curious. And always, you know, every time I heard a number, I had to link it to something or to you know figure out what it meant up and down, you know, from that number.

SPEAKER_02 3:24

Well, Jay, obviously, 30-year distinguished career have seen a lot. If you were um that young Jay McVain just getting out of school before you joined IBM today, um what would you be thinking about doing? How would you be thinking about what's coming next? And if you were a young person coming out of college today, thinking about a career in managed services, what advice would you give to a young person considering starting a journey similar to yours but starting it now?

SPEAKER_01 4:00

Yeah, there'd be two recommendations. One is to keep your eyes on the horizon. You know, when I joined IBM out of college in the early 90s, you couldn't get fired for buying IBM. It was the biggest company on the stock market. It was so big, a 13-year battle uh with the US government, and it was just getting broken up like AT ⁇ T into baby blues and things, and nobody could knock off this monopoly. And then a meeting in 1980 with a very young, disheveled Bill Gates. It was only 13 years after that meeting in Boca Raton, Florida, that IBM didn't make payroll. From a company the government was breaking up because of a monopoly to not making payroll in 13 years. That's how fast our industry changes. And you know, I say that 52% of the Fortune 500 from 20 years ago no longer exist. So we lived through that 20-year client-server era. We watched a little upstart Salesforce.com get its start in San Francisco in 1999. About 10 years later, we saw Jeff Bezos stop selling books and start selling excess capacity capacity for servers and create pretty much a trillion dollar cloud industry, which ran for the last 20 years. But as a kid coming out of college, I would say, what if I could go back to August 12th, 1981, and that first IBM PC with Microsoft DOS version one? What would I do? What would I do if I go back to 1999 and met a young Mark Benioff or Jeff Bezos? What would I do? Well, today we're going through a next generation. So in March of 2023, all of our neighbors and friends and family who are not tech people first saw ChatGPT. They saw the poetry, they saw the music, they saw the deep fakes. And they all came to us, asked tech people, and said, did we just light up Skynet? You know, when is Arnold Schwarzenegger coming? Like what's going on here? But we're at the start of the next 20 years. And the companies that lead today, I mean, Apple's been the leader for the last couple of cycles, the last 10 years, is the world's richest company. And now it's not. Nvidia and Microsoft are the AI leading companies. But I'm not saying anybody's going out of business, but there's going to be 50% of the vendors we know and love today that are not going to survive this era. If you're not in the Fortune 500, like most of the listeners who are not working for really big companies, do you know that 71% of tech companies, including MSPs, fail to make 10 years? So I'm just absolutely obsessed with why. Is it a new buyer? Is it new economics? Things are changing almost on an hourly basis. You got to check, you know, Twitter to see what just happened last hour that could affect our business and things like that. So back in the internet, 1995, you know, a month in the internet was like a year. It's pretty much a week in AI is a year, but we don't have to go back in a time machine. There's no DeLorean needed. What would you do with everything you know and all the experiences, all the customers you know, walking into this next 20-year era? And that's what I would be saying is looking up to that horizon and then also looking at the system. Everything is broken down. Your go-to-market, your sales, your marketing, your operations, your service decks, every part of your business has been done before. There's 341,000 people doing it. So what is the best of the best? How do I use AI? How do I be 10% better than my competition in every single way? It's not theory, it's not opinion. There are actual systems in place that I would be obsessed about learning and hanging around with the top five people in my category, you know, to have some of that rub off like osmosis.

SPEAKER_02 7:37

That's great advice. And I think that there's a lot of alignment around this phase that we're entering. I call it coming out of the cybersecurity era of managed services and into the AI era. And a lot of my clients a year ago who I started talking to about using a service attachment for managed AI to cover the legal risks associated with that. They looked at me like I had three eyeballs. And then, you know, last week I had standing room only at an AI legal discussion that I couldn't get people to go to just a year ago. And I think the biggest difference is now, Jay, people understand that this AI thing is for real, and they're either going to get on the train or get run over by it. And I think that's what you meant when you said a lot of people aren't going to be around through this cycle. Is that correct?

SPEAKER_01 8:37

Yeah, and I mean there's all kinds of things we can read. You know, last week MIT said 95% of AI projects are failing. You know, we've got to question the system underneath that. How are they measuring failure? Because yesterday, Dell just showed 44% growth in AI on selling servers and storage and things. You know, NVIDIA is absolutely killing it this week and earnings. So, you know, a lot of things don't make sense when you read it one way, the you read it the other. But that's the system underneath. Taking that extra minute to ask the important questions. And then for every dollar of NVIDIA or Dell or whatever it is, how can I spin off or multiply that opportunity? But my story on AI, I mean, I was lucky to be a futurist at IBM. I put out my hand very early when I was in the help desk to say, I'll go on TV, I'll go in front of students at colleges, and I'll talk about the future. We had just kind of proven out uh teleportation, like Star Trek style. Uh, we had just, again, at the time, we hired uh 10% of the world's PhDs in the world of every discipline came to work at IBM. So, in the science of inventing hard disk drives and inventing chips and inventing the future, there was a lot to talk about. Not just that, but us shaking hands and exchanging a business card with the electricity in our body. Not just that, but um, we were just about to play the world's grandmaster in chess, Gary Kasparov. Now, no grandmaster had ever lost up until 1996 to a computer. After IBM beat Deep Blue beat Kasparov, no grandmaster since 1996 has ever beat a computer. It was a turning point. It was brute force AI that we could play the game all the way to the back of every move, trillions and trillions of you know permutations. And no human can beat that. The best human can move ahead, look ahead maybe three moves. Most of us mortals can look ahead one or two moves. And so when you could look ahead every move, you can't be beaten. The game of Go got beat because you couldn't, you know, if the next best action was the next best action, no human could could be able to do that. So later on, though, the real generative AI story was in 2011. You'll remember when Watson played Ken Jennings and others in Jeopardy and wipe the floor with that. And you're only getting a couple of uh milliseconds to press the button, whether you know kind of the answer. And then you're given three or four seconds when Alex Trebek asked you at that time to you know answer it in the form of a question. Now, after you read the internet cover to cover in four seconds and you have to generate it back in English language voice in the form of a question, um, that was 14 years ago. So while ChatGPT dazzled people in March of 2023, you know, I was watching it back then and saying, oh my goodness, you know, this is advancing, you know, much faster. And at some point it'll become a consumer trend. And now 700 million daily users of ChatGPT have triggered this consumer uh era, which has triggered our business era, which is now a $7 trillion build-out of AI.

SPEAKER_02 11:48

And and I know just in the peer groups that I'm in and talking to clients, that many small business owners are struggling with exactly how AI fits into their strategy. You know, with Monger, we have committed to an AI strategy with our Monja pilot solution. And you know, we've been pretty focused on you know making sure that it does things very specifically that we know that it can do for our clients and not just out there building something because we think it's cool. In your mind, how do you distinguish between this vibe code weekender that you know has got a good idea versus the businesses with domain expertise that are maybe needing to shift from a SaaS 1.0 like our original cloud-based version of Monger to a SaaS 2.0 like our pilot-based version of Monger?

SPEAKER_01 12:45

Yeah, I mean, the first thing is SaaS itself. Um, there was a memo written by Mark Andriessen 15 years ago that software was going to eat the world, and it did. It created a you know a trillion-dollar cloud industry, and basically every industry, some industries were shut down because of software. You think of music and you think of some of the uh you know travel agencies. You look at Netflix and travel agencies. So, yes, it did have a monumental impact where Microsoft today and others are leading with this AI is gonna eat software. So we went from traditional billing in the 80s and 90s, and then 1999 we kind of started in the SaaS model of subscriptions, and then we went went to consumption with the hyperscalers. Well, all of the models that we're seeing now, hundreds of them, are micro consumption. You know, Copilot is gonna charge you per outcome, Agent Force at Salesforce will charge you per outcome, and there's hundreds of other examples per picture process, per chatbot conversation, whatever it is, it's per micro outcome. And if you can delight the customer, when I was at IBM at a help desk, you know, every call cost $30. Well, you know, something like a password reset cost $30, but a two-hour takedown on a machine took $30. So who's average? But what if you could delight the customer without humans being involved and it only costs you $2? And the customer, you know, whether it was a human or not, just got what they needed and they're on. And what if an MSP can solve a problem, a service ticket, at that same level where you still get that five-star review and you know the customer loves you and renews next month and everything else? So you start to think that's a 95% savings. So now that's how AI eats software. That's one way, is in the model it's going to be sold. So there's no resell of a $1 outcome. There's also no subscription because there's nobody to sell it to. AI is solving very particular human tasks that in a lot of cases replace or augment humans. You're not selling it in that same way. So the whole idea of the way we grew up in you know, somebody would sell it on behalf of somebody else and these co-pilots and other things would be a product skew. You know, we predicted pretty early on that that's not going to be the case. 250,000 software companies are going to include this in their platform. And this is going to make the platform better and it's going to make their users superhuman. But it's also going to, in many cases, take the head off of it. So if it's not human-based, there's no UI, there's no login, it's a set of data, workflows, processes, business logic, and you know, maybe a crub database underneath that, that agents come in through side doors and backdoors. And they're very, very valuable, but again, no human need apply. So how do you sell that subscription when there's nobody to sell it to or uh sign it against? It's not 150 bucks a month per person. So what you end up doing, and MSPs are going to end up doing this, is selling per outcome. And if it's one or two dollars per outcome, you need a new engine to be able to run that. And this consumption base usage base has uh incredible opportunities, growing at 59% right now, both in services and uh and the products. So this is how AI eats software. And now we're into this next 20 years. Like if you know everything you know today and you know this is gonna happen, what would you do? Well, 44% of MSPs are now writing software. It's not to go compete against Microsoft or Monger or anybody else, it's to be level seven of the stack. I have some last mile compliance, regulatory governance, whatever it is, that I can bring to the solution. So I don't just want to be one of the seven partners in the deal. I want to be one of the seven vendors in the deal too, winning product and services. Well, now 44% are developing agents. This is driving them to meet more people. It's not the IT manager or in a small company, the CEO that wants the agent. It's in the case of the CMO, the CRO, the head of HR, the head of operations, the head of finance. We're now spreading out where SaaS spread it out into the lines of business. What if I can have this process work better and this person become superhuman? And what if it could talk to sales? Well, what if it could talk to finance? What if it could talk to HR? We're now getting into a business conversation like we never have. This is where those opportunities start to arrive. And again, we're not selling more PCs, we're not selling more switches or firewalls. We're connecting into the business fabric and the business outcomes and trying to keep our customers alive. You know, so 71% of them don't fail over the next 10 years. And this is more profitable, it's more sticky, and it's obviously a huge opportunity for all of us to do more than just manage services to spread around and do the things that uh the customer values.

SPEAKER_02 17:22

For the typical managed service provider that is maybe a Maja subscriber and is thinking about what to do next. Like I heard Jay describe this future. I'm a believer in what he's saying. What can I do right now to get started down this path of taking advantage of the opportunity that presents itself?

SPEAKER_01 17:45

Yeah, well, the first thing I would do is look at who I'm most closely connected with. You know, in every category of what we do, there are going to be vendor relationships like Monjour, but I might be connected to Microsoft or AWS or Google, I might be connected to Dell and Ovo HP, I might be connected to Cisco, IBM, Oracle, ICB. But as we got and go down our top five, they're changing around their programs to help us build skills, capabilities, and capacity to go and do what the customer wants us to do. It's the number one thing partners are asking for, too, is we've never just been a cash register. But this industry for 40 years has treated us like cash registers because that's the only economic benefit of working with a vendor is making some sort of margin or program. Well, now these programs are getting squished out and saying, I think deals are won or lost at the consulting level. Let us help you become better consultants. Consulting is not a managed service, it's a project. But what leads to the managed service down the road, post-sale, is a consulting gig. You're in there, you've recommended, maybe you've designed and architected the deal. So if I go and look at any of those vendors and push them on the program and say, how do you build my skills, my certifications, my competencies so I can go in and win these profitable, uh sticky, but they're land and expand. How could I win that? How could I win design? How could I win implementation integration? So any managed service provider who's chasing 100% managed services is limiting themselves to only maybe 15 or 20% of the customer services spent. So what we now know is if you could go win consulting design implementation and win some of the software we talked about, it all adds up. It's a dollar per dollar for managed services for this. It adds up to maybe three, four, five dollars of multiplier effect. So if I sell $100,000 of a SaaS product or a hyperscaler product or any product, I'd like to win more than my vendor. So I win $3 of profitable services, they win a dollar a product. They give me partner of the year because I'm absolutely killing it at their customers by doing all these services. And I look at my own business and my stickiness and my profitability. And it's being celebrated to build out these partners that are so much bigger than the vendor. So five years ago, we would have been talking margin, you know, making 10% of the deal or making 20% of the deal. The smartest partners today are saying, I want to win 200 or 300% of the deal. Let's have that conversation on our next QBR, on our next connection hallway chat at the next event. I want to be triple your size. So let's have that conversation.

SPEAKER_02 20:27

That's very interesting. And specifically on the issue of those that are struggling to differentiate themselves in the market to acquire new business. Many of my clients tell me that that's one of their biggest challenges. How could they be using the opportunities with AI and to offer more consulting services to differentiate themselves in the marketplace and maybe start adding more new logos at a lower acquisition cost?

SPEAKER_01 20:58

Yeah, so AI is going to help in the execution, like your ability to customize and personalize and localize emails and social and search and all the things you ought to be doing in marketing. But the first thing is taking a hard look at your customer, who now the majority customer in industry is born after 1982. A millennial age buyer is much different than a um baby boomer or Gen X in that criteria has changed. They're integration first. Service, support, pricing, um, brand reputation, things that might have been important in the past, you know, to us, are not as important. And they want to be digital in the 28 moments before they make a decision. So marketing is paramount to earn some of these digital moments, but 75% of this new buyer doesn't want to talk to a human. If you still think that going golfing or rubbing shoulders at the Chamber of Commerce is going to have the same effect it did five years ago, it won't. So you've got to start thinking about surrounding your customer. The other thing is they they like best of breed. They don't buy one product like you can't get fired for buying IBM back in the 90s. No, or Cisco, it's very different. They'll buy you best of breed, they'll plug you in one of the seven layers if you win that layer. They also do it for partners. The average bigger customer has seven partners they trust. So when you think about going to your next client meeting and you're signing in on the guest book in the lobby, if they let you flip back the pages, the accountant, the lawyer, the digital marketing agency, everybody signing in to see whoever they're seeing, there's an 80% chance they're talking tech. 78 in digital agencies, 81 in accounting. I mean, we know it across the board. Go meet these people. And they don't have the skills we have. But we're all additive to each other. So when we're consulting, you know, we're maybe thinking about governance and compliance and security. The agency is thinking about something else, and the accountant is thinking about something else. This is why we work as a team nowadays. So my network, my ecosystem in my local town, in my local city, whatever my local or whatever my customer set is, if it's not local, my buyer, my industry, whatever I'm focusing on, start to think about the network effects around it and being part of that team and having them call you into deals the same way you would call them into a deal if that's what the customer was looking for. That's a completely different way of selling into the single throat to choke or trusted advisor that we've been taught for 20 years. It's just so different with the new buyer, and now you're majority buyer. So that's what I would tell them. I mean, does AI come into that? Sure. Once you get to the point of actually, you know, building that, reaching out to that, targeting that, and all these things AI can do better. But just the very basics of understanding, again, where the horizon is. Who is my target buyer? How do they operate? How do I join in their journey? Where are the different selling points where I can make 3x of what the vendor makes? And just rethinking my business and the economics of partnering and everything else. So I would take a few moments out just to, you know, take stock of where we are and take stock of maybe what the next three to five years is going to look like. And just, you know, you don't have to be perfect. You just have to be 10% better than your competitors.

SPEAKER_02 24:13

Yeah. Last question for you, Jay. Many of my clients are at this moment where they're sensing that we're on the verge of a major change and asking themselves, is now the right time to take some money off the table and maybe not try to build this Gen 2 offering that I may not be as good at as others. And if I wait too long, maybe this seller's market and managed services cools off. I may fall a little bit behind in the AI race. So should I sell my business today? That's a conversation that I have with a lot of my clients. And age, age plays a factor. You know, if you're north of 55, you're looking at this maybe differently than if you're 40. But what would you say to those MSPs that are struggling with that decision at this time?

SPEAKER_01 25:08

So there's actually, you know, a million personal things that you kind of brought up that come into the conversation. It's highly personal. Like the first 80% of the decision is your position and where you are and the business you have and the value that's third parties are applying to it, and you know, kind of the pain and suffering that you you would kind of go through in terms of you know, maybe giving your baby away, and if it's even worthwhile to do so. But once you got through all of that, my answer is actually yes. So being a born-in-client server type of company, if you started in the 80s, 90s, you know, even early 2000s, um, and you can get a value for your business and you have to do a workout of one or two years. This is what serial entrepreneurs do. You got to go work for a bigger company and you're their VP of sales or whatever you have to do for you know one or two years. But then you get to spin out and you start up as a born in the cloud company, you know, from 20 years ago. So I start to see these companies like um AWS's partner of the year mission get bought by you know for 10x revenue by CDW. I see Google's eight-time partner of the year SADA getting bought for you know 10x the revenue. Born in the cloud is you know, maybe three or four X more valuable than just a peer managed service provider. So now I'm thinking, now I'm not born in the cloud, that's old. What does a born in AI company look like? Half of the new unicorns in the world this year are you are um are AI companies. And they're running, if you compare their cost and their you know, PLs, they're running eight times more efficiently than the other unicorns on the list, which also run very efficiently because they made themselves into unicorns. So these born in AI companies, like when you rethink your company from the ground up, your your go-to-market, your chosen customer, your tech stack, how you're gonna go, all the things you've learned. Being a born in the AI company, if I can get money on the table, build some you know, family wealth, uh, you know, if it does make sense, I can spin out of you know, two years, you work for somebody else, you take your full vacation time. For the first time, you got a 401k and other things that are you know streaming in. And then plan during that time on what kind of company would I build? And that's what I said at the beginning. You know, if you got to go back in time and meet a young Bill Gates or Steve Jobs, you met a young Mark Benioff or Jeff Bezos, what if you could go meet a young Sam Altman and you know, uh NVIDIA and stuff? Well, they are young. This is it. So what if you met them today with everything you know? What kind of company would you build? One third of it would be managed services, 30, maybe 35% of it would be managed services, but 65% of it would be other stuff. And you'd be delighting customers and you'd sell that for 10x. Every dollar of revenue is worth 10 down the road that you build. That's what I would be doing. And that's growing at 59.3% right now. So I would want to get on the front edge of that. Go in partner of the year, my biggest vendor. And by the time I'm sitting with a piece of glass back at my table, I've got four offers on the table.

SPEAKER_02 28:11

Nice. Well, there you have it, folks. Jay McBain from Canalis. Jay, if people want to get in touch with you, what is the best way for them to reach out to make contact with you?

SPEAKER_01 28:22

I'm all over. I go to bed with a zero inbox. So, you know, there's no red circles on my phone. So if you send me a LinkedIn message, a Facebook message, send me a tweet, email, whatever. Uh, whatever digital way, just uh reach out and I will get to you. And if I don't know the answer, I'll maybe be able to connect you to somebody who can.

SPEAKER_02 28:40

Thank you so much, Jay. It's great to have you. Very, very uh grateful to have your insight and your wisdom and your vision. Uh, I really enjoyed our time together and look forward to having you back again in the future.

SPEAKER_00 28:54

All right.

SPEAKER_01 28:55

Thank you so much.

SPEAKER_00 28:56

You've been listening to Talk Tech with Rob Scott, brought to you by Monger. Monger is the first mover in providing contracts as a service solutions specifically designed for IT managed service providers. Their SaaS-enabled legal solution is based on industry-leading templates, customized for each client, and periodically updated to ensure that MSPs always have the latest protections and are legally compliant. For more information, visit monitor.com. That's n lnjur.com.