Hot Data: More Profit Through AI

What is Hyper Automation?

Okay. So we're going to talk about hyper automation. We're going to go beyond AI. So first of all, what is hyper automation? If you attended IT Nation Connect in November, you heard extensive discussion about hyper automation from ConnectWise executives. And what it is is the umbrella term. Everybody talks about AI. But it's our experience that it's not just AI that's going to drive efficiency gains. It's robotic process automation. It's other ways to build automated efficiency into your business. So what we talk about is hyper automation. And hyper automation is the umbrella term for all things related to automation and AI.

Profitability Impact

So what can it do for profitability? Well, we decided to dive into that. And last summer and fall, we spent several months analyzing current partner profitability. And we looked at a really detailed model about what we thought this could do for the industry for profitability. And at IT Nation Connect, Jason Magee, CEO of ConnectWise, talked about improving profitability in 18 to 24 months by 50% or more. Where he pulled that from was from our model. So I'm going to show you our model. We haven't shown the summary version of this very often. It's about how you can get into this and talk to you about not only how you can do it well, but you noticed in the title of my session, it's also how you can mess this up. I had a different title. My marketing team firmly rejected that title. So we messed it up.

Average Size Best-in-Class MSP

So what can it do for your profitability? Well, first, we're going to look at an average size best-in-class profitability MSP. Today, they're getting 18% profitability. Q4, the cutoff was actually 17.3%. But we'll go with the 18% for the sake of math. 

So first wave, 18 to 24 months, where do we see the impact? Well, we see it in three areas of your business. The biggest wave certainly will be in your help desk operation. And so under this model, we're assuming no growth. We're doing an apples to apples, looking at the two models and keeping pricing the same. We're going to improve your managed service payroll cost of goods sold by 20%. And we think that's probably conservative, but we'll go with that 4% increase in your tools cost. Why? Because companies like Connectwise and others are spending millions of dollars to build these tools. They're not going to give them away to you. You're going to subscribe.

 So we're going to build in an increase in your tools cost. We're going to build in a reduction of 10% into your project delivery. How? Your project management becomes more efficient. Your project delivery becomes more efficient. And then we're going to build in a 5% savings in your sales, marketing, and general administrative expenses. So everybody talks about the help desk, but it's not just a help desk. It's broader than that within your business. If you build those savings in, 23% is the new profitability, 18 up to 23%.

 Second Wave Impact

Second wave, next 18 to 24 months, we're going to now do a price increase, and we're going to look at this again, assuming no growth, but assuming a price increase of 4%, we're going to assume an additional 10% reduction in managed service payroll cogs, another increase in your tools cost, and another reduction in your project and SG&A, okay? So if you do those things, you're now at 28% profitability. Therefore, 50% improvement in profitability within a couple of years, okay? These are the numbers that we spoke about, that Jason spoke about at IT Nation.

Growth Scenario

So we'll look first at the growth scenario. So the argument is, if I cut my pricing 30%, I'm going to grow that much faster. First of all, it's not accurate. Our data says that best in class are charging more and they're growing faster. But I'll play along for the sake of the model, okay? So first wave, instead of going up to 172, I go down to 115. But I'm going to assume 12% growth for the 172 folks. I'm going to assume 24% growth for those who cut their prices. I'm going to give them the benefit of the doubt. They're going to grow twice as fast as the industry.

 What happens? Do they make up for it in growth? No, they don't. They're still at 12% making 900,000 instead of the 2.4 million they could be making, okay? So if we go and say, instead of cutting prices 30%, let's give another benefit of the doubt and you cut prices 20%. Do you make up for it? No, you don't. You make up for it a little bit, but you're still not making the money you should be making.

 Okay, so key takeaways as I wrap up. There's six of them for you. 

Number one is today's the day. If you're not starting on your strategy on hyper automation, you need to be. 

Number two, don't just focus on your help desk. This should be impacting all areas of your business, okay? Make sure you're looking throughout your business. 

Number three, I would add a dedicated FTE in my MSP today who would be called an AI advocate or an automation coordinator, an RPA coordinator. Somebody who's going to map this stuff out and train the rest of my team on how to do things today going forward, okay? Don't add that as a new FTE. Keep taking existing level two or three and move that person over. 

 Partner with companies who today have this in place in a roadmap for 2024. Okay, this is not something that if your vendors say we're working on it, we'll have it next year or later this year, it's too late. Your partner should have this today. We talked about pricing, don't give away managed service efficiency gains with managed service pricing reductions and update your project model so that you maintain those gains as you become more efficient. 

Once you figure this out internally, build this into your managed services stack. This should be part of your offering over the next two to three years, helping your customers realize these kinds of gains as well. Okay, so once again, if you haven't got our comp data, comp data is available today. 

Key Takeaways from the Session

Key Takeaways from the Session

Profitability Model Analysis

Here’s a step-by-step breakdown to help understand the impact of hyper automation on profitability:

Initial Profitability

Current State: Best-in-class MSPs achieve 18% profitability.

Projection: Using hyper automation, this can increase significantly in two phases.

First Wave (18-24 months):

Help Desk Operations:

Improvement: 20% reduction in managed service payroll costs.

Tools Cost Increase: 4% increase due to investment in new automation tools.

Project Delivery:

Efficiency: 10% cost reduction in project management.

Sales, Marketing, and Administration:

Savings: 5% reduction in these expenses.

Outcome: Profitability increases from 18% to 23%.

Second Wave (Next 18-24 months)

Price Increase: 4% increase in service prices.

Further Cost Reductions:

Managed Services Payroll: Another 10% reduction.

Project and SG&A Costs: Additional reductions.

Outcome: Profitability further increases to 28%.

 Key Strategies for Successful Implementation

Immediate Action

Start Now: Begin developing a hyper automation strategy immediately.

 Comprehensive Integration

Beyond Help Desk: Ensure all business areas, not just the help desk, benefit from automation.

Dedicated Roles

AI Advocate: Assign a dedicated FTE, such as an AI advocate or RPA coordinator, to manage and implement automation strategies.

Vendor Partnerships:

Current Capabilities: Partner with vendors who have established automation solutions and a clear roadmap.

Pricing Strategy

Maintain Gains: Avoid giving away efficiency gains through price reductions.

Customer Integration

Extend Offerings: Incorporate these efficiencies into your managed services offerings to benefit your customers as well