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.
Potential Pitfalls
Okay, so great, awesome. I've been hearing about AI all day today. I'm seeing all this stuff. How could this possibly go wrong? Well, let me show you, okay? It's going to take about eight seconds for a bottom quartile MSP out there to say, we just saved all this gain and efficiency, great. We can cut our prices. We're going to be that much more competitive in the marketplace, so we modeled that out. 30% gain in service efficiency, we're going to do a 30% reduction in pricing of managed services, okay? Project services is a more hidden area. We have a 20% reduction in project services, why? Because all of you in the room who are doing pricing on projects are using one or two models, time and material or fixed price. Under either scenario, you're basing that on your input cost. And if your input cost just went down by 20%, so did your quote to your customer.
So while you invested in all these efficiency gains and you picked up all of this automation in your project delivery, it didn't translate to an additional dollar or bottom line because you passed along those savings to your customers. Okay, so what happens in this scenario? This MSP goes from 18% profit when they started this whole journey down to 12%, okay? Actual dollars, 1.3 million down to 728. Okay, so I know what you're thinking. It's that nobody's going to be dumb enough to pass along efficiency gains on a one for one percentage basis. First of all, I would tell you in Q4, 27% of the industry lost money, okay? Trust me, I talked to these providers all day long. There will be plenty of them that will be dumb enough to do exactly that. But we'll set that aside for a minute and we'll say, I'll go with that and say, okay, true. Nobody's going to go one for one on those efficiency cuts. Second of all, there's going to be growth built in, right?