Q2 Partner Market Outlook: Cybersecurity Fuels Growth, AI in Flux, Channel Confidence High

MSPs are confident their sales and profits, along with the health of the IT channel and U.S. economy, will remain strong through the rest of the year, according to the recent Channel Futures’ Partner Market Outlook Q2 survey. On the technology front, respondents said they’re bullish about cybersecurity sales well into the future but wary about offering AI solutions until the technology matures.

About 125 MSPs and MSSPs responded to the Q2 survey, providing insight and outlook on the economic climate, technology trends, sales and profitability, and other factors impacting their businesses, their clients and the overall IT industry. Most of the numbers in the survey track closely with those in last year’s Q2 report, with the most noticeable differences clocking in low single digits. Look for more highlights from the Partner Market Outlook survey later this week at channelfutures.com.

Decision on AI Deployment Still in Flux

The biggest differences between this quarter’s survey and those Channel Futures have conducted in the past are questions about the deployment of AI technologies. About 6% of respondents said in-house use of AI increased more than 50% in Q2, 18% an 11% to 20% increase, 28% a 1% to 10% increase and 22% said they didn’t use the technology. Numbers related to AI-related customer consultations or deployment were a bit lower across the board.

Those numbers reflect similar AI usage among many MSPs, who are exploring the technologies in-house and sharing what they’ve learned with clients before they decide which solutions to roll out. Blake Schwank, president and owner of Colorado Computer Support, based in Colorado Springs, No. 437 on the Channel Futures MSP 501 ranking and No. 17 on the Fast Growth derivative list, has taken that path.

Colorado Computer Support’s Blake Schwank

“It’ll take a while before people really trust it. Clients have always been slow to take on new technology,” said Schwank, who counts education, healthcare and cannabis as verticals among an otherwise horizontal clientele. Most of them aren’t what he’d consider “bleeding-edge companies.” “We’re already throwing enough new stuff at our clients. We don’t have people going, ‘Hey, tell me more about this AI stuff.’”

At leas not for now.  Schwank and other MSPs know that day is coming. About 30% of respondents said AI-generated marketing tools and strategies are among the top go-to-market strategies they’ve made to improve business outcomes. Their clients, many said, will eventually follow. Other important strategies in Q2 include adding sales staff and tapping new customer segments (40% for both), taking advantage of vendor/distributor lead-gen initiatives (37%), adding marketing staff (23%), and entering new verticals (22%).

Cybersecurity Shows No Signs of Slowing

While most MSPs wait for AI to mature before going all in, other tech and solutions areas are chugging along. The majority of respondents (54%) added new vendors to their portfolios (down 10% from Q2 ’22), with 34% adding managed security vendors and 27% adding BDR vendors. Those show no significant change YOY. Cloud storage snuck in the middle of those at 28%, up from 25%.

Business continuity management (BCM) and disaster recovery (DR) drove the biggest sales gains for 26% of respondents, followed closely by managed security (including MDR, XDR and SEIM) at 25%. In last year’s Q2 survey, the security question wasn’t as granular. Cybersecurity (46%) and security (31%) topped that list, with cloud at 34%. Only 14% of respondents said security had “cooled off” in Q2 ’23.

MSPs say the big demand for almost any type of security solution will continue well into the future. Anthony Archambault, director of customer success at Cinch IT, an MSP headquartered in Worcester, Mass., with 13 franchises across the country, is one of them.

During the last few quarters, Archambault has noticed an interesting trend among his 60-plus clients and prospects. In the past, many of them have treated IT as an afterthought. Not anymore. Faced with a growing list of security questions from insurance providers, they’re proactively asking for multi-factor authentication (MFA), endpoint and detection response (EDR), and other security requirements. Some of those protections used to be optional, but an increase in claims following the shift to remote work has most likely changed that, Archambault said.

Cybersecurity Maturity Model Certification (CMMC) and Defense Federal Acquisition Regulation Supplement (DFARS) compliance that’s required for almost any type of government contract work – including healthcare, manufacturing and professional service – is also driving new business, he said.

To ensure across-the-board compliance, Cinch IT, which ranked 394 on the MSP 501 list and No. 36 on the Fast Growth, rolled out its Zero Trust program. It requires levels of oversight and permission for every single application a client uses.

“It’s ‘don’t ever trust, always verify.’ You have so many remote employees now, with some of them using their own devices even when accessing access email,” he said. “You have to wrap your hands around all that and have someone at the higher end be able to create a level of oversight, so at least you know what your employees have or don’t have access to.”

Strong Confidence in IT Industry

With security sales, MRR and cloud migrations up across the board, it’s no surprise that 46% of MSPs said their confidence in the IT industry’s health was good. 24% said it was excellent and 23% said average. Only 7% said it was poor. Those numbers closely track last year’s Q2 sentiment.

About 30% of MSPs said Q2 sales increased 1%-10%; 20% between 11% and 20%, and 17% more than 20%. For full 2023 sales forecasts, 28% predict 1%-10% increases, 26% say 11%-20%, and 18% project more than 20%.

Profit tracked similarly, with 27% seeing increases of 1%-10%, 22% between 11% to 20%, and 14% saying more than 20%. For the full-year forecast, 26% said 1%-10%, 26% reported between 11%-20%, and 17% said more than 20%.

MSP confidence in the business climate is high. But one trend bugs Archambault. For years, MSPs have complained about increased competition, saying many of those new players offer sub-par service. Archambault has seen more saturation new MSPs across the country during the last few quarters, especially on the East Coast. The quality of their services ranges from great to bad, he said, but it’s the negative client experiences that can give the entire industry a bad name. Many of his prospective clients are also reporting a drop in the quality of service.

“During the six years I’ve been with Cinch IT, I’ve had prospective clients tell me time and time again that they’re not switching, they love the company they’re with,” he said. “Now they’re calling us saying things aren’t what they used to be.”

Clients Unsure About Direction of U.S. Economy

Confidence in the U.S. economy is lower than it is in the health of the industry, with 31% saying it’s good, 39% average, only 10% excellent, and 14% saying it’s poor. MSPs across the country often use the world “fearful” when asked how clients are responding to the economy. They’re not sure what it will be like tomorrow. That’s forcing clients, who aren’t necessarily cutting back on their IT spend, to keep a  tight fist around their checkbooks … except for security solutions. They’ve come to realize that’s one area they can’t scrimp on.

MSPs don’t share that same fear. While shifts in the economy can hit some verticals hard, most industries have maintained IT spending levels, realizing the value, cost savings, efficiencies and security that MSPs deliver.

“We’re seeing a lot of fear and anticipation versus reality. The secure thing for our industry is that technology resolves most of the clients’ issues and gives them long-term ROI,” said Brian Glahn, CEO of Verinext in Blue Bell Pa., No. 436 on the MSP 501 and No. 8 on the Fast Growth list. “Security is something that no one’s cutting budget on. If you are scared or concerned about a specific vertical, security is not where they’re cutting, not for any reason. The risks are too big. It’s a big, big growth area.”