The Rise of the Vertically-Focused MSP (Part 1 of 2)

As an acquirer of IT businesses and as an IT customer, Worklyn Partners has observed a growing trend over the past few years: for IT service providers to succeed, they need to do much more than simply procure technology for their customers. The winning strategy is a logical shift; to differentiate from the competition of general IT services offered to most SMBs, MSPs are developing expertise around industry-specific software and becoming vertically focused. According to ChannelE2E’s Top 100 Vertical Market MSPs 2023 Edition, which included a worldwide survey of MSPs from November 2022 to April 2023, MSPs consolidated most heavily into two vertical markets: healthcare and financial services. Healthcare continued to be the largest market from the year prior, growing from 18% in 2021 to 31% in 2022. Financial services bumped manufacturing out of second place, growing from 13% in 2021 to 23% in 2022. The legal, retail, and government vertical sectors filled out the rest of the top five of the vertical sectors. Each of these industries has unique requirements and objectives. For example, law firms use special legal case management software, while many manufacturing companies that operate within the defense-industrial supply chain must stay compliant with CMMC (the US Department of Defense’s Cybersecurity Maturity Model Certificate) regulations and manage operational technology on the manufacturing floor.

A small MSP lacking in bandwidth would have to burn the candle at both ends trying to best serve these diverse vertical bases with their completely different technology requirements. Even if an MSP could serve multiple verticals, the end result many not be as efficient as it doesn’t allow the customer to maximize the capability of the MSPs technology stacks that have been standardized for a specific vertical. MSPs that specialize in specific verticals can also train their employees on the technologies and use cases that are most common to that vertical, creating a bundle of product and service that is truly differentiated against more generalist IT service providers. Specialization enhances the value proposition of MSPs, allowing them to become trusted technology advisors and grow a reputation across a vertical space where word of mouth is the best marketing strategy. In ChannelE2E’s survey, the top vertical market MSPs generated revenues that increased 27.5% YoY with $2.87B earned in 2022 compared to $2.25B in 2021. As geographic proximity becomes less important to customers, forward-thinking MSPs are leaning into vertical, compliance, and technology specializations, which is enabling them to become indispensable to their existing customers and expand into new regions to win new customers. It should come as no surprise that, when it comes time for a sale, proven successful vertical specialization can dramatically increase the valuation of an MSP, compelling buyers to pay a premium for these businesses.

Next month, I’ll publish a follow up piece on an even more specific, related topic: the rise of the PE rollup-focused MSP, so be on the lookout for that one in July!