March 14, 2022 • 23 mins
Episode 15 we talk to Peter Duflo Managing Partner with Strategic Ventures who provides strategies on how smaller Managed Service Providers (MSPs) can scale up to become highly valued acquisition targets. For the past 14 years Peter has been a leading executive search assignments for MSPs throughout North America. These companies and their investors engage Peter to help them hire key MSP leadership such as CEO’s, Presidents, COOs, CROs, and VPs of Sales and Services.
About Strategic Ventures:
Strategic Ventures is a retained executive search firm that helps IT Managed Services Providers hire executive leadership to achieve rapid revenue growth.
The clients of Strategic Ventures are typically providing IT managed services around public, private, and hybrid cloud services on various platforms, including Amazon AWS, Microsoft Azure, Google, Cisco, VMWare, etc. Their IT services often include IT Planning & Strategy, Comprehensive IT Support, Security & Compliance, Unified Cloud Management, Backup & Disaster Recovery, and IT Systems Integration.
Learn More:
https://strategicventures.com/
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Episode Transcript
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Play the King (00:00):
Today's podcast is sponsored by OMI the company
(00:02):
that makes CRM work.
And my guest is Peter Duflo themanaging partner for Strategic
Ventures for the past 14 years.
Peter has been leading executivesearches for MSPs throughout
north America.
These companies and theirinvestors engage Peter to help
them hire key MSP leadership,such as CEOs, president, COO,
for the C-suite and he's gonnatalk about various strategies
(00:24):
that smaller MSPs can use inorder to scale up and become
highly valued acquisitiontargets.
So Peter, you are in kind of a,a specialized line of work here.
Tell me how you got into gotinto it in the first place.
Peter Duflo (00:41):
Okay, Great.
Hi George.
And thanks for the introduction.
Well, I didn't start my careerin executive search.
Instead, I spent the early partof my career scaling to it
services companies, much likeour audience today.
One was ultimately sold to aprivate equity firm and the
other, I sold to a publiccompany after going through the
second sale, I decided totransition into providing M&A
(01:05):
advisory services because Iwanted to help other founders
like myself enjoy the benefitsof selling their companies to
monetize their hard work.
So after helping the owners of,many companies, uh, sell, I was
retain to by Price Waterhouse,or what we know is PWC these
days to help them acquire an itservices company.
(01:28):
I manage that M&A process andsuccessfully wrapped up the
acquisition for them just aswall street was collapsing in
2008.
Play the King (01:37):
Oh yeah.
That was kind of a, kind of acrazy time to be alive.
Peter Duflo (01:42):
Yeah, it sure was.
And I was in a boardroom at PWCin Manhattan and said to the
head ofM&A Steve, I don't knowwhat I'm gonna do now is M&A
advisory opportunities goingforward.
Look like they're just gonna belimited to selling collapsing it
services companies.
And that doesn't seem like a lotof fun in reply.
Steve said to me, Hey, you seemto know everyone in the it
(02:05):
services sector and PWCs lookingto hire practice leaders to
rebuild the it servicesdivision.
We had previously divested toIBM five years ago.
Why don't we retain your firm tohelp us find, you know, leaders
who rebuild that it servicesdivision?
So that's when I took transitionfrom providing M&A consulting
(02:26):
over to providing executivesearch consulting.
PWC ended up being my firstclient and when those search
assignments wrapped up, Ishifted over to providing
executive search services to thesmaller it services companies
that I helped build ones in the5 million to 250 million revenue
range, George.
Play the King (02:47):
Oh, thanks, Peter.
Um, so how do smaller MSPs scaleup and sort of become, you know,
acquisition targets?
Peter Duflo (02:56):
Yeah.
Well, today in today's economy,there's, there's three
challenges.
Small MSPs need to overcome inorder to, to scale into highly
valued M&A acquisition targets,one, they need to build like
effective sales teams, two, theyneed to hire enough technical
resources and three, they needto quickly expand through
(03:17):
acquisition.
Those are the three mainchallenges today, um, to scale
up to, to bigger MSPs.
Play the King (03:25):
Could you, could you dive into that a little more
and you know, what are, what aresome of the, the challenges, I
guess, that, that smaller MSPshave, um, you know, when they,
when they're trying to build aneffective sales team?
Peter Duflo (03:36):
Yeah.
Well, let me start by sayingfounder who can build MSPs are
truly amazing people becausegetting one of these MSPs off
the ground and establish can bevery difficult.
Uh, however, at the risk ofruffling, some feathers of
perhaps some of our listeners,uh, I need to point out smaller
(03:56):
MSPs often have difficultybuilding sales teams because
many of them are founded byengineers and these engineers
usually know how to hire andlead great technical teams, but
they frequently hire very weaksalespeople.
Now.
Now, why is that?
Well, it it's really simple.
(04:17):
Would you want a VP of sales tohire and lead an MSPs technical
team?
No, of course not.
It might very well end adisaster using the same logic,
the typical engineering foundersof MSPs often tell me they lack
the ability to hire the rightsales people.
One, uh, engineering driven MSPfounder, I spoke to a few ago,
(04:40):
told me that he hired four salesleaders over the past three
years and they all flamed out.
And what did those miss hirescost?
This company?
They cost them a lot.
Play the King (04:53):
So this is a pattern that you're seeing sort
of over and over in your field.
How, how do, how did the peoplewho do it right in sort of
break, break that mold?
How do they, how do they dothat?
Peter Duflo (05:04):
Well, um, I would first suggest the founders of
these companies personallyhandle the sales regardless of
their gifting, uh, until theyfully establish the company, if
it's a new MSP.
Um, they may also think aboutengage in MSP specific marketing
for firm like Robin Robbins, um,who has a technology marketing
(05:27):
toolkit, which does a great jobof helping smaller MSPs build a
predictable flow of sales leadsto drive their new logo sales.
But when the MSP grows to around5 million in revenues, they're
ready to hire, uh, an executiveper, uh, so professional like me
to help them hire a proven VP ofSales.
Usually they should considerfirst hiring a player coach
(05:50):
sales leader from the MSPindustry who can both sell new
deals while building asuccessful sales team.
When the MSPs hired these typesof gifted leaders, they often
start growing at over 25% yearover year, within 12 to 18
months.
Then when the MSP grows past 20to 25 million of revenues, they
(06:13):
often engage me to help themhire a chief revenue officer to
maintain the rapid revenuegrowth.
Play the King (06:20):
So can you take me through the differences
there?
Um, why would someone consider,uh, hiring a VP of sales versus
a, you know, a CRO?
Peter Duflo (06:27):
Well, that's a great question, George, at an
MSP, the VP of sales job isusually focused on just building
a sales team to drive newcustomer sales or logos as
mentioned.
This role is usually added oncean MSPs over 5 million.
On the other hand, the CRO isresponsible for all processes
(06:48):
that generate revenue for anMSP.
This usually includes sales,marketing, customer success,
pricing, customer contracts, asa result, the VP of Sales and
marketing and customer success.
Those leaders usually report upto the CRO.
Again, the MSP usually hires aCRO only after the revenues
(07:11):
exceeded 20 or 25 million.
Play the King (07:14):
And how did, how does the compensation differ for
those two roles?
Peter Duflo (07:17):
Uh, another good question.
Um, well, the compensation withthese two roles of course is
subject to the size maturity andgeographic location of the MSP.
For instance, a hundred millionMSP in Metro, New York pays
executives much more usuallythan a 5 million MSP in Baton
Rouge, Louisiana, for VP ofSales.
(07:40):
I often see my MSP clientsoffering salaries that range
from 1 75 to 225,000 plus anopportunity to earn up to, or,
or more than an equal amount incommission plus an additional
opportunity to earn equity basedon their performance.
(08:00):
And that's a key point as Isuggest to most smaller MSPs.
Uh, I suggest them don'timmediately grant equity to a VP
of sales or rather tie theequity grant to achievement of
sales targets.
And these sales targets can betied to, uh, achieving annual
(08:21):
sales or gross margin, uh,targets yearly over a four to
five year period for CROs chiefrevenue officers.
I see clients offering salariesin the 2 25 to 2 75 range plus
an opportunity to earn ahundred, 250,000 and bonuses.
And, and they're a littledifferent.
(08:42):
Um, they're usually granted acertain amount of equity based
on performance or tenure, andthat equity also has a four to
five year vesting period.
Play the King (08:51):
All right.
So we've talked about howsmaller MSPs need to, you know,
sort of beef up their, theirsales operations in order to
grow, you know, and part of thechallenge there was that
engineers are not necessarilygreat at hiring sales people,
but I presume they are better athiring engineers.
Can you talk to me about, uh,you know, how MSPs go about
(09:12):
hiring, you know, the technicaltechnical roles that they need
to, to succeed?
Peter Duflo (09:16):
Sure.
Um, many MSPs find itchallenging to hire enough
technical staff these days thatis no secret to your listeners.
And here are seven tips that Isee my clients using to address,
you know, the demand strongdemand for technical resources.
The first tip is potentiallyembracing a remote workforce.
(09:38):
Many at small MSPs have beenbuilt at a local office and
their workforces from that samegeographic area.
And the idea of remote employeesseems at odds with the tight
face to face teamwork thatcontributed to making their
company successful.
However, it's Bob Dylan sayingthe time's already changing.
(09:59):
Boy, are they?
For many MSPs, there are nolonger enough local candidates
to meet their increased hiringneeds.
In the current economic climatecompanies willing to embrace
remote workers of all levels,often gain a competitive edge
when they start sourcing theircanidates from other areas of
north America and the, andfurther on from Latin American
(10:22):
countries that have similar timezones, uh, maybe like Costa Rica
and many of my MSP clients alsosource candidates from Europe
and Asia, you know, inparticular India or the
Philippines.
The second tip is to considercross training, uh, your
listeners' existing technicalstaff to fill no new technical
(10:44):
roles in the MSPs existingtechnical employees have a leg
up on the learning curve byalready understanding the MSP
operations, the service modelsbeing used to members and the
customers.
Most importantly, they're aknown commodity that have
already proven that they fitwithin the company's unique
(11:05):
culture and culture fit isalways so important.
These existing employees areoften worth the additional
investment necessary to trainthem on new technologies.
This is a challenge.
These employees usually embracebecause it's a way for them to
enhance their job satisfaction,employment security in their
careers.
(11:25):
Now, the third tip for findingtechnical resources, third tip
is, uh, to make sure yourcandidate referral bonuses that
you offer to your existingemployees are large enough, many
MSPs offer their employees,bonuses for referring
candidates, which they hire.
However many of these companiescould benefit from dramatically
(11:47):
increasing the amount of thesebonuses.
This is because your employeesare often a great source of
candidates.
Uh, why is it that a company, anMSP will offer its employees
just a few hundred or a fewthousand dollars to incent them
to produce candidate referrals,but when no flow of candidates
materialize, they often turnaround and pay a recruiting
(12:09):
firm, a much larger amount tofind these candidates, your
listeners should consideroffering their employees much
larger candidate referralincentives, because these
employees have a personalnetwork of like-minded
technologists, who they know inmany in many cases, working at
other companies and theemployees social networks today
(12:31):
often reach out to a littlelarge universe and potential
candidates.
So that's the third tip.
The fourth tip is improvingcompensation.
Now I can hear some of ourlisteners going, ah, but yeah,
it it's important.
Many of the MSPs which arestruggling to hire resources
(12:53):
have been frankly, slow torecognize the tightness of the
tech labor market and how, uh,recent inflation has eroded
their employees, earning power.
The MSPs that have accepted andadopted to the new compensation
reality are the ones who arefinding it much easier to hire
the technical resources, h irethese resources, u h, MSPs must
(13:18):
offer their candidates acompetitive comp package.
And the most appealing packagesare those that o ff that often
include greater, u h, employercontribution to h ealthcare
premiums and some type of profitsharing or even equity
participation.
I was recently speaking, u h,with two technologists w orking
(13:39):
a smaller it services companies.
A nd i n both cases, theemployers c overed, u h, the
majority of their h ealthcarepremiums.
And they also participated in equity.
I think the, the premium oneemployee was paying for h
ealthcare was 150 dollars amonth.
Um, so the fifth tip forpresenting how your MSP is for
(14:03):
recruiting technical resourcesfor your MSP is presenting how
your company is helping oursociety.
For instance, when my clientserves healthcare industry and
they present how their servicesare contributing to improved
people's health, it's verycommon for millennials and other
recent generations to reallywant to feel they're working at
(14:23):
a job.
That's contributing something tosociety.
A relative of mine in his earlythirties, who's a technologist
recently declined two enticingjob opportunities b ecause he
cound not see how working a tthose companies would be doing
something valuable for society.
He ended up accepting a positionfrom a company delivering
(14:44):
healthcare services to anunderserved portion of the u s
population.
And I'm seeing that more andmore, my clients a re
positioning their companies, asdoing something meaningful for
society.
I have a new client this week tobring in a COO to an MSP.
And, uh, that's very much partof how they position their
(15:05):
company.
The six step is increasing thevelocity of the recruitment.
Unfortunately, too many MSPsfail to understand their Banton
death March interview process,which once worked very well is
now a real handicap in this hotlabor market.
Uh, the companies that aresuccessfully hiring enough tech
(15:27):
employees are often those whohave figured out how to condense
the comprehensive interviewprocess and get a candidate off
to an offer stage in less than10 days.
And I'll repeat that in lessthan 10 days now, to be very
clear, I am not suggestingcutting corners on the candidate
interview process.
(15:47):
Instead I'm saying successfulMSPs are finding to increase the
velocity of the candidateinterview process, as they
recognize that the tortoises areno longer winning out against
the hairs.
Play the King (16:02):
All right, you have given us six of your seven
tips.
I know that everyone is waitingto hear the seventh.
Uh let's let's just imagine that, this MSP or client of yours
has tried all of this stuff.
They've, you know, they've got aremote workforce, their cross
training staff, they're, youknow, they've sent referral
(16:24):
bonuses to the moon.
They're improving compensation,you know, all, all, everything
you just mentioned, what is thelast thing they can try?
One of that is, is moving theneedle for them.
Peter Duflo (16:35):
Okay, sure.
Um, oh, the seventh and finaltip is to engage a recruiting
firm that specializes in fillingtechnical roles for MSPs.
Now, since I only lead executivesearches at the upper CXO and VP
level, I can't help with lowerlevel hiring needs, but if your
(16:56):
listeners contact me, I canpoint them to, uh, recruiting
firms that specialize in fillingboth, uh, lower level tech and
sales roles, sales rep roles forMSPs,
Play the King (17:09):
You know, that, that seemed like a, a, a pretty
good hack if all of you above donot work.
Um, all right.
So, so we talked about thechallenges of hiring a sales
force, a challenge of hiring,uh, your engineering team.
Um, let's talk about the thirdand final challenge that, you
know, smaller MSPs tend to face,um, which is, uh, you know, for
(17:32):
them to, to make M&Aacquisitions, um, of other MSPs,
so they can, you know, gobblethem up and, and grow into a
highly valued acquisition targetthemselves.
Peter Duflo (17:41):
Yes.
Um, well sometimes founders ofMSPs think they have to wait
until they're large enough toraise investment funds on a
favorable valuation basis beforethe ready to make an
acquisition.
George, I think that approachcan be risky because the current
strong demand for MSP serviceswill eventually cool off all
(18:02):
economic cycles do.
And the resulting lower industrygrowth forecast will eventually
depress MSPs valuation.
I believe MSP founders arebetter off leveraging cashflow
or a piece of equity now toacquire small MSPs to quickly
scale up is the right strategy.
(18:23):
Um, they do this with theunderstanding that the valuation
of the remaining equity we'llgrow with the larger size of
their MSP with the addition ofacquisitions.
And this is because multiples,uh, this is because, um, the
(18:43):
multiple of EBITA, the privateequity firms and strategic
strategic buyers use to valueMSPs increases as the MSP grows
in size.
For instance, today, an MSPgenerating 5 million of revenues
may be valued at an EBITA amultiple of five to six while an
(19:05):
MSP generating 10 Million ofrevenues may, uh, be valued at
unable EBITA multiple of sevento eight.
While when MSP generating 20million of revenues may be
valued at an EBITA multiple ofeight to 10, and an MSP
generating 80 or a hundredmillion of revenues may be
(19:25):
valued at an EBITA multiple of14, of course, this valuation
multiple all.
So depends on many things suchas the market focus of the MSP,
the size of their customer base,the terms of their contracts
with customers, their averageMRR per client, their growth
service margin, their servicelevel agreement, times the
(19:47):
amount of churn they're havingin their customer base and any
potential threat litigation.
Finally, most importantly, theexperience of the executive team
and the pipeline of the salesorganization will have also a
significant impact on thevaluation of that MSP.
Play the King (20:07):
Okay.
And so the, the ones that you'veseen that, that are successful,
how are they identifyingtargets?
Peter Duflo (20:13):
Well, George, you put your finger on the most
difficult part, having done itmyself earlier in my career, um,
to find targets for them toacquire.
Um, I suggest they start byasking their contacts at their
technology partners forreferrals.
You know, if they're a Microsoftpartner, I ask the Microsoft
(20:34):
reps say, Hey, listen, I'm wannto grow larger and I want to
make some acquisitions.
Can you refer me to, or suggesta few companies or also
Microsoft partners I shouldreach out to cuz it's in the
best interest of these techpartners like ConnectWise data,
Microsoft, Amazon, and others,to have their MSP customers
(20:56):
growing as fast as possible.
Additionally, our listeners,they can reach out to their
smaller, local MSP competitorsto see if the founders are
interested in merging theirresources.
Uh, also you can contact me andI'll be happy to introduce any
of your listeners to M&Aadvisors who specialize in
(21:17):
helping MSPs find acquisitiontargets.
Play the King (21:21):
All right.
Well, Peter, thank you forsharing all of this today.
We've talked about buildingeffective sales team.
We've talked about hiring, youknow, your, your technical, your
technical teams, um, and youknow, the some of the
difficulties of theopportunities of expanding
through acquisitions.
I wonder if you could just wrapup for today and, and, you know,
mention anything that, that youmight have as a sort of a
(21:43):
parting thought, and maybe alsotell people how they can learn
more about what you do and, and,um, know anything else that they
you'd like them to know.
Peter Duflo (21:49):
Sure, sure.
Well, I appreciate theopportunity to speak on Brad
Banyas popular podcast.
Uh, again, I just specialize inleading high level CX O and VP
level searches for MSPs, but I'mvery well networked in the MSP
world having been here forliteral decades now, and I'm in
(22:09):
a good position to refer yourlisteners to specialized MSP
technical and sales reprecruiting firms.
If you need referrals to firmslike that, I can also refer them
to good M&A target acquisitionfirms.
I know, um, sometimes findingboth recruiting and these and a
firms that just specialize inthe MSP world can be difficult
(22:32):
for them because frankly therearen't that many.
Uh, but so if anyone asksquestions regarding these three
growth strategies that Idiscussed, um, or, or need to be
pointed in the right direction,or if you need a CXO or a VP for
your MSP, you can find mycontact information.
I believe Brad said it would beincluded on the invite to this
(22:56):
podcast.
So Brad, George, and thelisteners, thank you for the
opportunity to meet today andhave a great day, everyone.
Today's podcast is sponsored by OMI the company
(00:02):
that makes CRM work.
And my guest is Peter Duflo themanaging partner for Strategic
Ventures for the past 14 years.
Peter has been leading executivesearches for MSPs throughout
north America.
These companies and theirinvestors engage Peter to help
them hire key MSP leadership,such as CEOs, president, COO,
for the C-suite and he's gonnatalk about various strategies
(00:24):
that smaller MSPs can use inorder to scale up and become
highly valued acquisitiontargets.
So Peter, you are in kind of a,a specialized line of work here.
Tell me how you got into gotinto it in the first place.
Peter Duflo (00:41):
Okay, Great.
Hi George.
And thanks for the introduction.
Well, I didn't start my careerin executive search.
Instead, I spent the early partof my career scaling to it
services companies, much likeour audience today.
One was ultimately sold to aprivate equity firm and the
other, I sold to a publiccompany after going through the
second sale, I decided totransition into providing M&A
(01:05):
advisory services because Iwanted to help other founders
like myself enjoy the benefitsof selling their companies to
monetize their hard work.
So after helping the owners of,many companies, uh, sell, I was
retain to by Price Waterhouse,or what we know is PWC these
days to help them acquire an itservices company.
(01:28):
I manage that M&A process andsuccessfully wrapped up the
acquisition for them just aswall street was collapsing in
2008.
Play the King (01:37):
Oh yeah.
That was kind of a, kind of acrazy time to be alive.
Peter Duflo (01:42):
Yeah, it sure was.
And I was in a boardroom at PWCin Manhattan and said to the
head ofM&A Steve, I don't knowwhat I'm gonna do now is M&A
advisory opportunities goingforward.
Look like they're just gonna belimited to selling collapsing it
services companies.
And that doesn't seem like a lotof fun in reply.
Steve said to me, Hey, you seemto know everyone in the it
(02:05):
services sector and PWCs lookingto hire practice leaders to
rebuild the it servicesdivision.
We had previously divested toIBM five years ago.
Why don't we retain your firm tohelp us find, you know, leaders
who rebuild that it servicesdivision?
So that's when I took transitionfrom providing M&A consulting
(02:26):
over to providing executivesearch consulting.
PWC ended up being my firstclient and when those search
assignments wrapped up, Ishifted over to providing
executive search services to thesmaller it services companies
that I helped build ones in the5 million to 250 million revenue
range, George.
Play the King (02:47):
Oh, thanks, Peter.
Um, so how do smaller MSPs scaleup and sort of become, you know,
acquisition targets?
Peter Duflo (02:56):
Yeah.
Well, today in today's economy,there's, there's three
challenges.
Small MSPs need to overcome inorder to, to scale into highly
valued M&A acquisition targets,one, they need to build like
effective sales teams, two, theyneed to hire enough technical
resources and three, they needto quickly expand through
(03:17):
acquisition.
Those are the three mainchallenges today, um, to scale
up to, to bigger MSPs.
Play the King (03:25):
Could you, could you dive into that a little more
and you know, what are, what aresome of the, the challenges, I
guess, that, that smaller MSPshave, um, you know, when they,
when they're trying to build aneffective sales team?
Peter Duflo (03:36):
Yeah.
Well, let me start by sayingfounder who can build MSPs are
truly amazing people becausegetting one of these MSPs off
the ground and establish can bevery difficult.
Uh, however, at the risk ofruffling, some feathers of
perhaps some of our listeners,uh, I need to point out smaller
(03:56):
MSPs often have difficultybuilding sales teams because
many of them are founded byengineers and these engineers
usually know how to hire andlead great technical teams, but
they frequently hire very weaksalespeople.
Now.
Now, why is that?
Well, it it's really simple.
(04:17):
Would you want a VP of sales tohire and lead an MSPs technical
team?
No, of course not.
It might very well end adisaster using the same logic,
the typical engineering foundersof MSPs often tell me they lack
the ability to hire the rightsales people.
One, uh, engineering driven MSPfounder, I spoke to a few ago,
(04:40):
told me that he hired four salesleaders over the past three
years and they all flamed out.
And what did those miss hirescost?
This company?
They cost them a lot.
Play the King (04:53):
So this is a pattern that you're seeing sort
of over and over in your field.
How, how do, how did the peoplewho do it right in sort of
break, break that mold?
How do they, how do they dothat?
Peter Duflo (05:04):
Well, um, I would first suggest the founders of
these companies personallyhandle the sales regardless of
their gifting, uh, until theyfully establish the company, if
it's a new MSP.
Um, they may also think aboutengage in MSP specific marketing
for firm like Robin Robbins, um,who has a technology marketing
(05:27):
toolkit, which does a great jobof helping smaller MSPs build a
predictable flow of sales leadsto drive their new logo sales.
But when the MSP grows to around5 million in revenues, they're
ready to hire, uh, an executiveper, uh, so professional like me
to help them hire a proven VP ofSales.
Usually they should considerfirst hiring a player coach
(05:50):
sales leader from the MSPindustry who can both sell new
deals while building asuccessful sales team.
When the MSPs hired these typesof gifted leaders, they often
start growing at over 25% yearover year, within 12 to 18
months.
Then when the MSP grows past 20to 25 million of revenues, they
(06:13):
often engage me to help themhire a chief revenue officer to
maintain the rapid revenuegrowth.
Play the King (06:20):
So can you take me through the differences
there?
Um, why would someone consider,uh, hiring a VP of sales versus
a, you know, a CRO?
Peter Duflo (06:27):
Well, that's a great question, George, at an
MSP, the VP of sales job isusually focused on just building
a sales team to drive newcustomer sales or logos as
mentioned.
This role is usually added oncean MSPs over 5 million.
On the other hand, the CRO isresponsible for all processes
(06:48):
that generate revenue for anMSP.
This usually includes sales,marketing, customer success,
pricing, customer contracts, asa result, the VP of Sales and
marketing and customer success.
Those leaders usually report upto the CRO.
Again, the MSP usually hires aCRO only after the revenues
(07:11):
exceeded 20 or 25 million.
Play the King (07:14):
And how did, how does the compensation differ for
those two roles?
Peter Duflo (07:17):
Uh, another good question.
Um, well, the compensation withthese two roles of course is
subject to the size maturity andgeographic location of the MSP.
For instance, a hundred millionMSP in Metro, New York pays
executives much more usuallythan a 5 million MSP in Baton
Rouge, Louisiana, for VP ofSales.
(07:40):
I often see my MSP clientsoffering salaries that range
from 1 75 to 225,000 plus anopportunity to earn up to, or,
or more than an equal amount incommission plus an additional
opportunity to earn equity basedon their performance.
(08:00):
And that's a key point as Isuggest to most smaller MSPs.
Uh, I suggest them don'timmediately grant equity to a VP
of sales or rather tie theequity grant to achievement of
sales targets.
And these sales targets can betied to, uh, achieving annual
(08:21):
sales or gross margin, uh,targets yearly over a four to
five year period for CROs chiefrevenue officers.
I see clients offering salariesin the 2 25 to 2 75 range plus
an opportunity to earn ahundred, 250,000 and bonuses.
And, and they're a littledifferent.
(08:42):
Um, they're usually granted acertain amount of equity based
on performance or tenure, andthat equity also has a four to
five year vesting period.
Play the King (08:51):
All right.
So we've talked about howsmaller MSPs need to, you know,
sort of beef up their, theirsales operations in order to
grow, you know, and part of thechallenge there was that
engineers are not necessarilygreat at hiring sales people,
but I presume they are better athiring engineers.
Can you talk to me about, uh,you know, how MSPs go about
(09:12):
hiring, you know, the technicaltechnical roles that they need
to, to succeed?
Peter Duflo (09:16):
Sure.
Um, many MSPs find itchallenging to hire enough
technical staff these days thatis no secret to your listeners.
And here are seven tips that Isee my clients using to address,
you know, the demand strongdemand for technical resources.
The first tip is potentiallyembracing a remote workforce.
(09:38):
Many at small MSPs have beenbuilt at a local office and
their workforces from that samegeographic area.
And the idea of remote employeesseems at odds with the tight
face to face teamwork thatcontributed to making their
company successful.
However, it's Bob Dylan sayingthe time's already changing.
(09:59):
Boy, are they?
For many MSPs, there are nolonger enough local candidates
to meet their increased hiringneeds.
In the current economic climatecompanies willing to embrace
remote workers of all levels,often gain a competitive edge
when they start sourcing theircanidates from other areas of
north America and the, andfurther on from Latin American
(10:22):
countries that have similar timezones, uh, maybe like Costa Rica
and many of my MSP clients alsosource candidates from Europe
and Asia, you know, inparticular India or the
Philippines.
The second tip is to considercross training, uh, your
listeners' existing technicalstaff to fill no new technical
(10:44):
roles in the MSPs existingtechnical employees have a leg
up on the learning curve byalready understanding the MSP
operations, the service modelsbeing used to members and the
customers.
Most importantly, they're aknown commodity that have
already proven that they fitwithin the company's unique
(11:05):
culture and culture fit isalways so important.
These existing employees areoften worth the additional
investment necessary to trainthem on new technologies.
This is a challenge.
These employees usually embracebecause it's a way for them to
enhance their job satisfaction,employment security in their
careers.
(11:25):
Now, the third tip for findingtechnical resources, third tip
is, uh, to make sure yourcandidate referral bonuses that
you offer to your existingemployees are large enough, many
MSPs offer their employees,bonuses for referring
candidates, which they hire.
However many of these companiescould benefit from dramatically
(11:47):
increasing the amount of thesebonuses.
This is because your employeesare often a great source of
candidates.
Uh, why is it that a company, anMSP will offer its employees
just a few hundred or a fewthousand dollars to incent them
to produce candidate referrals,but when no flow of candidates
materialize, they often turnaround and pay a recruiting
(12:09):
firm, a much larger amount tofind these candidates, your
listeners should consideroffering their employees much
larger candidate referralincentives, because these
employees have a personalnetwork of like-minded
technologists, who they know inmany in many cases, working at
other companies and theemployees social networks today
(12:31):
often reach out to a littlelarge universe and potential
candidates.
So that's the third tip.
The fourth tip is improvingcompensation.
Now I can hear some of ourlisteners going, ah, but yeah,
it it's important.
Many of the MSPs which arestruggling to hire resources
(12:53):
have been frankly, slow torecognize the tightness of the
tech labor market and how, uh,recent inflation has eroded
their employees, earning power.
The MSPs that have accepted andadopted to the new compensation
reality are the ones who arefinding it much easier to hire
the technical resources, h irethese resources, u h, MSPs must
(13:18):
offer their candidates acompetitive comp package.
And the most appealing packagesare those that o ff that often
include greater, u h, employercontribution to h ealthcare
premiums and some type of profitsharing or even equity
participation.
I was recently speaking, u h,with two technologists w orking
(13:39):
a smaller it services companies.
A nd i n both cases, theemployers c overed, u h, the
majority of their h ealthcarepremiums.
And they also participated in equity.
I think the, the premium oneemployee was paying for h
ealthcare was 150 dollars amonth.
Um, so the fifth tip forpresenting how your MSP is for
(14:03):
recruiting technical resourcesfor your MSP is presenting how
your company is helping oursociety.
For instance, when my clientserves healthcare industry and
they present how their servicesare contributing to improved
people's health, it's verycommon for millennials and other
recent generations to reallywant to feel they're working at
(14:23):
a job.
That's contributing something tosociety.
A relative of mine in his earlythirties, who's a technologist
recently declined two enticingjob opportunities b ecause he
cound not see how working a tthose companies would be doing
something valuable for society.
He ended up accepting a positionfrom a company delivering
(14:44):
healthcare services to anunderserved portion of the u s
population.
And I'm seeing that more andmore, my clients a re
positioning their companies, asdoing something meaningful for
society.
I have a new client this week tobring in a COO to an MSP.
And, uh, that's very much partof how they position their
(15:05):
company.
The six step is increasing thevelocity of the recruitment.
Unfortunately, too many MSPsfail to understand their Banton
death March interview process,which once worked very well is
now a real handicap in this hotlabor market.
Uh, the companies that aresuccessfully hiring enough tech
(15:27):
employees are often those whohave figured out how to condense
the comprehensive interviewprocess and get a candidate off
to an offer stage in less than10 days.
And I'll repeat that in lessthan 10 days now, to be very
clear, I am not suggestingcutting corners on the candidate
interview process.
(15:47):
Instead I'm saying successfulMSPs are finding to increase the
velocity of the candidateinterview process, as they
recognize that the tortoises areno longer winning out against
the hairs.
Play the King (16:02):
All right, you have given us six of your seven
tips.
I know that everyone is waitingto hear the seventh.
Uh let's let's just imagine that, this MSP or client of yours
has tried all of this stuff.
They've, you know, they've got aremote workforce, their cross
training staff, they're, youknow, they've sent referral
(16:24):
bonuses to the moon.
They're improving compensation,you know, all, all, everything
you just mentioned, what is thelast thing they can try?
One of that is, is moving theneedle for them.
Peter Duflo (16:35):
Okay, sure.
Um, oh, the seventh and finaltip is to engage a recruiting
firm that specializes in fillingtechnical roles for MSPs.
Now, since I only lead executivesearches at the upper CXO and VP
level, I can't help with lowerlevel hiring needs, but if your
(16:56):
listeners contact me, I canpoint them to, uh, recruiting
firms that specialize in fillingboth, uh, lower level tech and
sales roles, sales rep roles forMSPs,
Play the King (17:09):
You know, that, that seemed like a, a, a pretty
good hack if all of you above donot work.
Um, all right.
So, so we talked about thechallenges of hiring a sales
force, a challenge of hiring,uh, your engineering team.
Um, let's talk about the thirdand final challenge that, you
know, smaller MSPs tend to face,um, which is, uh, you know, for
(17:32):
them to, to make M&Aacquisitions, um, of other MSPs,
so they can, you know, gobblethem up and, and grow into a
highly valued acquisition targetthemselves.
Peter Duflo (17:41):
Yes.
Um, well sometimes founders ofMSPs think they have to wait
until they're large enough toraise investment funds on a
favorable valuation basis beforethe ready to make an
acquisition.
George, I think that approachcan be risky because the current
strong demand for MSP serviceswill eventually cool off all
(18:02):
economic cycles do.
And the resulting lower industrygrowth forecast will eventually
depress MSPs valuation.
I believe MSP founders arebetter off leveraging cashflow
or a piece of equity now toacquire small MSPs to quickly
scale up is the right strategy.
(18:23):
Um, they do this with theunderstanding that the valuation
of the remaining equity we'llgrow with the larger size of
their MSP with the addition ofacquisitions.
And this is because multiples,uh, this is because, um, the
(18:43):
multiple of EBITA, the privateequity firms and strategic
strategic buyers use to valueMSPs increases as the MSP grows
in size.
For instance, today, an MSPgenerating 5 million of revenues
may be valued at an EBITA amultiple of five to six while an
(19:05):
MSP generating 10 Million ofrevenues may, uh, be valued at
unable EBITA multiple of sevento eight.
While when MSP generating 20million of revenues may be
valued at an EBITA multiple ofeight to 10, and an MSP
generating 80 or a hundredmillion of revenues may be
(19:25):
valued at an EBITA multiple of14, of course, this valuation
multiple all.
So depends on many things suchas the market focus of the MSP,
the size of their customer base,the terms of their contracts
with customers, their averageMRR per client, their growth
service margin, their servicelevel agreement, times the
(19:47):
amount of churn they're havingin their customer base and any
potential threat litigation.
Finally, most importantly, theexperience of the executive team
and the pipeline of the salesorganization will have also a
significant impact on thevaluation of that MSP.
Play the King (20:07):
Okay.
And so the, the ones that you'veseen that, that are successful,
how are they identifyingtargets?
Peter Duflo (20:13):
Well, George, you put your finger on the most
difficult part, having done itmyself earlier in my career, um,
to find targets for them toacquire.
Um, I suggest they start byasking their contacts at their
technology partners forreferrals.
You know, if they're a Microsoftpartner, I ask the Microsoft
(20:34):
reps say, Hey, listen, I'm wannto grow larger and I want to
make some acquisitions.
Can you refer me to, or suggesta few companies or also
Microsoft partners I shouldreach out to cuz it's in the
best interest of these techpartners like ConnectWise data,
Microsoft, Amazon, and others,to have their MSP customers
(20:56):
growing as fast as possible.
Additionally, our listeners,they can reach out to their
smaller, local MSP competitorsto see if the founders are
interested in merging theirresources.
Uh, also you can contact me andI'll be happy to introduce any
of your listeners to M&Aadvisors who specialize in
(21:17):
helping MSPs find acquisitiontargets.
Play the King (21:21):
All right.
Well, Peter, thank you forsharing all of this today.
We've talked about buildingeffective sales team.
We've talked about hiring, youknow, your, your technical, your
technical teams, um, and youknow, the some of the
difficulties of theopportunities of expanding
through acquisitions.
I wonder if you could just wrapup for today and, and, you know,
mention anything that, that youmight have as a sort of a
(21:43):
parting thought, and maybe alsotell people how they can learn
more about what you do and, and,um, know anything else that they
you'd like them to know.
Peter Duflo (21:49):
Sure, sure.
Well, I appreciate theopportunity to speak on Brad
Banyas popular podcast.
Uh, again, I just specialize inleading high level CX O and VP
level searches for MSPs, but I'mvery well networked in the MSP
world having been here forliteral decades now, and I'm in
(22:09):
a good position to refer yourlisteners to specialized MSP
technical and sales reprecruiting firms.
If you need referrals to firmslike that, I can also refer them
to good M&A target acquisitionfirms.
I know, um, sometimes findingboth recruiting and these and a
firms that just specialize inthe MSP world can be difficult
(22:32):
for them because frankly therearen't that many.
Uh, but so if anyone asksquestions regarding these three
growth strategies that Idiscussed, um, or, or need to be
pointed in the right direction,or if you need a CXO or a VP for
your MSP, you can find mycontact information.
I believe Brad said it would beincluded on the invite to this
(22:56):
podcast.
So Brad, George, and thelisteners, thank you for the
opportunity to meet today andhave a great day, everyone.
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