Should an MSP specialize in one industry?

Short answer

Yes, for most MSPs. A vertical makes an MSP easy to refer, gives it knowledge competitors cannot fake, and turns each client into a reference for the next one in the same industry. Bright Bear Technology Solutions, which Nathan Phinney co-founded in January 2010, started out working for anyone with a checkbook and grew by becoming known as the IT company that works with nonprofits and then a firm escrow companies sought out. Specializing also means saying no, and Phinney is candid that he was better at picking the industries than at letting go of clients who no longer fit. Chapter 7 of CTRL ALT SURVIVE, Focus, covers both halves.

What Phinney learned doing it

In its first year, Bright Bear took residential clients, built websites, and did some graphic design. Phinney took home about $17,000 that year. Later, Bright Bear began referring residential work to a trusted provider.

The argument for focus came from a business referral group. Phinney watched a handyman describe himself as able to do everything, from hanging a television to rebuilding a transmission to catering a party, and noticed that he got almost no referrals. Nobody refers “miscellaneous.” The worst thing a member could ask for was “businesses in the area,” which brings nobody to mind; asking for dental practices this week brings a name to everyone in the room. In Chapter 7, Focus, Phinney gives the rule he used to teach other members: “specific is terrific.”

Bright Bear’s first vertical arrived by accident. The finance director of the local chapter of a nationally known nonprofit vetted the firm thoroughly, down to inspecting its office, and then set up a meeting with his CEO. The nonprofit’s IT provider had quoted a large sum to replace an on-premises email server. Phinney arrived with two answers. Eligible California nonprofits could recover up to half of their phone and internet bills through the California Teleconnect Fund, a state program funded by a small surcharge they were already paying. And the email server did not need replacing; the organization could qualify for Google’s free email for nonprofits and migrate to it. Both descriptions are as of the early 2010s; check current program rules. That account became significant, and because the organization was admired by the other nonprofits in the area, it answered the question every prospect asks: who else do you work with?

The second vertical followed the same pattern. An escrow company found Bright Bear through Google and signed on, and Bright Bear began helping it with SOC 1 and SOC 2 compliance. When that company’s CFO moved to another escrow firm that also needed IT help, and because escrow officers change firms often, others followed. Phinney ended up speaking at escrow industry conferences about IT security, and escrow companies started seeking Bright Bear out. When Bright Bear was sold in 2020, CRN described it as focused on financial services, especially escrow firms. In the book Phinney credits that standing to specificity: “I was becoming perceived as an expert, because I had learned to be specific.”

How the nonprofit playbook worked

Phinney describes the nonprofit approach as a repeatable playbook:

• Open with savings. The Teleconnect Fund and free nonprofit email were usually enough to earn a second meeting.
• Read the 990. A nonprofit’s Form 990 is public, often posted on its own website, and frequently shows millions in revenue. “Nonprofit” does not mean “no money.”
• Sell twice. First to the staff, then helping the staff sell the decision to the board.
• Outlast the cycle. A regular business would sometimes sign on the spot. A nonprofit could take up to six months, by which point many competitors had given up.
• Ask for referrals. The book notes that nonprofit boards are full of donors who run businesses, and the playbook was to ask for referrals once Bright Bear was the IT provider.
• Learn the language. Nonprofits have their own software, their own vocabulary, and their own problems. Phinney reached the point of giving useful advice to grant writers, which no generalist IT firm in town could offer.

The vertical paid off inside the company too. Technicians handling a quick spreadsheet question for someone running youth programs came back with a lift in their step, and the staff started living a little through the clients’ successes. Bright Bear became known as the IT company that works with nonprofits, and the inquiries started coming from other states.

The part Phinney got wrong

Choosing verticals is half of focus. The other half is deciding whom not to serve, and Phinney writes that he never fired a client. Early on, the company was too lean to lose anyone. Later he treated loyalty to early clients as a virtue. His staff thought it was crazy, and he concedes they were probably right.

After the sale, Phinney built a dashboard of his former clients’ revenue and found the 80/20 rule literally true: about a fifth of the clients produced about four-fifths of the revenue. He could have referred away most of the calls, the noise, and the interruptions. He is careful not to tell anyone to fire a batch of clients this afternoon. His point is that making small clients wait for scarce attention is not kind to them or to the MSP, that other providers serve entry-level accounts well and need the work, and that letting some agreements expire is a legitimate option. In the book he calls it a hard lesson.

In the book

Chapter 7, Focus, covers Bright Bear’s move from taking any work to building two verticals: the referral-group lesson on being specific, the nonprofit meeting that started it, the escrow referrals, a wire-fraud scare that tested the escrow work, and the 80/20 dashboard Phinney built after the sale. Chapter 3, California, tells how a reluctant referral through a networking group became Bright Bear’s first six-figure deal.

Sources

• CTRL ALT SURVIVE, Chapter 7, Focus, and Chapter 3, California
• CRN, “MSP Merger: Coronavirus No Obstacle To Datapath’s Bright Bear Buy” (Joseph F. Kovar, July 13, 2020): original at CRN and this site’s page
• About Nathan Phinney and his professional profile in markdown