‘Labor is your single largest cost. Make sure you’re paying appropriately, structuring your team effectively and taking advantage of automation. And don’t wait, if you delay a year or two, you’ll be behind,’ says Peter Kujawa, EVP and general manager of service leadership and IT Nation, ConnectWise.
For MSPs, profitability doesn’t start with tools or technology, but rather with its people. And according to new data from ConnectWise’s service leadership division, how MSPs pay, structure and scale their workforce is increasingly the difference between top-quartile performers and those falling behind.
The Service Leadership Index 2026 Annual IT Solution Provider Compensation Report, released last week during Tampa, Fla.-based vendor ConnectWise’s IT Nation Connect Europe conference in London, draws a direct line between compensation strategy and financial outcomes, offering MSPs a clearer look at staying profitable in a high-cost, talent-constrained market.
“We were pleased to see continued improvement in wage inflation. That’s been one of the biggest pressures on MSP profitability for years,” said Peter Kujawa, EVP and GM of service leadership and IT Nation, ConnectWise, adding that wage inflation peaked in 2022. “Even at its best, wage inflation for technical roles runs about twice the rate of CPI (consumer price index). MSPs still haven’t been able to outrun that over the long term.”
[Related: ConnectWise’s Peter Kujawa: ‘We’re In A Golden Age Of Running An MSP’]
That imbalance is what the report calls the “service multiple of wages,” a metric comparing service revenue to labor costs. And despite advances in tools and pricing, that ratio has declined since 2013.
According to the report, MSPs should be generating about $2.50 in service revenue for every dollar spent on service labor, with best-in-class MSPs reaching closer to $2.80. Yet that ratio has declined, according to Kujawa.
“This ratio should be going up,” Kujawa told CRN. “Tools are better, automation is better, pricing has improved…but MSPs still aren’t getting ahead of labor costs.”
At the same time, top-quartile MSPs average about 23 percent profitability, while the broader industry is at 11 percent.
That’s where automation and digital workers come into play. Kujawa said if MSPs embrace AI and automation, they may get ahead of wage pressure and improve both gross margin and profitability.
About 70 percent of service desk tickets are Level 1 issues, according to the report. If MSPs can automate even half of those, they could eliminate about 35 percent of total ticket volume.
Entry-level roles are also expected to evolve rather than disappear, with digital workers handling repetitive tasks so technicians can focus on more complex work.
The report also highlighted inefficiencies that continue to impact profitability, particularly in service desk and project team staffing. Kujawa said the simplest way for MSPs to diagnose these issues is through benchmarking.
“You have to understand where you are today,” he said. “If you don’t know how you compare to the industry, you can’t measure improvement.”
KPIs (key performance indicators) such as managed service gross margin, service revenue per wage dollar and endpoints per engineer are becoming more important as MSPs evaluate both staffing models and automation investments, he added.
New this year, the report broke out businesses by ownership type, separating privately-held MSPs and private-equity-backed ones. One finding was that private equity-backed MSPs tend to rely less on outsourcing and place a greater emphasis on incentive-based compensation.
But despite the complexity of workforce strategy, Kujawa said many MSPs still overlook the issue of pricing.
“The biggest problem we see with low margins is underpricing,” he said. “Most MSPs don’t fully understand their true cost of labor.”
That includes not just frontline technicians, but also service managers, project managers and other roles tied to delivery. Without a clear picture of those costs, MSPs risk locking in unprofitable contracts, especially with long-term customers, he said.
“A level 3 resource can cost more than 50 percent more than a level 1,” he said. “If you’re too heavy at the top, you’re going to have to charge more, and that makes it harder to compete.”
To see a measured shift in profitability, he said MSPs should focus on labor, and act quickly on automation
“Labor is your single largest cost,” he added. “Make sure you’re paying appropriately, structuring your team effectively and taking advantage of automation. And don’t wait, if you delay a year or two, you’ll be behind.”
