The Service Leadership annual compensation report landed this week with a finding that most coverage treated as a warning. I want to suggest it’s actually a description.
Here’s the data: PE-backed MSPs lost more than 10% of their workforce in 2025 at a rate of 54.6%. The most profitable MSPs — top quartile — lost more than 10% of their workforce at 38.6%, compared to 22.8% for the bottom half. And the most profitable firms pay their employees less than their peers while experiencing more churn.
This is getting read as a cautionary tale about PE destroying the soul of the managed services business. That’s the wrong frame. This is what optimization looks like when PE owns your MSP. The churn isn’t a bug they’re trying to fix. It’s a byproduct of a machine running exactly as designed.
The Profitability Math
Let’s start with the finding that breaks most people’s mental model: the firms that make the most money pay their employees the least and lose the most people.
Service Leadership has been consistent on this for years. “There is a widespread belief that more profitable IT Solution Providers pay their employees more. The reality is we consistently find the opposite to be true.”
How is this possible? A few mechanisms, running simultaneously.
First, compensation compression. PE operators inherit inflated labor costs from founder-run companies where relationships drove pay, not market data. The optimization play is to restructure comp — compress salaries toward market floor, load variable compensation onto targets that many employees won’t hit. Some people leave. The ones who stay either didn’t have options elsewhere or actually liked the variable game.
Second, skill stratification. The top quartile MSP doesn’t need 100% of its workforce to be senior engineers. It needs a small number of senior people, a larger number of mid-tier people trained to deliver specific packaged services, and a system that onboards replacements fast. Service Leadership noted that PE firms “have organized their operations to accelerate hiring, training, and onboarding processes to address these trends.” That’s not damage control. That’s a production line.
Third — and this is the part that gets uncomfortable — AI. More IT solution providers decreased headcount in 2025 (43.5%) than increased it (36.4%). In 2024, the split went the other direction: 51.2% grew headcount, 35.7% cut. The report flags that firms may be using AI to backfill open roles rather than rehiring.
The churn creates the opening to not refill seats. You don’t fire anyone. You just don’t backfill the person who left. The question of what AI in PSA and RMM is actually real directly affects how aggressively firms can lean into this strategy.
The Founder-Run Counterpoint
The other finding worth sitting with: firms with $1-2M in annual revenue gave top-level salary increases to more than 30% of their employees on average. Managers saw the most wage growth across the industry.
Small firms are paying to keep people. They’re making a different bet — that relationships and retention are the competitive moat.
That bet works at small scale. Your team knows your clients. Your clients trust your team. Continuity is the product.
The PE playbook deliberately moves away from that model. When your value proposition is defined by process, tooling, and SLA adherence rather than relationship continuity, you can absorb more churn without client defection. Whether you can sustain that at scale is a different question.
The data suggests the top-quartile PE-backed firms think they can. Their profitability numbers back them up.
What This Means for the Industry
The MSP market is splitting into two things that will look increasingly different from each other. This bifurcation is showing up in the Omdia data too.
One model is the PE-optimized MSP: lower wages, high churn, process-driven, AI-augmented, targeting EBITDA above 20%, building toward a sale or a roll-up. The employees are components. Clients are recurring revenue streams. The relationship is a contract, not a partnership.
The other model is the founder-run or independently-owned MSP: higher wages, lower churn, relationship-anchored, slower margin but stickier clients. The employee is the product. When that person leaves, there’s risk.
Neither is wrong. But they’re not competing with the same tool. The PE-backed firm wins on margin and scale. The PE rollup machine is built for exactly that. The independent wins on the intangibles — the people who actually know your environment, answer the phone when you call, and remember that you switched to Office 365 because your CFO had a bad experience with Google Workspace.
The comp report points at a structural divergence that’s accelerating. Salary moderation, AI substitution, high churn — these aren’t headwinds for PE-backed MSPs. They’re the strategy.
What To Do With This
If you’re running an independent MSP and competing for talent against PE-backed firms — the kind of built-different MSP CEO who leads with culture over spreadsheets — know that you can win this fight. Not on base salary, necessarily — but on the things that PE can’t optimize. Stability. Culture. The fact that your lead engineer won’t be replaced by an AI agent next quarter. Make that real and visible.
If you’re a channel partner at a PE-backed MSP, the comp report is telling you something directly. The math of your employer is not aligned with your own interests. That’s not a moral judgment. It’s arithmetic. The MSP profitability paradox is built on exactly this tension.
If you’re evaluating an MSP to acquire: understand what the churn number is and why it exists. A firm with 50% annual employee turnover has a machine, not a team. That machine may be worth buying. Or it may be one contract loss away from cascading client defections. Know which one you’re looking at.
The Service Leadership data describes an industry reorganizing around a new economic logic. Ignore it at your own risk.