AI demand soars as traditional deal sizes shrink, Kaseya reports

The managed services market has officially entered a new era. While overall demand remains buoyant, the days of easily landing massive, monolithic IT contracts on the back of basic helpdesk promises are over. According to Kaseya's newly released 2026 State of the MSP Report, artificial intelligence, an escalating talent crisis, and shrinking initial deal sizes are fundamentally rewriting the channel's playbook.

Based on a global survey of more than 1,000 managed service providers (MSPs), the report paints a picture of an industry at a crossroads. Growth is still highly achievable, but it is becoming noticeably harder to earn. A staggering 71% of respondents cited acquiring new customers as their number-one business challenge, dwarfing all other operational concerns.

This friction is driven by a fiercely competitive landscape where 33% of new clients are "switchers" moving away from an incumbent MSP, rather than net-new outsourcers.

High demand, low monetization

The data reveals that AI has firmly transitioned from an industry buzzword into a defining market variable. Nearly half of MSPs (48%) ranked AI and automation as the top client need for 2026, beating out historical heavyweights like cybersecurity and backup.

However, a significant monetization gap exists. Despite the soaring customer interest, only 13% of MSPs report that AI is currently a meaningful revenue source.

Greg Jones, Kaseya's Senior Vice President of MSP Success, recently told ChannelPro at His company's Connect Local event in London Docklands that clients are actively leaving providers who fail to adapt. "The number one reason that an SMB will leave an MSP is not because of poor service. It's because they don't offer the skill set, the tools, or the technology that they need to move that business forward," Jones explained, noting that businesses are demanding guidance on AI integration and data compliance.

To bridge the gap, MSPs are turning AI inward. The report notes that 53% of providers are utilizing AI to automate tedious, high-volume tasks like ticketing, patching, and monitoring. As MSPs face tightening margins, this internal automation is proving critical for survival.

The death of the monolithic deal?

Perhaps the most striking finding in the 2026 report is the rapid compression of average deal sizes. The share of MSPs reporting typical customer spend above $25,000 per year plummeted to 41%, down sharply from 75% the previous year. Furthermore, 24% of MSPs noted that their clients are actively reducing IT budgets.

However, Kaseya executives argue this isn't necessarily a sign of a shrinking market, but rather an evolution in how services are consumed.

Dermot McCann, Kaseya's EVP and GM for EMEA and APAC, explained to ChannelPro that this shift reflects a move toward highly specialized, bite-sized engagements like co-managed IT or compliance-as-a-service. "The niches are how they're trying to stay competitive," McCann said. Because customers simply expect day-to-day IT to work – and don't call to thank their MSP for not getting hacked – providers are having to creatively unbundle their stacks to demonstrate continuous, targeted value.

The report corroborates this urgency: 19% of MSPs now report difficulty quickly demonstrating value to clients, nearly double the rate (10%) from the previous year.

The talent crunch replaces tool sprawl

Compounding the pressure of acquiring customers is the increasing difficulty of fulfilling the work. The report highlights that the primary operational bottleneck for MSPs has shifted from software tool limitations to human capital constraints.

The number of MSPs reporting difficulty finding and hiring skilled technicians jumped from 9% to 16% year-over-year. With talent scarce and expensive, MSPs are being forced to either lean heavily into AI automation to scale their current workforce or lean on outsourced NOC and SOC services to fill the void.

Cybersecurity and BCDR remain the anchors

Despite the disruption caused by AI and shrinking contract sizes, the foundational pillars of the MSP model remain robust. Cybersecurity and Business Continuity/Disaster Recovery (BCDR) continue to be the most reliable engines for growth. A massive 71% of MSPs reported year-over-year revenue growth in their cybersecurity practices, while 50% saw corresponding growth in BCDR.

Ultimately, the providers who dominate the next cycle will be those who can marry these reliable security anchors with modern operational efficiency.

"The MSP market is maturing, and rising competition is forcing providers to rethink how they grow," said Dan Tomaszewski, Executive Vice President of Channel at Kaseya. "The strongest MSPs are tightening their operations, prioritizing efficiency and using data to clearly prove their value to customers."