Managing Shadow IT in the Age of AI: Strategies for Modern MSPs

How AI Disrupts the Per-Seat Model for MSPs

A central development addressed is the projected effect of AI on the per-seat pricing model that underpins many MSP service offerings. According to the discussion, AI could reduce white-collar jobs by 30-50%, leading to fewer user seats for MSPs to support and bill for. This scenario presents significant revenue risk for MSPs reliant on per-user contracts. The discussion also references Microsoft’s introduction of Agent365, a product designed to license AI agents within enterprise environments, indicating a move by vendors to adapt licensing models while protecting enterprise relationships. Participants noted that if customer organizations reduce headcount, MSPs will face declining license and seat-based revenue. Discussion suggested alternative business models, such as switching to per-device pricing or developing new service streams, with an emphasis on advisory services and security. The timeframe for these changes was cited as two to three years, which was described as an operationally compressed window for MSPs. Additionally, security, data management, compliance, and governance were highlighted as ongoing service areas with continued relevance as the MSP landscape evolves. Additional topics included increased local competition among MSPs, as evidenced by survey data reporting 100% of respondents encountering significant competition in 2024. Differentiation and targeted marketing were underscored as necessary responses to commoditization pressures. Emotional considerations related to M&A were also discussed, with particular focus on the personal and organizational impact of business sales. Security operations in MSP settings were identified as a rising operational burden, amplified by rapid changes and the challenge of upskilling staff hired for traditional IT roles. Key implications for MSPs and IT service providers center on the need for rapid operational restructuring, with greater emphasis on knowledge-based services such as IT advisory, risk, security, and compliance. There is a recognized accountability for customer education on evolving threats and for managing new AI-related risks that impact both data sovereignty and contractual obligations. The discussion suggests that MSPs unable or unwilling to adapt to these shifts may seek exit strategies, while those staying will need to reassess both revenue models and the skills composition of their teams. Participation in industry peer groups was recommended to share best practices and address common operational challenges.   MSP Question of the week:    How will AI impact the per seat model?  -  How will AI impact the per seat model?  -  Captera did a survey on local competition: Captera did a survey of MSPs. 100% of surveyed MSPs say competition in their region is high.  This was a 2024 study—  in 2026, it has to be worse. MSPs that can't differentiate are suffering. https://www.capterra.com/resources/managed-service-provider-for-small-business/ [https://shared.outlook.inky.com/link?domain=www.capterra.com&t=h.eJxVjUEOwiAQAL9iOEuBthbbk1-hsFW0QLNLbYzx7wY9GK8zycyTrTizYccuOS80CLFtW2XNkgHRVDYFgUBpRQskgonmDI4T4N1b4Aumu3eAfErIKZh55uNKPgKRYPsdu5XuDTCayG2KtM7Zx7O4mgB0-vIf_ry01Ec9tu3USKWUBFdre5imVjmrm-7YCaV1X_fNoVdV18heqvKB8jHhccoXjy57wCpCLsYV809fb-ooUAA.MEQCIAVRkim5NRdkEh8qjJ06Y5AZd0BTFCWyu3Nu7--pcSMhAiBYz5nXmAFhlp437kVUcZRNsTyuTcBjaZF8V_oexXhm-Q] - Emotions of selling your business – AMY’S NEW BOOK: https://sellmymsp.com/book [https://sellmymsp.com/book] -  How AI Is Transforming Security Operations: https://www.thirdtier.net/2026/05/11/how-artificial-intelligence-helps-managed-service-providers-deliver-smarter-security/ [https://shared.outlook.inky.com/link?domain=www.thirdtier.net&t=h.eJxVj8tuwyAQRX8l8rp4wC_irPIrFMb2NICtAduKqv57g7qosrrSudJ9fFc7--p2qZact3QDOM-zzguxy4RcR8zQyGYA2YNSsKynMJxpIkvGC4oZvacZo0WxoN-SCCaaGZ1IyAe96MbrQQ45CYeeDmSRwiuhKNqdKT-h-rhUjzLhgRxNFHaNafeZ4gxfJmC6__F_XNs1gJb6qj-7bmqlUkqia7Ttp6lTzup2uA6gtB6bse1HVQ-tHKUqPVh6THje3y4WxxXnnf78AgpHXso.MEQCIF3p-CTLvb_GD7IBGggmc_m1X0-CQm20EVInjn-EIW2vAiBWvDNyYmXEpQ7ONUtvmeevxd31fXrk6sOXr5sIF_zGGg]When I talk with MSPs today—whether in my mentored-peer groups [https://shared.outlook.inky.com/link?domain=www.thirdtier.net&t=h.eJxVjk0OgyAYBa9iWFd-REVceRUKn0oVNIAxpundG9JF43YmL_Pe6Agr6gs0p7THnpDzPHGabTDJQsAeEnEqJgjOelPuAKGcwnbskaBHgZa8XCB45Uu9-XisyfqJvJSDOPz4H2O9OSKo6MSzrkdOGWMUTCV0M441M1rwtmsJE0JWkjeS4ZZTSVnuQO4odw23Z9mYbO708wXNBUR_.MEUCIQCH6CXqfVU-LAzeLEunxeRirxpGKs5SOdMDImrMJWqm_gIgNixGeIctpss_6PI_MOcUivC5-G0UAEcJ0hNH4Q2Xktg] or consulting gigs [https://shared.outlook.inky.com/link?domain=www.thirdtier.net&t=h.eJxVjssOgyAUBX-lYd3yEPWKK39FAStV0cAlpmn67w3ponU7k5M5L5LCQtoLmRD32DJ2HAfFyQWDzgbqLbI9bCZpZEOKztsYb3rzMS3o_J2R64XMeT7b4Hv_rx79amP35T9M9bYy4NDAUJaj5EIIbk0BuhrHUhgNsm5qJgBUoWSlBK0lV1zkjs2dfn12p3vZmGzO9P0BlVNGtA.MEUCIQDyjjJ3_mVxfz--Gk9O8oiRz0_ZjLAqgI9xyZek4Pu91AIgWdH3NQVQpAfUA3KUNjSkvIQgE5GN2tuz_MBC9DL5Xmw]—the same pattern shows up. Security has become the heaviest part of the workload. SOC-like responsibilities are landing on teams that were originally built for backups and patching. That mismatch is where AI can make a measurable difference and a wake-up call for MSPs looking toward the future.                - Not meeting with clients because you don’t know what to say? Speak To Your Clients About Email Threats: https://www.thirdtier.net/2026/05/19/speak-to-your-clients-about-email-threats/ [https://shared.outlook.inky.com/link?domain=www.thirdtier.net&t=h.eJxVjssOgyAQRX_FsC4O-EJc9VcojpWqYGCMaZr-e0O6aLo9J7nnvtgRVzYUbCba0wBwnmdJs4sjOYylR4JKVB2IFqSGtKNZOAX-DEfkdnXoKXFzCwdx3IxbOc0RDSVgl4IteXfB6I3nNvh0rOT8HR5mw3T98h8ubdhACdWrW9NMtZBSChwrZdtpauRoVd31HUildKXrVsuyq4UWMncwd8z2vP79zmbM5p--Pxt2Ta8.MEYCIQDGAIrrq5RNdQ_hCcSwR-zL2znZOxJoIRgH2mxXIDQD0AIhAMSna2JaCvDn9mFhIvY8AO0oQeWoGX5yRd_Lu5mOY6MJ]             - Tales from the field: Why MSP’s are exiting the channel  Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com [https://pcm.adswizz.com] for information about our collection and use of personal data for advertising.

Managing Shadow IT in the Age of AI: Strategies for Modern MSPs

The most consequential development discussed is the rapid proliferation of Shadow IT in client environments, with emphasis on the unchecked adoption of cloud SaaS applications and artificial intelligence (AI) tools by end users. Speakers noted that this has led to a substantial loss of MSP control over client IT environments, eroding trusted advisor status and prompting clients to question the ongoing necessity of working with their MSP. The pervasive use of AI and SaaS products without guidance or oversight introduces governance and security risks, particularly relating to sensitive business data being accessible to third-party vendors and potentially incorporated into external data sets. The episode provided details on how Shadow IT emerges, highlighting the ease with which employees can adopt SaaS and AI tools through free trials, personal accounts, or non-business credit cards, often outside of IT’s direct visibility. According to Amy and El, clients are increasingly self-serving their technology needs, shifting traditional MSP-client dynamics. The conversation outlined specific governance issues, such as most AI tools ingesting client data into the cloud, with limited assurance as to how it will be used or protected unless higher tiers of service are paid for—an unlikely scenario for most SMBs using free versions. Secondary discussion focused on broader industry fragmentation and the challenges it poses for knowledge-sharing, consensus-building, and vendor feedback. The speakers recalled a time when MSP best practices spread rapidly through tightly-knit peer groups or single platforms but observed current information channels are numerous and scattered, such as Discord, Reddit, LinkedIn, and Facebook. This dispersion hinders both MSPs and vendors from collaborating effectively and reduces the feedback loop necessary for responsive product development and operational improvement. The key implications for MSPs and IT leaders include the pressing need to shift operational models from rigid, tool-centric offerings to relationship- and advisory-focused services. There is heightened risk if MSPs fail to address governance and security concerns, especially as end users continue adopting technology independently. Speakers recommend implementing proactive client education, detailed risk analysis on SaaS and AI integrations, and establishing clear communication strategies to reclaim the advisory role. MSPs are encouraged to align compensation models to advisory activities, as future client value is projected to depend more on strategic guidance than product-resale or ticket-resolution metrics. Title: How are you managing Shadow IT? Topics: * How are you managing Shadow IT? * Is the MSP industry too fragmented in how we share knowledge? * Why do MSPs exist? (blog posts from “Amy’s Sayings”: https://www.thirdtier.net/?s=Amy%27s+sayings [https://www.thirdtier.net/?s=Amy%27s+sayings]) * What does it mean to be a M365-based MSP in 2026? Upcoming events: Zero Trust Workshop- 3 sessions starting May 28.  Register here: https://www.thirdtier.net/2026/04/27/arriving-in-may-zero-trust-workshop/ [https://www.thirdtier.net/2026/04/27/arriving-in-may-zero-trust-workshop/] Mastermind Event with James (and Amy is a guest speaker!) in Omaha, NE Register here: https://kernanconsulting-mastermind.mykajabi.com/mastermind-event [https://kernanconsulting-mastermind.mykajabi.com/mastermind-event] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com [https://pcm.adswizz.com] for information about our collection and use of personal data for advertising.

Navigating Vibe Coding: MSPs, Clients, and AI-Assisted Development

Recent reports highlight that Google Chrome and Anthropic’s desktop applications have introduced covert, non-optional downloads onto user devices without explicit notification or opt-out mechanisms. According to referenced analysis, Chrome has been silently installing its Gemini Nano AI model, and Anthropic’s Claude desktop app is deploying browser integrations across all Chromium-based browsers. These installations are performed without seeking user consent and, in some cases, persist even after attempted removal, raising direct concerns for device security and user privacy. The increased risk is substantiated by internal testing from Anthropic, which found that these browser integrations increased successful cyberattack rates by 23.6% and offered minimal mitigation (11.2% reduction) even when defensive measures were taken. This unnotified software deployment expands the attack surface for user devices and can compromise operational control for IT providers managing client environments. The practice also indicates a shift in vendor behavior regarding user transparency and system sovereignty, as noted by Speaker C. Adjacent to these developments, the episode discussed “vibe coding,” where non-technical users leverage AI tools to generate code for business tasks. This trend introduces new support and security burdens for MSPs as clients independently create potentially insecure or unsupported automation. Some MSPs are revising their Master Services Agreements (MSAs) to clarify that remediation of issues stemming from client-generated or AI-assisted code will be billed separately and are not covered under standard support contracts. The discussion also featured account of ransomware attacks on education platforms such as Canvas during critical exam periods, underscoring the importance of contingency planning and backup strategies. The implications for MSPs and IT leaders include heightened due diligence requirements regarding vendor software behaviors, increased need for endpoint and application visibility, and updated governance around end-user-initiated automation. To reduce operational and reputational harm, MSPs are encouraged to establish explicit client policies covering AI tool usage, conduct AI readiness and risk assessments, and formally delineate the scope of managed responsibilities in client agreements. Effective communication and continuous advisory engagement are positioned as vital to maintain alignment with client priorities and mitigate emerging technology risks. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com [https://pcm.adswizz.com] for information about our collection and use of personal data for advertising.

Creative Ways for SMBs to Recognize and Reward Employees for Outstanding Performance

Employee recognition structures and their risk-reduction implications received primary focus in this discussion. Both Amy Babinchak and James Kernan outlined verification-based strategies, such as leveraging Microsoft Teams' Praise app and Bonusly, a peer-to-peer micro-bonus platform, as cost-neutral or low-cost starting points. They emphasized that implementing structured recognition—either verbally, digitally, or via peer-nomination systems—directly supports workforce engagement and mitigates retention risk. James Kernan described anonymized in-house recognition systems, where peer acknowledgements are aggregated and rewarded via a monthly raffle, which included prizes typically sourced from vendor swag. Specifics included integration of recognition apps within established workflows and processes—such as Microsoft Teams for informal praise, and Bonusly for monetary or non-monetary peer-based rewards. Amy Babinchak noted that client compliments of staff are internally broadcast for transparency and morale. Both speakers advocated for public, peer-inclusive recognition in the workplace, with an explicit focus on acknowledging day-to-day contributions rather than relying solely on annual reviews or monetary raises. Further, operational and vendor management challenges were covered: Amy Babinchak articulated concerns that help desk KPIs often measure unproductive metrics and stressed the importance of incentivizing conversational and advisory staff interactions over ticket speed. Discussions also addressed the evolving Microsoft Partner Program, noting its complexity, shifting incentive structure, and the administration required. Alternative licensing approaches—such as MSPs enabling clients to purchase directly from Microsoft or using different distributors—were analyzed for cost and administrative impact. Additionally, strategies for navigating hardware supply chain volatility, including the use of white box solutions and refurbishments, were discussed in the context of margin preservation and client-specific risk management. The episode underscores for MSPs and IT leaders that systematic and visible employee recognition is a quantifiable retention and engagement strategy with minimal operational risk when thoughtfully implemented. Tactical decisions around help desk KPI selection, distributor choice, and hardware sourcing require ongoing evaluation to balance cost control, performance, and administrative overhead. Transparent data-driven management, especially concerning staff performance and licensing economics, can both reduce operational risk and foster a more resilient service provider organization. 1. How do you motivate your employees –ways to reward employees https://bonusly.com/pricing [https://bonusly.com/pricing] https://learn.microsoft.com/en-us/microsoftteams/manage-praise-app [https://learn.microsoft.com/en-us/microsoftteams/manage-praise-app] 2. Helpdesk KPIs  https://www.dropbox.com/scl/fi/84v9ri236n5ck1x8mgf2w/KERNAN-Financial-Goals-and-KPI-s.doc?rlkey=e1qugzgn8x6lzqgesfqjeawew&st=1ma7g8hq&dl=0 [https://www.dropbox.com/scl/fi/84v9ri236n5ck1x8mgf2w/KERNAN-Financial-Goals-and-KPI-s.doc?rlkey=e1qugzgn8x6lzqgesfqjeawew&st=1ma7g8hq&dl=0] 3. Is the Microsoft partner program worth it? And how should I buy Microsoft  licenses? 4. Supply Chain challenges and price increases – whitebox or refurbs? 5. What does an AI MSP look like?   https://www.thirdtier.net/2026/05/01/deep-thoughts-on-msps-in-the-ai-age/ [https://www.thirdtier.net/2026/05/01/deep-thoughts-on-msps-in-the-ai-age/] Amy's preferred white box vendor: https://equuscs.com [https://equuscs.com/] UPCOMING CHANNEL EVENTS: In-Person MSP and Channel Partner Events 1. Reinvent Telecom – May 12-14th, 2026 2. Zero Trust Workshop -  May 28th- 3 weeks 3 part series   https://www.thirdtier.net/product/zero-trust-workshop/ [https://www.thirdtier.net/product/zero-trust-workshop/] 3. Mastermind Event – July 30-31st, 2026     FREE PASS LINK: http://bit.ly/kernanmastermind [http://bit.ly/kernanmastermind] Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com [https://pcm.adswizz.com] for information about our collection and use of personal data for advertising.

Paying Techs Commissions: Best Practices and Pitfalls for MSPs

Compensation models for technical staff in MSPs require careful alignment with business objectives and operational capacity. Both James Kernan and Amy Babinchak emphasized that financial incentives such as commissions or bonuses can be appropriate when technicians are directly responsible for generating additional monthly recurring revenue (MRR) or securing new accounts. However, they noted that proper monitoring tools are essential to track productivity and ensure fairness—without adequate systems, variable compensation based on efficiency or project profitability can introduce operational risk and potential inequities. Supporting this, Amy Babinchak described implementing a tiered productivity incentive where technicians received additional pay for surpassing utilization rates above 80%, but expressed concern over excessive overtime. Both speakers underscored the necessity of clear job role definitions; rewarding sales activities for technical staff may be appropriate if it aligns with broader company goals and does not compromise core technical duties. Non-monetary recognition, such as trophies or gift cards for ticket resolution or utilization, was also mentioned as an effective, low-cost incentive. The episode expanded to analyze current challenges in industry education and vendor-driven events. Citing a survey from the "All Things MSP" group, Amy Babinchak reported that 86% of respondents believe MSP conferences are now allocating too much budget to entertainment at the expense of substantive educational content. Comments from participants indicated skepticism toward vendor-led sessions, noting that paid speaking slots are typically used for product promotion rather than useful training, raising questions about increasing conference costs and the dilution of actionable takeaways. Key operational topics included shifting preferences among AI tools, with both speakers confirming recent moves toward Claude and Copilot, and persistent debate over MSP documentation practices—ranging from ad-hoc tools like OneNote to industry solutions. The discussion concluded with an observation about payment processing costs: James Kernan highlighted a case where $24,000 in annual credit card fees significantly reduced firm profitability, stressing the importance of passing such costs on to customers or utilizing ACH to preserve margins. MSP leaders are encouraged to assess compensation structures, conference participation ROI, and vendor relationships in order to minimize risk, align incentives, and ensure operational resilience.  Question of the week:  Should I pay my tech commissions? 1. Rod Trent Substack: learning to talk to our apps https://rodtrent.substack.com/p/the-new-normal-talking-to-your-apps?r=h2641&utm_medium=ios&utm_source=notes-share-action [https://rodtrent.substack.com/p/the-new-normal-talking-to-your-apps?r=h2641&utm_medium=ios&utm_source=notes-share-action]   2. Do you think that MSP conferences are spending too much on entertainment and not enough on education?  All Things MSP survey   3. What is your favorite AI tool right now? Blog post: AI Image Generators Can Now Spell: https://www.thirdtier.net/2026/03/20/breaking-news-ai-image-generators-can-spell/ [https://www.thirdtier.net/2026/03/20/breaking-news-ai-image-generators-can-spell/]   4. What tool do you use for Documentation? This is more for the smaller MSPs or internal IT folks not running something like IT Glue or Hudu. GitHub: https://github.com/  [https://github.com/]     5.  TALES FROM THE FIELD: Payment processing fees of 24K reviewing financials during valuation.  Alternative Payments and other payment automation firms help reduce/eliminate these fees by giving customers options for EFT or passing fees to them. https://www.alternativepayments.io/ [https://www.alternativepayments.io/]   6. UPCOMING CHANNEL EVENTS: Reinvent Telecom – May 12-14th, 2026 Mastermind Event – July 30-31st,2026 1. Amy’s Podcast Appearance Book Tour happening! Learn more about the book here: https://www.thirdtier.net/20-questions-every-msp-owner-asks-before-selling-their-business/ [https://www.thirdtier.net/20-questions-every-msp-owner-asks-before-selling-their-business/]                        Do you have a story from the field that you’d like to share? Or a question you’d like us to answer? Email it or send it as a voice memo or video to james@kernanconsulting.com [james@kernanconsulting.com], and we just might use it in an upcoming show. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com [https://pcm.adswizz.com] for information about our collection and use of personal data for advertising.