I get this question at least twice a week from MSP owners: “Joseph, should we be doing more than just managing our clients’ IT infrastructure?”
The short answer? Yes. But here’s the real story: you’re not just adding a service line. You’re fundamentally repositioning your business from a cost center that “keeps the lights on” to a strategic partner that builds competitive advantages for your clients. And in 2026, AI is making this transition not only possible but absolutely necessary for survival.
Let me be direct: the traditional MSP model is breaking. Margin compression is real, clients are demanding outcomes instead of uptime reports, and your technical bench strength is getting harder to scale. Meanwhile, the MSPs that are pivoting into application development as a managed service: leveraging AI to do it: are seeing significant margin expansion while most of the industry is still dealing with margin compression.
That gap isn’t luck. It’s strategy. And it’s what we need to talk about.
The “Keeping the Lights On” Trap
For years, managed services consulting meant reactive support: monitoring servers, patching systems, responding to tickets. You became really good at preventing downtime and solving problems fast. That’s table stakes now.
Your clients don’t just want their email working anymore: they want custom workflows that connect their CRM to their project management tools, they want automated reporting dashboards, and they want applications that actually solve business problems. They’re asking: “Can you build this for us?”
Most MSPs say no because they think it requires hiring a 20-person development shop with six-figure salaries. But in reality, AI has completely changed the economics of application development. You don’t need an army of coders. You need a strategic orchestration team that knows how to deploy AI-powered platforms.
What Agentic Process Automation Actually Means for Your Business
Let’s cut through the buzzwords. Agentic Process Automation (APA) sounds like consultant-speak, but it’s the single biggest shift in how technical work gets done.
Traditional automation was dumb: it followed scripts. “If this happens, do that.” APA is different. These AI agents understand context, make decisions, and can self-correct when something breaks. They’re not just automating single tasks; they’re managing entire workflows end-to-end.
Here’s what this looks like in practice: One of my clients implemented APA across their service delivery framework. Before the shift, each technician could realistically manage about 150 endpoints. After implementing AI-driven agents that handle routine monitoring, triage, and even first-level remediation? They’re now at over 400 endpoints per tech.
That’s not a 10% efficiency gain. That’s a complete transformation of your service delivery model: and your unit economics.
But here’s where it gets interesting for application development: those same AI agents can build, test, and maintain custom applications for your clients. You’re not writing code line-by-line anymore. You’re defining business logic, and AI is handling 85% of the implementation and testing.
The Low-Code Revolution (And Why It’s Your Secret Weapon)
I know what you’re thinking: “Low-code tools have been around for years, Joseph. What’s different now?”
AI changed everything. Modern platforms like Microsoft Power Platform, n8n, and similar tools now have AI co-pilots that can interpret what you’re trying to build, suggest optimizations, and even write complex integrations automatically.
This is where the vCTO positioning becomes real. You’re not selling “dev hours” anymore. You’re selling business transformation. A client comes to you and says, “We’re manually copying data between five systems and it’s costing us 20 hours a week.”
Your response? “We can build you a custom workflow that handles that automatically, monitors for errors, and scales as you grow. And we’ll manage it as part of your service agreement.”
That conversation positions you as a strategic partner, not a vendor. You’re solving business problems, not just IT problems. And because AI is doing the heavy lifting on the technical implementation, your margins are significantly better than traditional development work.
Here’s the math that matters: Traditional development might bill at $150-200/hour with 40-50% margins after you factor in developer salaries and overhead. AI-augmented application services? You’re looking at 60-70% margins because your team is orchestrating rather than coding from scratch.
From Technician to Architect: Rebuilding Your Service Delivery Framework
The role of your technical team is fundamentally changing. This might seem uncomfortable at first, but it’s the path to higher valuations and better work-life balance for your team.
Your technicians don’t need to become software developers. They need to become solution architects who understand how to map business processes to technology solutions. That’s a different skill set, and honestly, many of your best people already think this way: they just haven’t had the tools to execute at scale.
Here’s what I’m seeing work in MSPs that are making this transition successfully:
Reframe the role. Stop hiring “Level 2 techs” and start building a “Solutions Engineering” team. The mindset shift matters.
Invest in platform training. Get your team certified in 2-3 key platforms (Power Platform, n8n, or similar). This isn’t a six-month computer science degree: it’s 40-80 hours of focused training.
Start with internal tools. Before you sell this externally, build something for your own business. Create an automated client onboarding workflow or a custom reporting dashboard. Let your team learn with low stakes.
Package it as a managed service. This is critical: don’t sell projects. Sell ongoing management and optimization of the applications you build. That’s recurring revenue and it’s what makes your company valuable.
The Security Layer You Can’t Skip
Here’s where a lot of MSPs stumble when they move into application development: they forget that building applications creates entirely new security and compliance obligations.
If you’re building workflows that touch customer data, financial information, or healthcare records, you’re now responsible for ensuring those applications meet GDPR, HIPAA, or other regulatory requirements. This isn’t optional.
The good news? AI helps here too. Modern DevSecOps tools use AI to continuously scan code, manage identity and access controls, and ensure compliance automatically. You’re offering what I call “Digital Trust Architecture”: the confidence that the applications you build are secure by design.
This is another service layer you can monetize. Instead of just building the application, you’re also providing ongoing security monitoring, compliance reporting, and risk management. That’s a higher-value conversation with clients, and it justifies premium pricing.
What This Means for Your Company Valuation
Let’s talk about what really matters to most MSP owners I work with: exit value.
Traditional break-fix or even managed services businesses typically sell for 3-5x EBITDA if they’re well-run. Application Managed Services providers with strong recurring revenue models and higher margins? I’m seeing multiples in the 6-8x range, sometimes higher for especially strategic books of business.
Why the premium? Because buyers see predictable revenue, better margins, and strategic client relationships that are harder to replace. You’re not competing on price anymore: you’re competing on outcomes and strategic value.
When you combine AI-driven efficiency (more endpoints per tech, faster deployment) with higher-margin application services (a substantial increase in profitability compared to traditional MSP delivery), you’re building a fundamentally more valuable business. And if you’re thinking about an exit in the next 3-5 years, this transition could materially improve your final sale price.
The 2026 Reality Check
Here’s what I tell every MSP owner I coach: 2026 is the year of truth for AI in managed services. The tools are mature enough to be reliable, the market demand is real, and the competitive advantage window is still open: but it’s closing.
Fifty-six percent of MSPs are already using AI for threat detection and predictive maintenance. AIOps is reducing system downtime by 30% and resolving help desk tickets 50% faster for early adopters. If you’re not building AI into your core operations right now, you’re not just missing an opportunity: you’re falling behind.
The MSPs that will thrive over the next 3-5 years are the ones repositioning from reactive operators to strategic partners. They’re bundling security, compliance, application development, and managed services into outcome-based offerings that clients can’t get anywhere else.
This isn’t about being a software company. It’s about being a software-powered MSP that uses AI to deliver better results, faster implementation, and higher margins.
Your Next Move
The transition from traditional managed services to AI-driven application development doesn’t happen overnight, but it also doesn’t require a complete business overhaul. Start small: pick one internal process to automate, get your team trained on one platform, and build your first client application as a pilot.
The margins are there. The tools are ready. The question is whether you’re ready to make the shift before your competitors do.
If you’re thinking about how this applies to your specific business: or if you want to talk through what this transition actually looks like operationally: let’s have that conversation. This is exactly what we help MSP owners navigate at RedVine Operations.