The Premiership, MTN8 and Telkom Knockout champions exited the event at the first hurdle under former coach Julio Leal in 2011/12.
And McCarthy, a UEFA Champions League winner with Porto, admits Bucs' domestic heroics mean little if they fail to impress on the continent.
"It's no good that we dominate South African football by winning two successive trebles, but in Champions League we suck," McCarthy said in the Sowetan.
"Palacios deserves to stay and this will give him a better chance of preparing the players for our next challenge."