5 keys to a profitable MSP business: Lessons learned from IT business veterans

“If your goal is anything but profitability — if it’s to be big, or to grow fast, or to become a technology leader — you’ll hit problems.”

~Michael Porter, Harvard Business School

I talk to a lot of MSP business owners as part of my job and recently had the privilege of sitting in a room with several veteran MSPs. One of the liveliest topics was on profitability — and what these owners would do differently if they could go back and do it all over again.

Out of that discussion came these top five lessons learned on how to be more efficient and increase your profitability, especially for MSPs just starting out:

  • Baseline every customer
  • Be careful with “all-in” programs
  • Fire bad customers and don’t take on difficult ones
  • Sell managed services efficiently
  • Do you really need your own data center?

LESSON 1: BASELINE EVERY CUSTOMER

Most MSP business owners in the room nodded with a smile as someone discussed a nightmare customer environment they took on. In the heat of the moment, it was too tempting to close a deal quickly by saying they would managed all computers for a fixed fee each month only to find out that the network was a mess, nothing was standardized and some of the equipment desperately needed to be replaced. Even if it takes you weeks to clean up the environment there is no going back to raise prices after the contract is signed.

You’ll save yourself a lot of grief by baselining — charging time and materials or a project to assess and bring the environment to a baseline that your team can managed efficiently. To baseline, you’ll use your remote monitoring and management (RMM) system to do a complete hardware and software inventory and bring each device into a state that you are comfortable managing. Baselining is also about understanding the purpose of every system and looking for those hidden or proprietary devices up front before you get a call and need to support them. Depending on your contract, security and backups might be in order and you will want to fully backup and deploy AV before your official coverage begins.

When you charge time and materials (T&M) for baselining you can ensure that all costs are covered regardless of the complexity of the network and ensure that when the NOC takes over everything is humming and of course profitable. Obviously you don’t want to lead with this in the sales process but towards the end of discussions you should be clear what the expected costs of baselining everything will be.

LESSON 2: BE CAREFUL WITH “ALL IN” PROGRAMS

Most of the MSP business vets told me that monthly recurring revenue is great — but if you’re just starting out in this business, you need to know you won’t make much money offering fixed fee, all-in, 100-percent coverage for every device. If your clients call 10 times or more a day (simply because their contract says they can), your profitability drains away.

One of the strongest themes that I heard around the room was to use fixed fees for predictable costs and T&M for unpredictable costs. Sounds like something we all know but most small to medium sized IT service businesses are trying to do an all you can eat model that their customers will take advantage of and eat as much of your margins as they possibly can.

So charge a set monthly fee but with a caveat: for example, the customer will get up to 10 hours of support per month per user, but any additional support is charged at your usual hourly rate.

LESSON 3: FIRE BAD CUSTOMERS AND DON’T TAKE ON DIFFICULT ONES

Fire your customers? Really? These veterans pointed out that this isn’t a hard-and-fast rule but rather an overarching mindset you should aspire to reach for your managed services business. If you’re just starting out, you may need to take on any customer just to meet payroll and keep the lights on.

But over the long term, if you want a profitable business you need profitable customers — and that means firing or avoiding customers who take up too much of your time and resources. Do that and your overall profitability goes up because now you can manage two or three healthier customers — at the same technician labour cost — for every bad customer you cut loose.

When you’re pitching, what are some of the warning signs that you might be dealing with an unprofitable customer?

  • They just want to talk about price. If they don’t understand the value you bring, they’ll constantly nickel and dime you.
  • They’ve just dumped — or been dumped by — an MSP with a good reputation.
  • They don’t see the point of baselining.

If you’re not in a position to cherry pick new customers, protect yourself with contracts that specify exactly what is and isn’t covered.

LESSON 4: SELL MANAGED SERVICES EFFICIENTLY

Time is a costly and finite resource, so use it wisely in your sales process. The key is to make strategic use of your salespeople and technicians.

On your sales team, you want “hunters” to make the cold calls and set up meetings and “sharks” — your most highly skilled salespeople — to close the deals. Using your sharks to make cold calls is a poor use of their skills. So is giving them unqualified leads.

The same thinking applies to your technicians. You’ll often need to pull in a technician during the sales process to assess the prospect’s IT environment and talk technical details. Pulling your L3 senior techs away from their work to attend a sales pitch isn’t cost-effective unless the contract is very large or complex and you feel you have a good chance of winning. For more routine pitches, use less experienced technicians.

LESSON 5: DO YOU REALLY NEED YOUR OWN DATA CENTER?

A private cloud run from your own data center — it’s tempting because both you and your customers will benefit from greater control, reliability and security compared to the public cloud. But does it make sense financially?

Maybe., say the veteran MSP owners. Those in the room who built their own datacenter are still having success today but there were mixed feelings in the room if it makes sense for new MSPs to start building their own datacenter today. Each person knows their customers and their niche best but everyone in the room was feeling the profit squeeze more and more as cloud services proliferate and time is definitely not on their side. As public cloud technology costs continually drop , your private data center could become not an asset but a liability.

A FINAL THOUGHT

The lessons MSP business owners have learned about profitability can be boiled down to a single principle: be efficient. That means focusing on what matters most and using only resources that are truly necessary. Applying this test to everything you do will make you more profitable. It’s that simple — which isn’t to say that it’ll be easy.

If you’re looking for help, we would be happy to talk about tools or processes that help MSPs be more efficient. Contact us if you’d like to learn more — and maybe one day you’ll be the grizzled veteran sharing your hard-fought wisdom with up-and-coming MSPs.