In recent years almost everything about being an IT service provider has changed. You have acquired new tools, advanced your service model and retrained your teams on how to market, sell and support customers. It’s anything but business as usual these days and yet profitability averages for MSPs and IT service pros haven’t changed.
Sure, the top providers have dramatically increased profits, but the average provider’s results remain the same. Why is that?
Increased Complexity in Crunching Numbers
Here’s one reason: Understanding profit margins was much easier in the past. If you were an hourly provider you only needed to know your hourly rate, utilization rate and the cost of your technology to determine gross profit. The math was easy. If you kept your team billable 85% of the time, you made money. It was that simple.
Today, MSPs charge a monthly client fee that covers a variety of services. These services include support, automations, cloud features, consulting and more. This means that you have multiple people or teams delivering services in addition to a set of tools and technology. Simply stated the math got harder to do. Relating the various costs to a monthly fee has proven challenging for MSPs and IT service pros and as a result, profitability is paying the price. MSPs need to master the math of the MSP model in order to ensure and ultimately raise profitability.
Measuring the Wrong Numbers
Again it is back to knowing the math, and now we have to introduce the science behind making a business successful. MSPs are searching for the right metric and number to gain command over their profitability. Many times they look to their financials for the answers. The problem is that many of the keys to achieving higher profitability are not found in your profit and loss statement.
Looking at numbers like gross profit percentage and labor costs is interesting, but what do you do with the information? Your gross margin is low and your labor costs are high relative to revenue, now what?
I have built two MSP businesses that generated industry-leading profit margins and I have helped hundreds of others do the same. The key to achieving results is to simplify the complexity of the MSP model. Once you understand the economic principles underlying your business, you will be on the road to higher profits. I call these MSP economic principles Picanomics.
The concept of macro Picanomics is to relate your primary costs (people) to revenue in order to influence the amount of service revenue you can generate per technician or per employee. If you understand the relationship between people and revenue you will be able to make a complex decision simpler.
The first step is to define roles and assign people to each one. Next, we can create a relationship between each role and how much revenue they can manage in relation to top-line service revenue.
Defining the Roles & Finding Your Leverage
Under Picanomics, we divide an MSP’s business into five necessary service delivery roles:
- Professional services: Implementing new technology and technology projects for your clients.
- Reactive support: Providing reactive support for user requests and responding to alerts.
- Centralized services: This includes managing your remote management and monitoring (RMM) platform as well as any cloud services.
- Network administration: This role is responsible for continuous alignment of each client’s technology against your standards.
- Technology consulting/virtual CIO (vCIO): This role is responsible for the business relationship with each client including strategy and budgeting.
Each of your technical resources should fit into one of these roles. Next, look at the metrics that determine the amount of service revenue each role can manage. We call this relationship between revenue and roles “leverage.” As your leverage increases, so does profitability. For example, if a vCIO can manage 35 accounts and each account is worth $2,000, on average, then their leverage would be $70,000/month.
In other words, you need one vCIO for every $70,000 of MRR. The only way to increase your vCIO leverage is to manage more accounts or raise the average MRR amount. The next step is to go though the other four delivery areas applying the same logic and math. Support is the most complicated since the leverage in this area is impacted by your average seat price and the number of seats one support desk resource can manage. Once you understand the process of determining leverage factors for each delivery area, you can prioritize the process of increasing leverage.
Yes, it takes time to master the model, but once you have the mold, making money gets a lot easier and far more profitable. Recurring revenues are nothing if they aren’t profitable for the business. Know your math. Apply the steps needed to build a successful business and lean on others for help where you should to bridge the gap and make it happen.
Ready to learn more about this process in detail? Check out this SlideShare from a recent webinar I did with SolarWinds N-able called “The Math and Science of a Top Profitability MSP.” For more information about TruMethods visit the TruMethods website.