I’ve heard many MSP’s (managed service providers) reveal that they’re unsure as to whether or not they’re operating efficiently. Are they staffing their company adequately? Which clients are making them money and which are costing them? Why is it that their company is twice the size it was years ago, but they’re not making any more money?
Thanks to my good friend Michael Kraner at MSP CFO for sharing this information with me.
Many MSPs are good at helping their clients manage their systems, yet they’re unsure if they’re managing their own company as they should. What’s the answer? Metrics called Key Performance Indicators (KPIs).
Before you start worrying about how profitable you are, or make adjustments without the proper metrics, try to understand what’s driving your current success—or lack of. Regularly review your KPIs to ensure that you’re on the right track. Spend a bit of time identifying KPIs, and learn how you can incorporate them into your business plan. If your KPIs evolve without your business model, then the KPIs will begin to lose value very quickly. The ability to identify good or bad trends is a huge part of the value of KPIs.
The following KPIs are particularly important for MSPs:
- Client Contribution (CC):
Learn how much you earn and what the associated costs are for each of your clients. For example, add the revenue from fixed fees, services and product sales to get your client revenue. Your expenses will be what these services cost you, which will typically be the time you spent plus the cost of your products and services. Many MSPs only think about fixed-fee margins, however, if you have a specific client who generates significant project and/or product revenue, then it’s important for you to consider this as well.
- Client Effective Rate (CER):
To find this number, divide your monthly fixed fees by the number of hours you’ve attributed to the client; this results in a revenue/hour figure. Finding this will show you what clients are using your time immoderately in comparison to what you’re being paid. However, be careful with raising the rates for clients with low CER. Instead, find out if you can reduce the time they’re spending with you through training and upgrades. This investment will help you keep your larger clients (low CER is more frequent with larger clients) and help make them more profitable for you. This requires some research, but it’s simple to narrow your work to select clients with the CER metric.
- Revenue/Compensation (RpC):
This specific metric takes many different factors into account, such as efficiency, employee costs and client margins. Divide each employee’s revenue by his or her compensation costs. Try to find the ones who stand out on the high end vs. the low end, and you’ll find out fast which employees are driving growth.
When you’re committing to any KPI project, it’s important that you keep the following things in mind:
- If you try to do this without a powerful professional services automation (PSA) system, you’ll be in for a lot of hard work. There are many options in terms of PSA systems and consultants, and you’ll be very happy once you’ve implemented the right one.
- Follow trends and understand why your employees, clients and anything else is different than they used to be, starting with previous operating levels.
- This is not a comprehensive list of metrics, only a foundation. MSPs may have a lot in common, but they’re all unique. Decide what you want to learn about your business, then work towards using the right metric system with the right data.
- It’s important to differentiate between KPIs that are actionable and non-actionable. Focus your efforts in order to maximize the return for your efforts. If something is outside of your control and affecting your business, you should understand and recognize this. Concentrate on the changes you’ll need to make in order to get your KPIs closer to where you want them to be.
- Ensure that you understand what you’re doing, and always seek help when you don’t. Erroneously constructed metrics are dangerous. If you need to, consider talking to peer group members or bringing in an outside consultant.
Metrics are the beginning to improving the management of your business. They let you know which parts of your business require adjustment, before you attempt to make them.
Stuart Crawford serves as Creative Director and CEO with Sebring, FL and Fort Erie, ON-based Ulistic, a specialty MSP Marketing firm focused on information technology marketing and business development. He brings a wealth of knowledge and experience pertaining to how technology business owners and IT firms can use marketing as a vehicle to obtain success.