Is Your Managed Services Business Operationally Sound?

Ulistic's The MSP Show, hosted by Stuart Crawford of Ulistic IT Marketing Services provides monthly MSP training sessions. Stuart recently interviewed Rex Frank, Founder and CEO of Sea-Level Operations, an MSP business operations consulting firm. Rex has had a long and extraordinarily successful background, starting in 1988 as a computer tech, soon advancing to management roles and on through a series of high-level corporate directorships and VP positions in the IT management industry.

How did you build your highly successful strategy for IT service business operations modeling?

Rex explains that earlier in the operations management stage of his career, he held the role of Service Director for a large IT company. During that time, he was responsible for meeting some common service department financial performance metrics, such as labor costs, tool costs, and profitability numbers.

Through that responsibility, he came to understand the importance of meeting those metrics that reflect the health of an IT services business. He recalls that being held accountable really changed him. It deepened his understanding of what is necessary to achieve the operationally sound set of comprehensive business practices.

Rex also recounts a time in his career during his tenure as VP of Managed Services with Northwest Computer Support (now Blackpoint IT), when he realized the need to systematize the process of improving operations. He started making a list of operational topics necessary to build a Managed IT Services operation and forming an operational optimization model.

Rex reflects on yet another game-changing realization that Operations' most important client has never actually been any one of the company's external clients. Observing the consequences of service deficiencies he had discovered, he came to recognize that the most important client of Operations is actually the company's sales department. He saw that for a business to succeed, the sales team must be able to represent service operations that they can truly believe in.

He knew that this meant that Operations must seek, as its first goal, to perform at a level that meets the fundamental need of the sales staff to believe in what they're doing—to have confidence in what they're representing and selling. He has since framed a business potential for success in terms of how well its operations support the need of its salespeople to be able to confidently declare the company's reliability to deliver quality.

Equipped with these early business operations development revelations, Rex founded Sea-Level in 2010. For the past 8 years Rex's company has been helping IT services providers get their operational processes in order. His firm has worked with over 300 client companies, and currently has 10 coaches on staff who are working with IT solutions providers every day to develop sound operational systems. The team provides help implementing and habituating improvement strategies that can stabilize performance metrics and carry their client companies to long-term financial success.

In the Managed IT Services world right now, what is the biggest challenge you're seeing for operations?

Carving time out of your day to lead on standardizing operations is a major challenge for IT services business owners. There's always a fire to put out. The Entrepreneurial Myth addresses this problem very well. Overcoming the tendency to stay busy grappling with one catastrophe after another, and not making time to work on modifying operational methodologies to resolve process issues that are causing the catastrophes is the biggest obstacle to improving overall operational quality.

The first step of a solution is to decide that you need some quiet time to work on improving one of your processes today. Decide which one of your process is most important to work on right now, and then take the time out and do it.

Rex explains that success in reducing repeated service problems requires devoting the necessary time to tackle these five phases of the process of operations quality improvement:

1. Learn from your peers. — There are a lot of great information resources to help you understand how other people have become successful at what you want to do.
2. Take all these learning documents and make them yours. — Use all of the templates you find for building operations success, and incorporate them into your plan for your own operations.
3. Use those documents you find to train your team. — Present your team with the new methods for each new and better process approach you discover. Tell your team, "This is the way we're going to start doing this."
4. Implement the new task. — Actually start doing the process the new way, and reinforce it to habituate the modified process.
5. Inspect what you expect. —Ensure that the new process is consistently being followed by all. This is the most challenging of these five process improvement leadership steps. It's not enough to commit to it, and it's going to test all of your leadership skills to see that it becomes the routine.

What have you done at Sea-Level to help clients carve out the time to make improvements?

If they don't do anything else, they're going to be able to make an hour of progress in the weekly phone call with their Sea-Level MSP operations coach. We also provide each of our clients with about two hours of homework that they can do to advance their operations optimization goals. That has seemed to work out about right. It's not too much to fit their busy schedules, yet it's also enough to allow them to make real progress.

What do you do when clients insist that they simply don't have any time at all to spend on process improvement?

I explain to clients if I give you best practices, and you then can't carve out the time to implement them, how can you expect to be successful in your operations improvement goals? I can recommend Franklin Covey time management seminars, which teach how to manage your time by addressing the most important stuff first.

The principles in the Covey time-management teachings are based on Benjamin Franklin's time management habits. They use simple principles, like thinking in terms of your day as a glass jar. If you fill it with the sand grains (lower priorities), then try to fit the rocks (bigger priorities) into it, then the rocks won't fit.

Eat That Frog is another great book of ideas on ways to organize priorities. Or, I recommend just prioritizing items into A, B, C categories of importance as an even simpler approach. Just do the A's first.

However, the essential perspective on why you must take out time to work on operations improvement must come first, before you turn to learn how to manage your time to do that work. For those who think they really can't afford the time to implement best practices, shrinking profit margins, declining client satisfaction ratings, and costly excessive personnel turnover are consequences that prove a service business owner really can't afford to make time to improve insufficient processes.

Do you recommend selling trust before value?

I kind of have a negative reaction to that idea of selling "trust". Telling people "believe me" seems counter-intuitive for me as a sales approach. I think it's about making a promise and delivering on that promise. In selling, it's about value.

I apply wisdom from The Entrepreneurial Myth that suggests if you really want to stick to your processes, make an impossible promise, and then if you fail on that promise, you have to pay.

It occurred to me that since people fear change, there must be a very compelling reason for people to opt to face their fear and changing their IT services provider. I've asked prospective clients, "What's your current provider doing so badly that you're really ready to face the natural fear of change and switch companies?" A very common answer is along the lines of, "We have this flat fee contract, but we keep getting all of these additional bills, and it really frustrates us."

So, we resolved to make the commitment to clients that they'll never receive a bill from us that they're not expecting, and if they do, we'll mark it "Paid". This created a situation in which for every service ticket that comes in, we need to triage it. If it's covered by the contract, then we need to go through the process of getting permission to do this work outside the contract before the engineer ever gets the ticket.

So, this way of making an impossible promise—one that causes you to have to pay if you don't keep it—can create the necessary incentive to get creative. It can motivate you to get an effective process in place that provides a solution for your customers and for your business.

I read The Pumpkin Plan. I really liked the concept of using the word "guarantee". A lot of people in the MSP space often stop short of guaranteeing. If you put in the right solutions, do you think you can safely offer guarantees?

Well, I'm the ops guy, so the word guarantee completely terrifies me. Instead of providing a guarantee that they'll never have an outage, I've been comfortable with offering "or we'll fix it for free." That way, we're on the hook for repairs, which is a more reasonable obligation.

By the way, never guarantee that you'll be on the customer's site within a certain amount of time. Things can go very wrong when companies inadvertently incent their employees to drive faster, rushing to beat such deadlines. The operations side of me asks, "Can we really deliver on that?" It makes more sense to commit to dispatching within a certain timeframe than arriving within one.

Like Ulistic, we also currently have an OES implementation underway. We tried to do it ourselves, but it's been a great decision to get a professional to guide us through it. The key is to make sure that whatever your proclamation is, you had better have your processes in place so that you will never have to deliver on it.

Can you tell us a little bit more about your operations journey?

So, as I mentioned earlier, I had started making a list of operations things I needed to put in place. That list has matured over the last 10 or 11 years into a formalized operations development checklist.

The first section is about getting your PSA configured (whether you're ConnectWise or Autotask).

• We start with understanding your profit centers. (1A)
• Then we get into your board queue configuration, and all the statuses, and the way the statuses flow. We get your email communication standardized coming out of your PSA tool so that it uses the same look and feel and format and comes from the same form address. We just get that all working the way you want it to work based on the way you want the life of your ticket to flow. (1B)
• We get into workflow rules. (1C)
• We get all of your agreement types set up. Some client companies we start working with have 4 or 5 workflow types. We try to simplify the number of agreement types down to 3 or 4. (But, some clients we start with have as many as 20.) (1D)
• We get your billing rates working. We use a concept I call 4 levers that control service gross margin. The four levers that work together to produce gross margin dollars are:

1. How much you pay your engineers.
2. How much you charge your clients.
3. Utilization.
4. The effective ratio on your flat-fee agreements.

If all of your levers are set, and you increase your engineer pay, your margins go down. If you increase your billing rates, margins go up. If you increase your utilization, margins go up.

Your job is as the director of services is to set those levers. You have to set your engineer pay and your billing rate. Then, you have to put policy procedures in place to try to increase your utilization. Those three levers can be moved a little bit without impacting margins significantly.

But, moving the fourth lever is a different story. Your agreement profitability goes way up or down depending upon the differential between how much you charge and how much your flat-free service contract stipulates, compared to how much you charge to your clients who pay on a time-and-materials arrangement. So, this fourth lever is where you really have the ability to make the difference in your margins.

But, we find that our clients flat-fee agreement efficiency across all of their contracts shows that they're working for around only 60% to70% of their normal billing rates for their flat-fee clients. It's always because there are a few clients with flat-fee agreements that are out of line.

We go on to billing rates, figure out work roles and work ties, standardize travel and do all of the things necessary to get your PSA configured according to industry best practices. There are 10 areas of operational development we work through:

1. Get your PSA configured.
2. Get your policy procedure documented (primarily around the life of the ticket).
3. Establish measurable KPIs — manager facing (efficiency, margins, etc.) and engineering facing (number of tickets that don't meet some condition, utilization rates, billing rates, etc.)
4. Service team HR (org charts, job descriptions, engineer comp plans, etc.)
5. Leverage your tools (Standardize how you use them, and establish a standard monthly process).
6. Get your accounting systems in order (agreement billing, month end time and materials billing, credit memo process, etc.)
7. Client-facing systems (How do we interact with our client, and how does our client work with us?)
8. Get ready to grow (hiring , employee onboarding, one on one meetings, annual training programs)
9. Marketing Operations (You've got the great machine ready; now you're ready to bring on staff.)
10. Outside sales (Take leads and convert them into revenue. Get the engineers to participate in the scope of the work process.) Owners sometimes do the scope of work.

This task needs to be turned over to an engineer or a tech. The owner should stop doing this work, to avoid micro-managing it, potentially negatively impacting relationships with the sales reps. (The owner can also be so invested in the work that he doesn't feel he should pay the sales rep for the work, because he's done so much of the work himself.)

Initially, the quality you're going to get back from your service person is probably going to be terrible and totally unusable. But, that's the starting point. When they finally give you back something you can use, that's probably the point at which it's time to go get a salesperson.

When the service manager/lead engineer eventually finds he/she is creating bottlenecks, this is the time when you'll start developing pods, and team leaders will become the next mode of growth for the team.

That's the view I have of how things develop.

How can business owners confidently delegate responsibilities in fear of negative impacts to quality?

There's always the risk of people disappointing you in the work you delegate. A stumbling block for many leaders at this point can become their own hesitance to let go of some tasks. You've got to teach people and delegate.

There's a quality curve any time you hand off work you've been doing to someone else. You're going to create some process procedures to keep quality high. But, like teaching a kid to write a bike, at some point you're going to have to let go and risk letting them try it on their own. You know there are going to be some mishaps. You know the quality is going to drop below the level you expect. But, you don't just give up on them and say, I'll just do it all myself. You just keep encouraging until they improve. You have to document your processes, and let go, and let people make mistakes.

When you're transitioning and someone is delivering below quality, admit to the client who calls with complaints that you're working to improve the situation. Only about 10–15% will respond negatively. 90% of the time you'll get a response like, "I have the same problem in my business. What can I do to help?"

At a point, you may need to review A, B, and C level clients. The work that goes into developing a single employee is usually worth more than any single client. If you're too busy to keep up, with the amount of staff you have, it may be time to get rid of your unprofitable clients first. You can usually increase your revenues and keep your costs the same by getting rid of the bad client.

If you have to increase your costs to accommodate a client, you can then as well afford to be bold and willing to tell that unprofitable client—we've got a problem. Your choices become:

1. Get rid of the client.
2. Explain to the client, we don't' have a win-win relationship. We're losing too often on the revenue side. You'll find that 9 times out of 10 they'll agree to pay appropriately. If they're not willing to work with you, you can get rid of them.
3. Sell the client's work off to a competitor.

Rex Frank's Comprehensive Managed IT Services Operational Development Plan

Rex Frank identifies the foundation for operational success as the combined knowledge of: 1) the need to meet necessary operations performance benchmarks, 2) to follow a proven formal system of operations development and optimization, and 3) to recognize a service business's top operational priority as that of striving to meet the sales department's need to sell with confidence that Operations will consistently deliver on the commitments they make in their sales presentations.

Building upon that groundwork, Rex Frank provides a highly refined step-by-step development plan, which we have been able to only roughly detail above, for putting in place all of the operational processes and policies to manage IT services and ensure stable long-term profit margins, the latter of which is, of course, the litmus test of sound operations management.

Sea-Level Operations

For more information about operations consulting services or coaching on Sales Processes For MSPs, provided by Rex Frank and his team of IT services industry experts at Sea-Level Operations, visit their website. Or, call (855) 4-Sea-Level (473-2538) to arrange to meet with a member of their world-class IT business development coaches.