4 tips for improving profitability for MSPs

Posted:
06/17/2022
| By:
Peter Kujawa, Service Leadership and Brian Troy, ConnectWise

MSPs thrive on their specialized knowledge. Being able to rely on a trusted outside provider for IT and tech needs is a crucial part of many modern companies’ success. However, where most MSPs get into trouble is failing to realize there’s more to running an MSP business than the managed services themselves.

With such specialized knowledge and a unique skill set, it’s easy to lose sight of the big picture. You not only need to provide your clients with first-class IT services, but you also need to put your “CEO hat” on and run your business. This means employing smart, data-driven decision-making regarding things like marketing, partnerships, hiring, and more. 

Fortunately, ConnectWise is here to help. We’re going to cover 4 tips you can use to increase your profitability and, ultimately, improve the health of your MSP business.

Why MSPs always need to think about profitability (even if they’re successful)

As with any business, profit can be a great indicator of health and performance. Running an MSP is no different. With so much focus on growing revenue, taking care of clients, and recruiting and retaining employees during high wage inflation, running a profitable MSP enterprise becomes a real challenge.

Aside from that general business truth, MSPs also run into challenges unique to their industry. Pricing competition can be much higher in the MSP sector as opposed to other industries, which, for MSPs that try to compete on price, will lead to decreased profit margins on the services MSPs provide. Without a healthy profit, it becomes difficult for MSPs to invest in needed technology, pay for more staff, pay down debt, and more.

The importance of data-driven decision-making 

To be successful, MSPs must constantly analyze key performance indicators (KPIs) within their business and use them to drive intelligent data-driven decision-making. More specifically, this means a focus on the profitability of their services. This might be easy to track when you first start your MSP business, but the key to remaining profitable as you grow is to continue to monitor service profitability  (also known as Service Gross Margin) as you become successful. 

Entrepreneurs in any industry have a nasty habit of “taking their foot off the gas” once they begin to turn a profit. Doing so is a recipe for disaster in most businesses – let alone one as competitive as the managed IT services space. In fact, one of the most important times to focus on “doing the right things right” with Service Gross Margin is when MSPs are growing the most. If they don’t, they will wake up one day with a large number of unprofitable contracts that will need to then be addressed.

For more information, check out this newsletter from our Service Leadership team for a deep dive into Service Gross Margin or contact us with any analytics and reporting questions.

Essential tips for MSPs to improve profitability

If you feel your analytics tracking and reporting aren’t up to par, have no fear. We’ve made our case for the importance of tracking your profitability as an MSP, and we wouldn’t leave you without a viable solution.

Below are 5 essential tips you can implement in your MSP business to help make data-driven decisions that increase your profitability.

4 Tips for Improving Profitability for MSPs - in-post image.jpg

1. Have a concrete measurement strategy

You can’t improve what you don’t track. That maxim applies to several industries like fitness, marketing, and of course, managed IT services. Therefore, improving your profitability begins with developing a reliable, consistent method for calculating it.

In its simplest form, profitability can be broken down to the following formula:

Profit = how much is left over from business revenue after expenses are subtracted.

This goes hand in hand with Service Gross Margin, which is calculated as follows:

Service Gross Margin = Total revenue from services (including T&M, Project, and Managed Services revenue) – Services Cost of Goods Sold (COGS), including total cost of tools to provide services plus technical team payroll to provide services.

While the calculations are simple enough, the challenge comes from keeping detailed records of how much it costs you to provide each service. This can become especially difficult as you become more successful and your company grows – bringing somewhat “intangible” costs like workforce labor allocation, by hours spent on each category of revenue, into the mix. Effectively using a Professional Service Automation (PSA) tool for all ticketing and ensuring all time by your employees is being tracked, will help to keep expenses organized and allow you to accurately use data to make decisions.

2. Heavily evaluate any vendors you plan to partner with

Most business owners underestimate the influence of their third-party vendors. Often they’ll shop around for the services or technology to meet an immediate need, and then sign a service agreement. It’s important to adopt the right perspective when it comes to vendors and third-party service providers, though.

Understand that just because a third-party vendor operates under a different business name doesn’t mean they’re a separate business. Once you sign a service agreement with them, they essentially become part of your business – a business partner. Therefore, you owe it to yourself and your team to run all potential vendors and suppliers through an in-depth vetting process.

Here are some areas to focus on when evaluating a vendor or partner:

  • Availability – Make sure potential vendors listen to you and address your concerns. They should be available when you ask questions and not “going dark” for days.
  • Programs – Evaluate a vendor’s in-house program. Do they provide education and training to your team as well as their in-house team? Also, make sure they provide you with a dedicated portal to interact with them as their partner.
  • Reputation – Ask for recommendations from colleagues, distributors, members of industry groups, etc. Ask for general referrals or ask about their experience working with a particular vendor you’re interested in. It’s also helpful to ask how a vendor’s product performs (i.e., did they have any trouble with scalability, compatibility, etc.?).
  • Advisors – A strong vendor will be supplemented by advisory councils that meet regularly and are experts in the vendor’s business area. These councils should provide you with honest opinions and feedback and address any concerns when vetting a potential vendor. 
  • SLAs – Examine vendor SLAs to better understand what your daily business relationship would look like. Research their delivery process, performance and delivery standards, and issue resolution process. 
  • Compliance – Clients require certain certification and audit standards from their MSPs. The same requirement should be applied to your vendors as an MSP. The relationship needs to be equitable in both directions – especially concerning compliance.
  • Channel Sales Commitment – Occasionally, when working with a vendor with a direct sales model, you may run into channel conflict issues. Find out what procedures or policies your potential vendor has in place to avoid these issues.
  • Price – While price should not be the primary consideration, it must be considered carefully because all of these costs will impact the Service Gross Margin, which will ultimately impact profitability.

Using these 8 areas and more to vet your vendors will go a long way toward creating partnerships that align with your goals and service offerings. It may seem tedious, but a little research will help you scale your business long-term and minimize turnover.

3. Find ways to simplify and consolidate administrative practices

The key to any business is focusing on the highest and best use of everyone’s time. Your most important role as an MSP is addressing the managed IT service needs of your clients. But just because you shouldn’t be primarily focusing on administrative tasks doesn’t mean they are not essential to your business.

Invoicing, accounts payable, and tax filings are a few of the necessary “behind the scenes” aspects of your business. It may cost a little more money or energy up-front, but automating and batching tasks together can create efficiencies that help you spend less time on ancillary tasks that take away from your “one thing.”

Leveraging automation or e-services is a great way to simplify and consolidate. E-file your taxes or hire them out to an accountant and bookkeeper. Batch all of your insurances with the same company, so you only spend time sitting down with one agent. You can also save time by blocking off your schedule to pay all of your subscription/certification fees at one time.

Meetings are another opportunity for optimization. Many corporations spend hours meeting on issues that could be resolved in minutes. There are dozens of online resources for techniques to trim down meeting times

Some other services MSPs can leverage for help with the admin side of their business are:

  • Online accounting/bookkeeping software
  • “Rent a CFO” or other one-off high-level consulting services
  • Integration of time management software for employees
  • Outsource HR 
  • Shorten your “To Do” list to get more done

4. Create target customer profiles

One of the fundamentals of business is that you can’t be all things to all people. This can be something that many well-meaning MSPs grapple with as their organization starts to mature. 

By this, we mean that MSPs in the early stages can fall into the trap of thinking every company that wants to do business with them is a good client for them. However, this can lead to a chaotic environment that hurts profitability rather than supports it. The solution here is to define and pursue that ideal target customer.

Benefits of creating an ideal customer profile include:

  • The ability to use the same technology to support all clients, which leads to your staff understanding the technology better, which leads to more effective and efficient issue resolution.
  • More efficient issue resolution allows you to staff with fewer techs. This in turn leads to better profitability.
  • A narrower client profile and a tighter tech stack make it easier to train new technical employees and to staff with more employees who are less experienced (and therefore, lower cost).
  • Increased customer retention through stronger service quality. Not only does this lead to less customer turnover, but it allows you to charge higher prices.
  • A faster sales cycle by determining early on whether a prospect is a good fit.

So, with this in mind, how can MSPs put together their ideal customer profile? This, again, starts by looking at existing data. List the existing offerings you have, look at the number of customers for each one, and sum up your total revenue for each offering and customer size segment.

The last step here is to follow this formula:

(Revenue/customer size)/number of customers for each customer size

The goal here is to determine what customer size segment is giving you the most clients, as well as what segment is buying the most of your services, then use that understanding to determine what customer size range is your best fit to target Knowing the most profitable customer profile for your business right now is the ideal launching pad for your future profile targeting.

What are common mistakes MSPs make regarding profitability?

While making sure you’re only offering profitable services is important, you also need to understand this is an ongoing process. Many MSPs leave profitability on the table by making these common mistakes:

  • Being too flexible with service offerings. Most MSPs offer their service in bundles. Three to five is typical, and some MSPs even end up offering 6 to 8. The more options a customer can select, the worse the impact on quality and profitability.
  • Not measuring the success of their services. A simple example might be pooling all revenue together, leaving you unable to determine how much revenue a particular service brings in.
  • Promising more to clients than they can deliver. Overpromising services to clients and setting false expectations can cause serious problems within your MSP business. Not only may it cause loss of clients, but it may also result in lawsuits. Be sure to clearly communicate what clients receive when hiring you.
  • Ignoring the client-side of the business. It’s easy to get caught up in performing your technical work for your customers. However, your MSP business doesn’t work without clients. Marketing, sales, and customer support are all essential parts of the client-facing side of your company. Be sure those aspects are getting significant attention from you. Tools like customer feedback systems are essential for getting information straight from your client base on areas of strength and areas for improvement.

There’s an old saying, “it’s not how much you make, it’s how much you keep.” Being aware of these common pitfalls will ensure your growing business doesn’t have profit that comes in the front door and leaves directly out the back.

What tools can help MSPs improve profitability?

As a bonus tip, MSPs should consider implementing automation and tools to bolster the data-driven decision-making that pushes their profitability forward. An all-in-one solution that handles administrative and analytics duties can significantly improve the structure of your business, as well as the service you provide your clients.

ConnectWise Manage is an app within our suite of MSP management tools that can help you do exactly that. Streamline billing, decrease routine admin work, and more. We even offer free trials and demos so you can try before you buy to see if we’re the perfect partner for your business. 

Another potential option for support is BrightGauge, a ConnectWise solution. Data-driven decision making starts with having organized data collection and presentation to reference. Brightgauge can create customized dashboards, and has over 40 integrations to work with your existing workflows and tools.

Lastly, education on what contributes to profitability and success is essential. Service Leadership, a ConnectWise solution, provides not only performance diagnostics to help your team understand areas for improvement, but gives you a customized, step-by-step Action Plan with best practices to show how you can start doing things the way the top performers do. They can even provide you with quarterly benchmark reports that analyze your profitability and compare your financial performance not only to the rest of the IT solution provider industry but to the best-in-class in your specific business model. You’ll get insight into how you are really doing and where there is room for improvement.

Whether it’s to try our products or ask general MSP questions, contact us anytime. We’re here to help propel your business forward.

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