How To Become A $100-Million MSP4:53 PM EST Fri. Jun. 10, 2011
Since taking the helm at mindShift Technologies, a Waltham, Mass.-based MSP in 2003, CEO Paul Chisholm has made acquisitions and created a $100-million company. Along the way, he's learned a few things. He shared some of his experience of creating a "Super MSP" Friday at TruMethods' Schnizzfest conference in Philadelphia.
Chisholm was interviewed at the conference by Gary Pica, CEO of TruMethods and former head of Dynamic Digital Services, one of the companies that mindShift acquired. The following are excerpts from the session.
Many MSPs struggle with finding good talent. How do you find and develop strong employees?
It is tough to find good talent. First, don't hire a resume, hire people. Your first look should be at the individual. I meet all new employees within 30 days, which I think helps set the correct environment to excel. Don't rush them. There's a process to go through to train them. Take the time to do that. The second thing is give constant feedback to people. People like to hear how they're doing.
What are some of the operational challenges you face as you grow and how do you overcome them?
Organizationally, you may need to redo your structure. As you grow, new people will have new responsibilities. What happens is people get sorted into silos. You create all these little silos. Don't make the structure too tight or too big. But the process of reorganization is really a thing you have to do to get scale.
So you apply pure business principles to processes?
What customers don't want to do is rely on a person. A person can change. You have to do more convince them that the company is built upon processes, that there's a process that backs the person up. That will help you in selling process to the customer.
What metrics do you use to measure the company?
There are three kinds of metrics: financial, sales and operational. Break down each category. You can't have 500 metrics. In each one of those categories, what are 10 key metrics to drive business. Then the whole company can focus. What frustrates me is when someone says 'A spreadsheet said that number.' I can see that number. I want to know the logic behind the number. Get down to a unit-based system, like revenue per person, and it's easy to see trends in business.
You have twice as many employees as you did a couple years ago. How does that change the culture of the company?
The biggest thing I had to learn is I had to change the way I managed the business first. All of you know every little component of the business. The more people you find, the more you need to share responsibility. You have to rely on other people to break down the organization so they can have an individual focus at a local level.
Next: Looking Five Years Out
What is your vision for the next three to five years in the MSP industry?
We're not having growth in the SMB part of the business. The economy has hurt all of us. Our bread and butter is with companies with 30 seats who add five or 10 seats. We don't get that organic growth anymore that gives you a little cushion. Margin pressure over the next several years will be more difficult.
Number two is more consolidation. You need more scale to drive better revenue. The third part is the technology direction to cloud and Saas. The implication is it takes more capital because you need a data center. But you don't have to do it yourself. Another thing I tell people is it's not a panic situation. There's always a place in business for [small] companies. People might look at Office 365 now and they can buy Google for nothing. But did they ever hear of a thing called service? Differentiate yourself through service. Added pressure is a fact of life for all businesses but with better scalability, better financial performance. A bad economy forces you to focus on what make money and what what doesn't make money.
Is your core of the business the same as it was years ago? Fundamentally. The sales process hasn't changed. You really have two buyers: a business buyer and a technology buyer. We do tailor our business depending on what we're doing. A CIO of a 150-to-200 person company we might approach more technically, but most sales are to the business owner.
What's your view now of the M&A landscape?
The industry is still dominated by MSPs of $1 million to $7 million [in annual revenue]. That's about 80 to 90 percent of companies. There are two extremes in that. One benefit is the $7 million company has local service, local customers. I don't see that changing. There's no question there will be bigger companies but this is a big marketplace. I built a big telecom company but this is the hardest business I've ever owned. I work hard every day but there are so many chances for failure, even if you're a good company.
This is not a roll-up industry but more one of strategic acquisitions?
I've had that fight with the board for seven years. I call it selective acquisitions. Roll-up is acquiring multiple companies to get rid of all admin. How much admin do you all have? You have none. We're all doing a bunch of things. Don't just get rid of management. The customer sees that local person as their IT person. We've been successful integrating acquisitions because we do it selectively. About 75 percent of the people that we added through acquisitions. That's important for the continuity of the customer.
Next: Advice For Entrepreneurs
Company valuations can be a sticking point between buyers and sellers. What components do you look at?
The first thing I look at is is people not numbers. Date me before you marry me. Understand the people and culture of the organization. Then you look at financials. First, we look at revenue stream. Not the total revenue but how much is recurring? How much is professional services? How much is hardware? Is the recurring revenue a block of hours or a recurring service? Is it delivered remotely or on a people model? We have different criteria against each of the three.
Then we look at earnings. How much has the company brought to the bottom line? If it is profitable or if it isn't, what can you bring to make it better? Probably the last thing is the sales model. Is there really a sales model? Every company today says we're here today but our growth is this. If you think you're going to grow 60 percent, how will you get there? We look at discipline of the sales model.
What's your best advice for entrepreneurs today?
Start your company as though you want to become a public company. That implies a discipline structure and metric management. Even though that's just a dream for most people, start with that mental concept. Second, I'd tell them to hire their first three people very carefully. That sets the culture. If you were looking to hire 60 to 80 people at one time, you'd have a mix-match of cultures. The third is focus. You can't be all things to all people without failing. In the early days we all do it. It's a natural tendency [to chase all revenue]. You can always move along a little but not too far.
Next, don't be afraid to tear up your business plan and start up again. When I started my first business, we probably did that to the business plan six or seven times over the course of the first three years. It was a new industry and we didn't understand it. I was never afraid to say we learned more, this is the change we need to make.