Here's a complaint commonly heard in the managed service provider industry: "My business is twice as big as it was five years ago, yet I am not taking home any more money now than I was then."
Other comments often repeated by MSPs include: "My partners and I can't agree which clients are making us money and which are losing us money," and "I think I am being efficient about my staffing, but I can't really be sure."
While we are all pretty good at helping our clients manage their systems, we are just not sure we are managing our companies well. What is the answer? It's metrics.
Before you worry about how profitable you are, you need to understand what is driving your success or lack thereof. Key performance indicators (KPIs) should be reviewed regularly to see if you are on the right track. Before you get started, remember to spend some time to identify the right KPIs and how you will synthesize them. KPIs lose value rapidly if they constantly evolve without a change in the business model to merit such evolution. Part of the value of KPIs is the ability to identify good or troubling trends.
We have spent some time analyzing MSPs and have found a few KPIs to be particularly important.
1. Client effective rate (CER): For this, you divide your monthly fixed fees by the number of hours attributed to the client, resulting in a revenue/hour figure. You will quickly see which clients are using your engineers' time disproportionately to what you are being paid. Now, be careful not to simply raise the rates on the clients with a low CER. Dig a little deeper and find out if more training or upgrades would reduce the time they spend with you. This kind of investment will help you keep larger clients (low CER happens more frequently with larger clients) and make them more profitable. This part requires some research, but because of the CER metric, you can narrow your work to only a handful of clients.
2. Client contribution (CC): For each client, you should know how much you earn across all business lines and what the associated costs are. For example, add the revenue from fixed fees, products and services sales together to get client revenue. The expenses will be the cost to you of these services, which is typically the allocated time plus your cost of the products and services. Too many MSPs only care about the fixed fee margins. If you have a client that is consistently generating significant project or product revenues, you should consider that in conjunction with the base business. A dollar of profit is not so different if it is earned on one side of the business or the other. That said, you should be careful about one time vs. recurring events.
3. Revenue/Compensation (RpC): This metric takes so many factors into account -- efficiency, employee costs and client margins, among others. For each employee, divide service revenue by his or her compensation costs. Benchmark the employees within functional groups and try to find the ones that stand out on the high or low end. You will quickly see which employees are driving growth.
NEXT: Mitigating FactorsA few things to keep in mind as you undertake any KPI project:
1. You are in for a lot of work if you do this without a well-built professional services automation (PSA) system. You have options in terms of PSA systems and consultants. Trust me, once you have it running the right way, you will be happy.
2. This list of metrics is not comprehensive, but rather a foundation. MSPs have a lot in common, but they are also unique. Start with what you want to learn about your business and then work toward building the right metric using the right data.
3. Follow trends. Understand why clients, employees and whatever else is different than it used to be. The best benchmark to start with is previous operating levels.
4. Differentiate between actionable and non-actionable KPIs. This is all about focusing your efforts to maximize the return on your efforts. You should understand if something outside of your control is affecting your business, but you should concentrate on changes you want to make to get your KPIs closer to where you want them.
5. Make sure you understand what you are doing and get help if you don't. Poorly constructed metrics are dangerous. Talk to peer group members or bring in an outside consultant.
Metrics are really just the beginning to improving the management of your business. They let you know which parts of your business need adjustment, not how to make those adjustments.
Larry Cobrin is a director at MSP CFO, a financial services management firm focused strictly on MSPs and VAR IT consulting firms to help them more profitably manage their businesses.
PUBLISHED APRIL 19, 2013