How One MSP Grew To $24 Million By Eliminating ‘Efficiency-Focused’ Fixed Fee Model
‘We think efficiency is a bad word,’ says Brent Morris, vice president of business development of Success Computer Consulting. ‘If I'm an efficiency-focused business, that means I'm trying to provide as much as possible with as few resources as possible, which equals burnout with technicians.’
Since January 2014, Success Computer Consulting has added a new customer each month except for five individual months.
The model Success follows, Theory of Constraints, has allowed the company to grow 10 to 20 percent every year, according to Brent Morris, vice president of business development of Minneapolis-based Success, a $24 million organically-grown MSP with just over 100 employees.
Success does not offer fixed-fee services as Morris said they almost always lead to cost driven decisions that “prevent a good client experience or underinvestment in things like security, training and other resources.”
When MSPs approach their operations with a capacity mindset and agreements that flex with demand, as opposed to efficiency/fixed fees, more work can be accomplished with the same resources, said Morris
“I wouldn’t say that the predominant business model in our industry is wrong, it’s more about approaching service delivery differently, one that focuses on the flow of work through the system to eliminate constraints,” Morris said.
Morris and Bruce Lach, president of Success, said their model is working and spoke exclusively to CRN on how they believe the message to MSPs, and how MSPs grow, should change.
Lach said the more Success can teach its peers to grow, the better off the industry will be and the better clients will be served.
“But the industry is broken,” Lach said. “If we're all getting the same advice, how come we're all performing the same way and that tends to be underperforming? That's kind of our premise that somehow the conventional wisdom is not moving the needle for the industry.
The Issue With Fixed Fees
To grow a successful business, Morris said business owners must practice the Theory of Constraints, a philosophy developed by Eliyahu M. Goldratt in his 1984 novel “The Goal,” which identifies the most important limiting factor–a constraint– that stands in the way of achieving a goal and then systematically improving that constraint until it is no longer the limiting factor.
The message being trumpeted across the industry, Morris said, is that the best way to profitability is to bring on new clients and not have enough people to serve them.
“That’s also compounded by the fact that we’re all taught to have all-you-can-eat agreements,” he said. “There's bronze, silver and gold plans where clients can pay one price, per user, per month, and then it's exasperated by the security needs.”
He said by doing an all-you-can-eat, fixed fee agreement, MSPs sell a service that they are promising will standardize everything and will be so airtight that there will be no variability in the system.
“But if you're growing in business, you're always introducing variability into the system,” Morris said. “It's impossible to do an all-you-can-eat agreement at a fixed price per month.”
Success has three components to its pricing model. One is fixed as it's a price per user, per month for the tools that they are going to use to deploy the software and manage the network. The second is a variable component that acts as a mini block time agreement every month.
“I might determine that a client has 20 users on their network so they’re going to need roughly 15 hours a month for support,” he said. “If it goes over they’ll get an invoice at the end of the month for that overage amount. If it goes under then those minutes roll till next month.”
Success doesn’t want to accrue a bank, so they are always looking to right size agreements. The third component is whatever backup needs the client may have.
Lach said there are two issues with fixed fees. The first is MSPs promising unlimited access to a limited service.
“The help desk can only take so many calls before the calls start to backup,” he said. “While their fee might be consistent, their experience won't be.”
‘Efficiency Is A Bad Word’
“If I can serve more clients faster with the same amount of people, I can accelerate multiple times more profitability than I can by being efficient,” Lach said. “That simple math will show you that it's worth keeping the people. The answer is understanding that it's not about utilization of your people. It's not about billable hours. It's really about the flow of tickets through your service desk. It's the amount of projects that flow through your project team. It's about owing that value to your clients.”
“We think efficiency is a bad word,” Morris added. “If I'm an efficiency-focused business, that means I'm trying to provide as much as possible with as few resources as possible, which equals burnout with technicians.”
He said the general approach to having a backlog in a Theory of Constraints business is that if the MSP has a backlog, it's a promise that they haven't met or that they haven't kept for the client.
Success has a very short backlog and it's typically because there's an equipment dependency or the timing for the client isn't right for them. In terms of helpdesk tickets, the MSP processes about 100 a day, according to Morris.
“We take a look at capacity and flow every single day to determine staffing and resource needs, but staffing and resources to me are two different things,” Morris said. “I can throw a whole bunch of bodies at a service desk, but if they don't have the right skills then we're not going to be good at a servicing an organization.”
The secret is to be more productive, not efficient.
“We're not arguing the fact that the industry is growing and there isn’t advancement and opportunity,” Morris said. “What we're arguing is the MSP industry, because their efficiency focused, are not serving the industry or their clients as well as they could.”
Investing In Security
In 2013 when the Target breach happened — the store’s headquarters are a few miles from Success’ office — Success decided to invest about $500,000 to stand up its very first SOC (security operations center).
“We knew that that breach potential was going to feather down into small business,” Morris said.
The MSP transitioned two employees from its NOC team to create its SOC team who then went after a few certifications.
“We knew the stuff that the NOC or a traditional MSP used couldn't be used to protect the organizations in the same way,” Morris said, adding that they sold the security service on top of their regular service.
“But in 2019 we couldn't let business owners decide anymore whether or not they need security,” he said. “We had to bake it into our current offering.”
Through assessments of other MSPs they’ve helped, they still see “terrible security.”
“They suffer with trying to make sure antivirus definitions are up to date and their firewalls are still challenged with firmware updates and software updates,” Morris said. “Those three critical components are the three base level things that every MSP should do really well. But they don't have the capacity to do it well. Why? Because they offer a fixed fee, all-you-can-eat agreements.”
MSPs can't invest in security if their clients are contracted to a rate for all that they can provide.
“We're seeing networks that are not being taken care of effectively,” he said. “It's because MSPs are told to be profitable, run efficiently. That's why MSSPs have had the ability to impede our market space because they can develop their own practice specific to just security. So MSPs are dependent on MSSPs to provide the two halves of the whole that are necessary to take care of clients.”
The Theory of Constraints ‘Is A Discipline’
The Theory of Constraints means satisfied clients and satisfied employees which lead to a profitable business, Morris said.
“The concept is easy, the practice is really hard,” he said. “One of the challenges that we face every time we advise an organization on this practice is they understand it, they do small things to make quick changes and then after a while they revert back to the same metrics that they've always chased.”
“This is about the flow of work through a system and making sure you have enough capacity in that system to accommodate Murphy and opportunity,” he added. “Murphy meaning if something can go wrong, it will go wrong. You have to have a consistent drumbeat of new business coming in. Sales is really freaking hard. I think I understand the plight that a lot of MSP owners face and that is, ‘I don't know how to train salespeople. I don't know how to support salespeople. I don't know how to put together a compensation model.”
While Success has consulted other MSPs informally for free on this, they haven’t defined what that looks like going forward.
“We’ve worked with about a half dozen at this point,” Morris said.
The second evolution of a Theory of Constraints company, he explained, is to do it somewhere else.
“Take what you created here and go put it in other businesses. That's where we're headed,” he said. The next step of evolution for Success is to do this elsewhere.”
Nathan Stallings, president of Indianapolis-based MSP Matrix Integration, which is on the CRN 2023 Tech Elite 250, is in a peer group with Success through Ingram Micro and has consulted with Success for about a year.
“They were outpacing everybody else from a profitability and growth perspective, and customer satisfaction,” Stallings told CRN. “They seem to be doing a lot of things right.”
Almost immediately he was told about the Theory of Constraints.
“We're continuing to see the benefits of it,” he said. “It's a journey to really understanding this and applying it. When you start thinking about it as, ‘Where's the constraint?’ It is a different way to view your business. People don't think this way.”
He echoed Morris’ sentiment in that it’s easy to understand but hard to implement, “It’s a discipline.”
“The first step is to identify the current constraint,” he said. “Then you exploit the constraint, subordinate it, elevate it and repeat. Once you've got that in order than you go find the next constraint.”
And the model is working for Matrix. Stallings implemented the Theory of Constraints model into its enterprise business unit where they tackle a lot of project work. Since applying the concept, Matrix has seen a 10 percent increase in its gross profit margins.
“It's proof that it's working and we need to dig in more,” he said.
Another component he’s taking from Success is looking at the customer as the hero.
“You're doing everything to make the customer the hero instead of you being the hero,” he said. “That whole mind shift changes just how you deliver for your customers.”
Grow At A Consistent Pace
Focusing on productivity provokes the question: what comes first, service or talent? It depends where the MSP is on their journey, the execs said.
“You have to have a good sales system in place,” Morris said. “If you can't deliver new business or new opportunities, then it's really difficult to scale the system. You've got to be able to deliver that growth in a consistent, predictable way. If you overwhelm the system, and then conversely, underwhelmed the system you won't have trust in the organization to deliver so you have to be absolutely consistent.”
Generate demand, deliver on the promise, administer the business, Lach added.
The best way to grow is consistently, not through spikes, Morris said.
“The more that you can be consistent, the easier it is to know exactly when you need to add resources and the type of resources that you need to add,” he said.
They also hire good talent when the opportunity arises, not when they’re scrambling for talent.
“I'd rather hire somebody who's great when they're available than be scrambling for somebody when I need them,” Morris said.
A system that helps this model is having a team of hunters and farmers. Hunters are those out finding new clients whereas farmers are taking care of the needs of existing clients.
Before 2014, Morris called new business coming in a leaky bucket.
“I can bring in new accounts, but we might lose them because our service model wasn't one that could accommodate the additional capacity needs that were required of the new clients,” he said. “It's about gross and a model that accommodates excellence in the service.”
The Advice Needs To Change
It's hard to become a mature business when owners are inundated with the majority of responsibilities as the owner. Because they’re not properly taught how to grow, the resources are difficult to consume. That hinders the best-in-class profitability that MSPs are taught to strive for, Morris explained.
That’s because the advice MSPs are given, the execs believe, is broken.
“Why do we have 25 and 35-year-old companies that are still stuck between five and $10 million?” Lach said. “There's something wrong between the advice we're given, the way it's measured and results we receive in this industry. That's the essence we're trying to crack. We think we have a model that works.”
The advice given should be tailored to the maturity of the company, he said. Advice given to a $3 million MSP should not be the same advice given to a $20 million MSP.
“You have these resources, but there's no playbook that helps us go from one tier to the next, one level to the next,” Lach said.
The answer: MSPs should quit taking generic advice and assimilate it into the path they're on, he said. MSPs should find others who are one to two tiers above them, revenue-wise, and ask questions about how they got there.
Morris said his answer is slightly more bullish: Stop focusing on efficiency and focus on providing great service. Figure out how to provide great service.
“Providing great service means figuring out the right flow of work for the system,” he said. “That efficiency-focused flow of work through the system is burnout for everybody.”