6 Questions To Get On The Path To Success In the MSP Marketplace

Growing Your MSP Business

Looking to grow your MSP business but want to avoid bringing a CFO on board? Co-founders of MSPCFO Michael Kraner and Larry Cobrin have built a business around outsourcing the CFO position for managed service providers, adding a level of business expertise and managed service provider experience to their clients.

They sat down with CRN at ConnectWise's IT Nation Partner Summit in Orlando, Fla. to discuss some of the common business questions that MSPs should start asking themselves to break down barriers to profitability.

Do You Have A Strong Budget?

From their own experience helping MSPs take advantage of a growing marketplace, Kraner and Cobrin said that many MSPs don't have as strong of a budget structure as they could. Cobrin said that MSPs should compare current numbers to the previous year and then budget accordingly for growth and attrition. He said keeping track of patterns within the organization can make sure the company is on track and can flag problem areas, such as a $5,000 overrun in office supplies, which could be preventing success. The key to building the patterns is to step back from a month-to-month budget and construct the bigger budget picture over quarters or years.

"It's something you can build a story around," Cobrin said. "I have an opportunity here to improve this area."

Are You Aware Of Key Metrics, Not Just For Today But Tomorrow?

It's not just about knowing the numbers, MSPCFO's Kraner told CRN -- it's about knowing what the numbers mean for business. Kraner said many businesses collect numbers for the quarter, but don't necessarily delve deeper into the significance of those numbers and what they mean going forward.

"The numbers tell the story," Kraner said. "The numbers are the proof in the pudding in what's going on."

He said that the numbers reveal problems, or what the MSPCFO founders refer to as "opportunities" for change and growth.

"Companies with that habit are going to be more successful and better run than those that aren't," Kraner said.

Can I Restructure Contracts To Grow Profitability While Improving Stability?

As more MSPs move toward fixed-fee sales, they have to make sure they are also restructuring the contracts during the switch in a way that is good for both themselves and their clients. "It's much easier if you have the historical data and usage of how the client has worked previously so you can structure a win-win relationship," Kraner said.

One of the important points is making sure to take into account the profitability behind renegotiated contracts, Kraner said.

"It comes back to having better information to make those decisions," Kraner said.

Which Of My Clients Are Driving Profitability, Which Are Costing Me Money?

The benchmark often for deciding which client is the most profitable has traditionally been the effective rate, meaning the price per hour of maintaining the client, Cobrin said. While that has been complicated by the adoption of fixed-fee pricing of services, you can still back into the effective rate by keeping track of hours.

Gross margin also plays a big factor, the MSPCFO founders said, instead of measuring straight revenue. For example, a company could sell $10,000 worth of hardware to one client and receive $2,000 in profit, or they could sell $5,000 and get $3,500 in profit. While the second option brings in less revenue, it yields more profit.

"Some people are really concerned about revenue from clients and we make that the argument that it isn't important," Cobrin said.

Am I Utilizing My Labor Force The Right Way?

A big question for a managed service provider business is making sure labor is being used effectively, and that all the work is properly invoiced, the MSPCFO founders said. Kraner said that it is important to track how many hours a client is taking up of your employee's time. While some months will have some spikes in service, if a client gets a virus for example, it is important to analyze the data to see if the demand for additional service is a one-time event or a trend. While MSPs will notice if a client has a catastrophic event, they may not notice if a client is slowly requiring more and more attention.

"The tragic ones you know about; the ones that are chipping away at you go unseen," Kraner said.

For clients that are consistently off track, it could suggest a need to revisit pricing, a problem with the systems or a need for more training, Kraner said.

Are You Converting To The Cloud In The Most Cost-Efficient Way?

As the cloud bursts into more and more managed services practices, businesses need to establish what their evolved business model will be going forward. MSPs will sell less physical equipment, which changes their relationship with clients, Kraner said.

"It changes the whole dynamic," Kraner said.

Kraner likened the change to a car approaching a curve in the road. If businesses don't turn with the road or hit the right angle, they might fall off to the side or hit a tree.