WAYNE HUNTER is an admitted “”propeller head”” who happens to be good with numbers, something he has focused on since starting his business in 2004. “”Every year, every quarter, every month, I’m looking at something and trying to figure out, how do I improve on what I’m doing?”” explains the president and CEO of AvTek Solutions, an MSP in Allen, Texas. “”Customers change, markets change, business changes, and if you don’t know how to recognize it, then you’re going to get left behind.””
Hunter is somewhat of an anomaly, according to Rex Frank, vice president of Academy for Pax8 and formerly head of MSP coaching firm Sea-Level Operations, which Pax8 acquired. “”It’s disappointing how low the number is of the companies that do know their numbers,”” he says.
Yet the ability to understand key performance indicators that show if prices, payroll, profits, and more are where they should be is critical to not only staying in business but growing.
Knowing your numbers and monitoring them regularly serves two key purposes, says Allen Edwards, president of Eureka Process, an MSP consulting firm. First, metrics enable you to make data-based decisions. “”You think things are going a certain way and it’s not always the reality the numbers speak,”” he notes. The second factor is psychological. “”That which gets measured and reported on gets improved exponentially,”” he says, adding that once MSPs start diving into the numbers “”that is usually when things begin to take off.””
He cautions, though, that while KPIs and other metrics are key to growth, a number measures a process. If your numbers are not providing an accurate picture of your company’s health, it’s because there is no clearly defined process for your team to follow. That’s the reason your data “”is crap,”” he says. Once you define your processes and everyone in the company is aligned and clear on what’s important, your numbers will start to improve even before you set targets, he says.
High-Margin Financial KPIs
What revenue and profit metrics should you track, particularly if your MSP is just starting to focus on the numbers or you want to dial up growth? The three most critical are gross profit margin, net profit, and breakeven, according to Rayanne Buchianico, owner of ABC Solutions, an accounting, tax, and Autotask consulting firm in Clearwater, Fla.
“”By determining your breakeven sales number, it allows you to set a monthly target of how much you need to sell in order to start making a profit,”” she says. To determine your breakeven point, she explains, start with your fixed expenses. For example, say it costs $45,000 a month to keep the lights on, including rent, utilities, payroll, etc. Next, say your gross profit margin is 50%. If your margin is 50%, and your fixed expenses are $45,000, you need to have $90,000 in monthly revenue to cover your 50% gross margin and your $45,000 in fixed expenses, she explains. That’s your breakeven. Every dollar above $90,000 is net profit.
If you’re failing to grow, “”the No. 1 red flag is that gross profit margin,”” Buchianico stresses. “”If that number is below 40%, [MSPs] will struggle to make a profit.””
Of course, there are some products that will never provide 40% margin, she adds, such as hardware or Office 365, but MSPs can compensate for that with higher margins on managed services and projects.
Edwards recommends focusing on just a handful of key performance indicators. “”We need to set targets. And if these are good, we don’t have to drill in. If they’re bad, hopefully we have somebody on the team who’s already drilled into the other metrics. I’m definitely a proponent of having other metrics, but those are management tools.””
This is Hunter’s approach. He focuses on gross margin and net profit, along with contribution margin. To calculate contribution margin, Hunter subtracts his cost of labor to deliver the gross margin. “”So that way I can figure out what my labor efficiency ratio is for every dollar I spend—how much margin do I make per employee,”” he says. “”So really trying to obtain that I have that dollar value at the right place.””
If any of those numbers are off from his target, then he drills down into other metrics. “”It might not necessarily be down to an individual level but what is it that team’s doing overall in that area that has changed?”” Or he may drill down to a certain service, only to find it is no longer viable because the market has changed.
Edwards also recommends reviewing a detailed P&L statement every month. “”You should know where your money’s going [and] you should break it up into service lines.””
Solid-Gold Sales and Marketing Metrics
MSPs need data on sales and marketing to have a clear picture of what’s in the pipeline, according to Frank. Two metrics to track are marketing qualified leads (MQL) and sales qualified leads (SQL). If you know you need to close X amount of new recurring revenue in a month, for instance, then you need Y amount of proposals. “”In order to get that many proposals, we need to have this many sales qualified leads. In order to get that, we have to have so many marketing qualified leads,”” Frank explains. Those numbers will be different for every MSP, he adds, “”but they do need to know what their numbers are, start tracking them, and do the math and work backwards.””
Buchianico recommends tracking leads in your CRM to determine where they come from and how much time you’re spending on each lead. If a less costly lead requires a lot of work but you’re closing a more expensive lead in half the time, the expense may be worth it, she explains. “”You should evaluate your advertising and marketing packages by the ROI, not just the close rate.”” This not only includes length of time to close but the size and quality of the customer.
Another important metric is client churn rate, Frank says. If you have to spend more money to get new customers to replace the ones you’re losing, that drives up your sales and marketing expenses.
Streamlined Operational Metrics
The efficiency of your service desk is also critical to growth. Buchianico recommends tracking time to ticket resolution—how much time an individual employee is spending on a client ticket, which enables you to determine your most productive employees. “”And then I create what’s called a labor efficiency ratio, where you can take the amount of the labor and their efficiency at the service desk level and match it up to the amount that you’re paying them to make sure that you are properly staffed … and your people are being paid an adequate salary for the work that they’re doing,”” she explains.
At the same time, you will be able to identify technicians with low utilization rates. “”There’s no reason that your technicians should not be at 80% utilization,”” says Buchianico, adding that you should be reviewing resource utilization weekly as you process time sheets.
Don’t push for more than 80%, cautions Edwards, “”because then you’re asking them to record bathroom breaks, which is just draconian.”” Over-recording time is as much of a common problem for MSPs as under-recording time, he says. “”You have to be very careful in measuring people. They feel pressure, that maybe you turn the screws too tight, and they don’t enjoy their job anymore.””
Hunter says his firm tracks ticket and project status every Monday in a staff meeting. “”From all that, I can also go back in and look at what load level do I have?”” He says this enables him to redistribute the load, so all staff are working more efficiently.
Getting Prices Right
Even if your staff is efficient, your agreements may not be profitable, Frank points out. MSPs often have a false sense of security about agreement profitability because technicians aren’t tracking their time properly, he says. Once technician time is accurate, they sometimes find their agreements are less profitable than they thought, or worse, unprofitable. “”This is the moment that the ‘five stages of grief’ begins. I’ve seen it over and over, where we give the accurate data to the key decision makers about unprofitable agreements. They tend to go through the denial, anger, bargaining, depression, acceptance, right? And it takes about a year and a half to come to the conclusion that they’re not going to hope their way to profitability. They have to start making some tough decisions … talking to the clients about increasing prices or doubling down on leveraging tools, technology, and standardization to start to get their agreement profitability in order.””
Buchianico advises drilling down into the profitability of each individual customer. “”That’s when you start digging into your PSA and start looking at your client effective hourly rate. What are you charging them? What are they costing you? How many hours are you spending on this customer and how much are you making on them?”” You want each customer to be profitable, at or above a 50% margin, she stresses.
You should also be continually reevaluating your product stack, she adds, not only to stay up to date on new tools that may offer a better solution for your customer but may offer better margins too.
Getting Help or Getting Started
Like many MSPs, Hunter is not an accounting expert, so he enlists the help of a CPA firm, leverages the knowledge shared in his peer group, and takes advantage of resources provided by his membership in The ASCII Group. Most important, he reviews his numbers monthly, at a minimum, looking at the month, the quarter, and the past 12 months.
Setting a revenue goal with milestones is also important, Edwards says. “”Let’s assume it’s a year out. I ask myself the question, why haven’t we done that before? What are the roadblocks in the way? And then I start breaking up quarterly milestones.””
In addition to revenue KPIs, he suggests developing some targeted KPIs, even if just temporary ones, to help identify core issues, such as a problem employee or an unprofitable agreement.
Frank offers three tips for MSPs either starting to get a grasp on their numbers or planning for growth. No. 1 is to simplify and use your PSA. “”Number two is go to work on the life of the ticket. That’s triage, dispatch, time entry, and then once you get those in order, I would go to work on agreement profitability.””
Finally, Hunter says there’s always more to learn when it comes to leveraging your numbers for insight. “”If you want to continue to be successful and grow your business and be in business for a long time, you’ve got to evolve. And so, I’m always learning.””
Coda: Transparency or Close to the Vest?
How much, if any, financial data should MSP business owners share with employees? According to ABC Solutions’ Buchianico, transparent or “”open book”” companies tend to have greater success because openness earns the trust and respect of employees. “”They really feel like they are part of this company rather than just somebody filling a desk,”” she says. “”If they feel that you trust them, they will trust you as well.””
That doesn’t mean opening up your QuickBooks and giving employees free rein to payroll or other confidential information, she notes, but rather providing them with an overall picture of where the company is, where it’s going, and where it’s struggling. “”Your employees want to help, and the more they know, and the more that they are included in these decisions, the better off the company is going to be.””
The MSPs that are less operationally mature are the ones that tend to keep their numbers closer to the vest, says Pax8’s Frank. When the owner is the only leader in the company, “”they tend not to share anything with anybody,”” he says. As a business starts to mature, Frank encourages owners to share gross margin with the service manager. Once the leadership team is developed, he advises owners to share the full P&L statement with them. “”And we try to get them to share at least gross margin information with more of the employees, if not the entire company,”” he adds, because “”everybody in the company has to recognize what their individual contribution toward profitability is.””
Buchianico encourages owners to have monthly meetings with the leadership team to discuss key financials, any challenges the business may be facing, decisions that need to be made, and how that will affect the bottom line. “”Now you have invested employees in the company and they really feel like they’re part of a team.””
