As business gurus have long argued, you cannot manage what you cannot measure. Good metrics and key performance indicators (KPIs) are key to business success.
MSPs have a special sort of business, and as a result, their metrics are often specifically tailored for managed services, such as the prominence of monthly recurring revenue (MRR) – a harbinger of long-term success and indicator of company value.
Taylor Business Group (TBG), an MSP peer organization and consultancy, counsels service providers on driving revenue, profits, growth, and how to buy or sell their business. Recently the group advised Kaseya customers on metrics that matter for services, starting at a high level and then drilling into the details.
First off is a simple, basic but crucial measure – gross profit margin. TBG believes you should have ambitious goals, in this case a gross margin of 65 percent. The other 35 percent should go to employees (25 percent for unburdened labor) and the remaining 10% spent on tools. TBG advises the following steps:
- MRR / Standard billing rate ($3,000 per month / $135 per hour = 22 hours)
- Calculate the No. of hours on average billed against the Agreement
- Average billed hours needs to be < (MRR / Standard billing rate) * .25
For example. 22 hours * .25 = 5.5 hours
Many shops are not hauling in a 65 percent gross, but that does not mean that you cannot if you make the right moves. TBG cites the following common issues:
- Too low pricing (When was the last time you raised your prices?)
- There is no escalation clause in your contracts that call for scheduled price increases
- A poor sales organization
- You can’t properly explain the value of your offerings
- You have too many tiers or options of services, such as silver, gold and platinum plans
- You don’t have standard plans based on standard tools, but too many services based on too many brands of technologies
- Your service team is not top quality
- Processes and procedures are inefficient
Here are some other key metrics MSPs should consider.
Hourly Service Rates
Pricing is key to profit, and what you charge for services is core. Services rates are what you charge before volume or other discounts are applied. The hourly rate an MSP gets should be 4.5 times the “hourly burdened salary rate,” which includes taxes, supplies, insurance and other related worker costs.
TBG believes that no more than 10 percent of your total revenue should be spent on sales. That expense should be fully loaded with salary, commission, and bonuses. It should also include sales training expenses, advertising and marketing spending, and miscellaneous sales expenses.
Administration is critical, but it does not directly build the business the way sales and technical development can. As a result, these expenses should be controlled – and be less than 20 percent of revenue.
These expenses include administrative salaries, benefits, related taxes, internal IT costs, and building and office expenses.
First, service utilization must be defined. According to TBG, it is the “percentage of service inventory time that is billable per technician.”
This notion is similar to another metric we described in a blog “The Encyclopedia of MSP Measurement.” In this blog, we described Billing Resource Utilization, which also focuses in billable hours. In this case, the MSP judges staff efficiency by calculating the ratio of billable to wasted-hours. If you add in your tech’s hourly rate, you will discover how much money is lost when techs are not working on billable jobs.
Managed Service Agreement Profitability
This metric has some specific measurements, including:
Client Contribution (CC): How much an MSP earns from each client, less the cost of obtaining this revenue.
Client Effective Rate (CER): How much an MSP makes from each client based on time spent servicing them. It is the monthly fixed fees that are charged divided by how many hours spent with that client. This will produce a revenue-per-hour result.
TBG suggests the concerted use of Managed Services Agreement Profitability. As argued earlier, TBG believes there should be at least a 65 percent gross margin on each agreement. If you make less than that, you are pricing your services too low, your service staff is deficient or your procedures and processes are not optimum.
The No. 1 Metric is Net Operating Income
TBG is a huge fan of Net Operating Income, which is a metric that pretty much sums up the current health of an MSP business.
Operating income is similar to earnings before interest, taxes, depreciation, and amortization (EBITDA), except that EBITDA also considers amortization and depreciation. Net operating income is more commonly used because it is a bit easier to calculate than EBITDA.
According to TBG, your net operating income should be a least 10 percent. At the same time, TBG likes services to be more than 60 percent of total income. Moreover, when it comes to service revenue, Monthly Recurring Revenue (MRR) should be more than 60 percent of the total.
Check out the Kaseya 2018 MSP Benchmarking Survey Webinar to learn more strategies for MSP success.