In the MSP world, there are tens of dozens of possible metrics you can adapt. Try and do so, though, and you’ll spend all your time measuring and precious little driving growth. The trick is to choose those metrics that work for your business and management style.
MSP consultancy Taylor Business Group (TBG) is focused on helping clients drive profit, and it has 10 metrics it says are the most important metrics to keep MSPs on track to achieve their goals.
It’s important to note that the first step to take before you start implementing any new metrics, is to ask what kind of company you own or work for. There are MSPs that are “lifestyle businesses.” The owner knows and loves technology, enjoys working with a small close group of clients, makes a good living, and is perfectly happy running the business this way. In this case, the intense discipline of tight metric tracking may not be critical to this business’ success.
Metrics are made for growth-oriented businesses, argues TBG’s John Christophersen. These businesses are entrepreneurial, have a vision, believe in a high-horsepower sales engine, invest profits back into company development, and manage by numbers and metrics.
With that caveat out of the way, let’s look at the metrics, starting at number 10 and moving all the way up to number one.
10. Product Margin
Product margin is, to quote Investopedia, “the difference between the cost of the good or service and the retail price; the greater the difference, the higher the margin.”
TBG also uses this basic definition, with ‘product sales revenue’ substituting for the ‘retail price.’
According to TBG, the number to shoot for is over 17.5% margin, with over 20% being preferred. Beyond that, TBG believes that the margin should be at least based in part on the product, with some products needing a higher targeted margin than others.
However, calculating the true cost of goods sold can be the trickier for a services provider than a manufacturer. Include direct labor, any service delivery charges (such as transportation costs if there is any travel involved) and sales commissions. Don’t include overhead or operating expenses such as rent, utilities, or salaried positions not directly tied to delivering the service.
9. Hourly Service Rates
This metric is pretty self-explanatory. To use this as a measurement, the MSP should have a service organization structure, with clearly defined service organization structure. This involves clear job descriptions, well-thought-out career planning strategies, and ‘pre-defined compensation plans’ Clarity on rates for different staff levels makes calculating this metric easier.
Meanwhile, your service rates should be what you charge before volume or other discounts are applied.
That said, 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.
8. Sales Compensation
You should invest in sales and compensate properly, including offering a base salary, commission and bonuses. At the same time, you shouldn’t spend more than a third of your gross profits on sales.
7. Sales Expense
Building on the topic of sales spending, TBG believes that no more than 10% 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.
6. Administrative Expense
Administration is critical, but doesn’t directly build the business the way sales and technical development can. As a result, these expenses should be controlled – and be less than 20% of revenue.
These expenses include administrative salaries, benefits, related taxes, internal IT costs, and building and office expenses. While TBG doesn’t point this out directly, administrative expenses also include all IT systems which support the business, such as billing, CRM, finance, project management, etc.
On a related front, TBG stresses that MSPs should “eliminate or minimize all non-strategic costs!” And yes, the exclamation point came from TBG.
5. Service Utilization
First, let’s define service utilization. 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 recent blog “The Encyclopedia of MSP Measurement”. In this blog, we described Billing Resource Utilization which also focuses on 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’ll discover how much money is lost when techs are not working on billable jobs.
4. Managed Service Agreement Profitability
This metric has some similar 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 use of Managed Services Agreement Profitability. They believe there should be at least a 65% 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.
3. Service Salaries
Service roles and titles can include help desk, NOC technicians and engineers, service managers, overall engineers and technicians, and service coordinators. The salaries of these staffers should be no more than a third of overall service revenues.
To make service efficient, TBG recommends clearly defining the structure of the service organization. This involves clear job descriptions, well-thought-out career planning strategies, and “pre-defined compensation plans.” The company also recommends hiring entry-level workers and then promoting from within. By doing this, you can train new employees to your specific work processes (and not have to retrain technicians used to doing processes another way). But, more importantly, by providing a career path – and actively promoting from within – you increase morale and employee retention rates.
2. Service Department Profitability
In general, you don’t want to spend more than 55% of your gross profits on service. Similar to Product Margin, you calculate this by adding up all your services revenues and subtracting the cost of goods sold – or cost of services sold. Calculate the salary expense that is directly related to delivering services, training or travel expenses, sales commissions, and any transaction fees associated with annuity revenues. Again, overhead costs such as rent and utilities, and any salaried expenses not directly related to delivering services is not including in the cost of goods sold.
So, an MSP that received $1.2 million in services revenue and had $540K in expenses tied to delivering these services would reach a minimum of 55% gross profit on services.
MSPs must keep a close eye on pricing and expenses to make their goal.
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 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%. At the same time, TBG likes for services to be more than 60% of total income. And when it comes to service revenue, Monthly Recurring Revenue (MRR) should be more than 60% of the total.
What to Learn More?
Check out TBG’s on-demand version of their Ten Most Important Numbers talk for more details.
Looking to reduce your administrative expenses and increase efficiency? Request for a demo of Kaseya BMS – a next-generation business management solution that was built specifically to help MSPs spend more time selling and delivering services, and less time on non-revenue-generating tasks like billing and project management.