Many moons ago, Austrian-American management consultant Peter Drucker said, “If you can’t measure it, you can’t manage it.” This maxim ranks high on the list of Drucker’s quotations, and over the years, it has become a business dogma.
There’s just one problem: He never actually said it.
It was W.E. Deming who said it but in a drastically different context. The correct version is, “It is wrong to suppose that if you can’t measure it, you can’t manage it—a costly myth”.
When measuring their performance, many MSPs measure either irrelevant technical indicators or business indicators that become relevant weeks or even months from the time of measuring. One could even compare it to measuring the quality of your Sunday roast with the smoke detector.
So, in this article, we take a closer look at performance metrics and progress indicators, the difference between them, and when to use them. Let’s start with a short review of metrics and KPIs.
Metrics vs. KPIs
What is a metric? A metric is a piece of quantifiable data that is relevant to a business’s performance. A metric is an absolute number. For example, the volume of a car’s gas tank is 10 gallons. Other metrics are kilometers, hours, pounds, square inch, total profit, and the total number of employees.
What Is a KPI (Key progress indicator)? A KPI is a combination of metrics used to track and measure the whole business’s progress toward specific business goals. A KPI is a relative number. For example, a car’s gas performance is 45 miles per gallon. Other KPIs are kilometers per hour, pounds per square inch, gross profit per client or gross profit per employee. They are based on two or more metrics.
|Measures the performance of certain activities and processes||Measures progress toward key business goals|
|Have a low-level tactical perspective||Have a high-level strategic perspective|
|They are department-specific||They are inter-department business-specific|
|Used for tactical/operational decision-making||Used for strategic decision-making|
|Usually tracked by supervisors||Usually tracked by senior executives and CXOs|
A KPI should be based on the following principles:
- Every KPI must have a strategic objective
- Every KPI must measure something over a period of time
- The best KPIs are attainable with a “stretch” effort. It means it takes more than normal “comfort zone” effort to achieve them
- Every KPI must be measured against specific goals
And now let’s distinguish between…
Leading and lagging indicators
Those indicators can be both metrics and KPIs.
- Leading indicators look into the future (The CFO’s view) and predict and anticipate future outcomes and events
- Lagging indicators look at the past (The accountant’s view) and summarize actual indicators against projected indicators and if the intended results were achieved
And now let’s look at those key metrics and KPIs…
1. Number of leads generated
The number of people in your target market that have contacted your firm, a.k.a. entered your sales funnel.
2. Number of prospects generated
While a lead is one member of a large group, a prospect is an individual who has a 1-to-1 relationship with you. Prospects are people with whom you’ve already had a short intro call to determine if there is a good fit to work together. Prospects have the propensity to move to the next stage to have a sales conversation with you.
3. Number of sales calls
These are extensive meetings with economic buyers, NOT intro/fit calls. During those calls, you meet with buyers to discuss their objectives, measures of success, expectations, and the perceived value of their projects.
4. Number of clients
This is the one that we’re most interested in. That’s the true outcome. When MSP leaders talk about improving their firms’ marketing, what they really mean is how they plan to get more ideal clients.
5. Monthly recurring revenue (MRR)
Marketing is split into two parts: 1) winning new clients and 2) growing those clients. That is, MRR increase on a 12-month basis. For instance, between March 2021 and February 2022, a client paid $X. Between March 2022 and February 2023, the same client paid $Y. So, client growth is $Y–$X. Client growth is caused by clients buying contracts with larger scopes.
6. Client acquisition percentage
This KPI is measured by dividing the number of new clients who have signed contracts within a specified time period by the number of project proposals that were sent to prospective clients during the same time period.
7. Utilization rate
This metric measures the amount of time an MSP’s service delivery staff gets used to deliver services.
You divide the number of billable client hours within a specific time period by the total available staff hours.
A high utilization rate translates to increased revenue for the MSP.
8. Gross margin per client
This KPI measures how profitable each client is for the MSP firm. You calculate it by deducting the cost of delivering the service from the gross revenue the client pays the MSP.
9. Client satisfaction
This metric measures the satisfaction level of an MSP’s clients. Client satisfaction can be measured either by conducting formal satisfaction surveys or intuitively, that is, by how you feel about the relationship. I prefer the latter. I don’t think a relationship can be measured.
10. Internal hourly rate (IHR)
Internal hourly rate (IHR) is a KPI for yourself to see how effective your firm is. You track how much time you spend on various activities or complete projects.
- IHR per project => Total revenue from a project divided by the total number of hours worked on that project
- IHR per client => Total revenue earned from a client divided by the total number of hours worked with that client
In both cases, you need minimum values, and if clients fail to produce those minimum values, you’d better leave those clients to the competition.
11. Days of outstanding (DSO)
Days of sales outstanding (DSO) is the average number of days it takes to collect an average invoice. It is used to determine an MSP’s accounts receivables effectiveness.
In general, higher than 25 percent of the annual revenue in receivables is a cause for concern.
Many MSPs operate on a Net 15 or Net 30 basis, but I believe in invoicing clients on a Net “Right away” basis.
Many other indicators can be tracked, but in my experience, the above 11 make the most sense. Some of the KPIs don’t even need to display exact numbers on your dashboard. Take #11, DSO. If the DSO is lower than 25 percent, then your dashboard displays a green sign, between 25-35 percent is a yellow sign, and above 35 percent, a red sign.
#10, IHR, is pretty much the same. Green, yellow or red.
Of course, I don’t know what you track, but there is a good chance that you track far too many numbers, and some of them are not necessary. Review them, revise them, and make the appropriate changes as needed.
Photo: Blue Planet Studio / Shutterstock