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I previously wrote a blog post for SmarterMSP on Why your MSP needs to stop relying on gut feelings. When I was running my Managed Service Provider (MSP) business, I was always taught that “What can be measured, can be managed.” When you manage by metrics, it makes it easier for you, as an MSP owner, to make informed decisions.

Therefore, I was fascinated to read Sam Goh’s excellent article, he recently wrote for for SmarterMSP, entitled Identifying an MSP’s most important KPIs. Sam highlighted twelve MSP metrics that can make or break your business.

In this article, I wanted to share how you can use just one of those key metrics – profitability – to make a number of better decisions and grow your MSP business.

Biggest isn’t always best

When it comes to the money your MSP business earns, you need to remember the old adage, “Turnover is vanity, profit is sanity.”

I quickly learned that I’d much rather run an MSP that makes £500k turnover and £200k profits, than an MSP that makes £1m turnover and £50k profit – trust me when I say the headaches of running a larger business are considerable!

Yet, despite this, many MSPs focus on increasing their turnover rather than their profitability. For instance, if I asked you to name your biggest client — you could probably tell me right away.

But, in my experience, your answer would probably be based on the amount of revenue that client generates and *not* the amount of profit they create. When it comes to managed service agreements, bigger isn’t always best.

Raising prices

For instance, I recently worked with an MSP who had a gut feeling that they were undercharging for their services. Their challenge was, they didn’t feel comfortable approaching their clients with an arbitrary price increase. Instead, they wanted a solid reason.

I encouraged the MSP to start focusing on the profitability of their clients, rather than the revenue they generated. To their huge surprise, a number of their smaller (in revenue terms) clients were generating a much higher amount of monthly profit than their biggest clients!

Once this MSP had analysed the figures, they saw that the amount of time they spent servicing their biggest clients drastically reduced those clients’ profitability. This made it much easier for them to work out their price increases.

The MSP went to the unprofitable clients and told them “We’re increasing your prices by x percent.” If the client questioned the price increase (and to the MSP’s surprise, hardly any of their clients did) then they could point to figures and tell the client why this contract wasn’t profitable for them.

The key here is to measure the time you spend servicing all of your managed service clients. Once you manage time, you can start to understand the profitability of each contract.

Every business owner understands the need to turn a profit. As a result, knowing the profitability of your managed service agreements makes it easy for you to make decisions on price increases.

Implementing new tools

Another area that MSPs often experience headaches in is implementing new tools. For instance, you’ve seen a powerful new solution that will help keep your clients safe. But, can you afford to implement that tool, or is it just another cost to your MSP business? Well, if you understand where your service desk spends their time, then you can make a more informed decision.

One MSP I worked with took a close look at the typical type of service desk tickets that cost the most to resolve. They found that much of their time (and money) was being spent dealing with end-users clicking on links they shouldn’t, and then calling the Service Desk for help resolving the resulting chaos.

In measuring the time spent on this specific type of help desk ticket, the MSP realised that by implementing a content filtering solution, the cost of that new solution would be dwarfed by the money they would save in time resolving this type of ticket.

The lesson here is that if you understand where you are spending your time, you can make informed decisions on lowering the cost of your support. This metric makes it easier for you to make decisions on purchasing new MSP tools for your business.

Selling hardware

The final example I will share is a common bone of contention for MSPs – reselling hardware.

Many MSPs view reselling hardware to their clients as a necessary evil. But is selling hardware actually losing you money?

You might answer “no” to this question, but when I speak to some MSPs, they tell me that the markup they use when selling hardware is five to 10 percent.

It’s understandable why some MSPs charge this low figure. Clients are cost conscious and will compare the price you quote for hardware with prices they can find online. Except, if you actually measure the profitability of your hardware at this margin, you will find you aren’t profitable at all!

For example, I worked with an MSP who charged a 10 percent markup on hardware sales. Over a period of three months, we fastidiously tracked the time that this MSP spent researching, quoting and doing the administration of purchasing hardware for their clients. We also tracked the time the MSP spent dealing with service desk tickets around hardware setup, and hardware issues – all of those RMA requests to a vendor take up time and energy!

At the end of the three months, we deducted the cost of these hardware related tickets from the “profit” the MSP made in markup. To their horror, the MSP realised that, on average, they were *losing* money on the hardware they sold!

This metric meant that the business owner could make an immediate decision to charge a much higher markup on hardware sales. For any client who balked at this cost, the MSP explained the additional value they brought to each deal (setup at no cost, RMA management, etc.).

When I checked on the MSP a few months later, they were not only turning a genuine profit on hardware they sold, but clients had a lot more respect for the buying process – reducing the number of times they were “nickel and dimed” by client’s looking for a cheaper deal.

When it comes to running a Managed Service Provider business, you need to measure by metrics, not by gut feeling. By focusing on measuring just one metric – profitability – you can answer a number of important questions in your business:

  • Should I raise my prices?
  • Can I afford to purchase that new MSP tool?
  • What should I charge for providing hardware?

Remember that most MSPs manage by gut feeling rather than metrics. By focusing on the metrics, you can steal a competitive advantage over other MSPs. And that is priceless!

Photo: Photobyphotoboy / Shutterstock

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Richard Tubb

Posted by Richard Tubb

Richard Tubb is a blogger, speaker, and author from Newcastle-Upon-Tyne in the Northeast of England. He provides expert advice to help MSPs grow their IT business, and he has helped the owners of hundreds of MSPs to free up their time, concentrate on doing what is important, and make more money.

One Comment

  1. Once you are in “sell mode” you face a different reality. I have been told several times that buyers would prefer a $2M firm with 10% net profits to one at $1M with 20% profit. They argue that revenue is paramount, since they can always improve profitability later.

    I have said for years that “the top line is vanity, the bottom line is sanity,” and still feel that way. But in a PE (private equity) driven, M&A (mergers and acquisitions) world, “looking good” takes precedence to “being good.” It is not sensible but it is true.


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