MSP by the Numbers

Roaming around Austin last week, I got into a discussion with a small group of partners about whether or not I had any regrets about selling my business and crossing over to the Dark (Vendor) Side of the channel.  It was an interesting discussion, and in the final analysis the answer is “of course I have regrets, but if I had it to do all over again, I would choose the same destination, and likely the same course, with very few exceptions.”

That led to, “As an MSP, what would you have done differently if you could do it all over again?”  That was an even better question, and here is the answer:

1. I would figure out EXACTLY what each portion of my business is costing me.

2. I would figure out EXACTLY what each portion of the business is making me (a better way of saying this is what  would be lost if that part of the business was gone).

3. I would make certain that I knew where I could spend more money to drive growth, and where the money I was spending was going to waste.  In short, I would measure everything.

In an earlier blog this year I stated that an MSP really needed to be billing about $2,000,000 per year in order to be long term viable. Let’s use that as a baseline, crunch some numbers, and in the process, describe what I mean by running a business by the numbers.

Sales – Let’s assume every sales person in your organization can maintain an average of $40k per month in sales.  Using that as a baseline, to drive $2 million in sales you need to employ 4-5 sales people.  Let’s assume that they are earning roughly $100,000 per year annually all in (this number is going to differ significantly based on region).  So, with 5 people in sales, you get $500K in annual cost.

Services – If each technical resource can bring in approximately $17.5K per month (again, a number that will vary wildly from location to location, but to get this number I assumed 100 billable hours per month @ $150.00 per hour) for project people and a higher average for managed services clients to get a round number.  At the end of the day, you need to have roughly 11 technical resources and their service manager employed in order to generate that services revenue.  Assuming they are averaging $80K per year all in, you’ve burned through another $1 million dollars, and have $500K available for the remainder of operations.

Marketing – One of the reasons many channel partners don’t spend a great deal of money on marketing is because they don’t have the money to spend.  For the purposes of this discussion, let’s assume that you can spend $10K per month ($120K/year) on marketing.  If you cannot figure out marketing strategies in this budget range that can keep your sales people busy selling, then you are going to have to spend more, because let’s face it, not keeping those guys and gals busy is a bad idea.  (Important side note – if you think that your sales people can generate their own leads, close them, maintain existing business, and at the same time be remotely happy, you are mistaken.)

Other Costs – Rent, utilities, insurance, phone, cable, Chamber of Commerce membership, CompTIA dues, travel costs, etc. – let’s assume $10K per month for these costs as well.  That might be the most generous and optimistic expectation on the planet, but assuming you are really good at keeping those costs under control, it could happen.  Maybe.  Let’s assume you have a line of credit which you use to manage cash flow that costs you $800 per month, you need an admin/office manager, and various other expense, adding up to another $5K/month of expense, or $60K per year.

When it is all said and done, you have $200K left to pay your salary and retain as earnings.  You are making a living as an MSP.

What’s the point?  Two things:

If you know exactly how much the business is costing you in a component fashion, and you know what each component is contributing, you can choose to invest in growth intelligently. You can also choose to downsize intelligently when things go poorly. If you can look at your business as a set of dials that you can turn up and down to drive growth or deal with downturn, and you know how much to turn the dial to have an impact, you will be better prepared to run your business. Had I known this in 2002, I could have avoided a ton of stress in my life.

When you look at these numbers (and yes, they scale up and down, but some of them are fixed), it is really hard to imagine running a worthwhile business with even 75 percent of this revenue, much less 50 percent.  Get your business to $2 million and you will actually make money.

I chose not to look at product margin here. Why? The revenue from software, hardware, and other sales can be treated as pure profit if you choose to think about your business as a pure services revenue business. If you add an additional $10K per month in product at 30 point margins, you get an additional $36K in annual income. Not a ton, but you if you can keep that as retained earnings, you can get off the line of credit much sooner, and make that much more.

This is a high level overview – I know that many of you are going much deeper and running your business like the pros that you are. That having been said, if you are not thinking about the details of the cost and the income in your business, you should be.  Professional services management is not just about profit – it is about knowing the details of your business well enough to manage to profitability regardless of circumstance.  When you can do that, you make your business that much more stable.

Ted Roller is vice president of Channel Development at LogMeIn. This guest blog is part of MSPmentor’s Platinum Sponsorship Program.