Tips to Maintain MSP Profitability in an Uncertain Economy

By Peter Kujawa

Peter Kujawa

Managed service providers thrive on being a strategic outsourcing partner to their customers. Being able to rely on a capable outside source for IT and other technology needs is critical to the success of most businesses today.

However, many MSPs fail to recognize there’s more to running a business than just providing excellent quality technical services. You must not only deliver first-rate IT services, but you must also wear your “CEO hat” and make smart, data-driven decisions about marketing, partnerships, compensation and other areas. In times of economic uncertainty, this rings especially true.

Fundamental Business Truth

Profitably needs to remain top of mind, even if the MSP is successful. Profit, like any other metric, can be a good measure of any company’s health and performance and an MSP is no exception. With so much emphasis on increasing revenue, satisfying clients, and attracting and retaining employees during a period of significant wage inflation, running an MSP business profitably can be a genuine struggle.

Aside from that fundamental business truth, MSPs face industry-specific problems. Pricing competition can be significantly higher in the MSP sector than in other industries. For MSPs that try to compete primarily on price, this results in lower profit margins on the services those MSPs provide. And without a strong profit, MSPs find it hard to invest in critical technology, hire additional people, pay off debt and so on. In short, profitability is the gas needed to power your MSP.

Considerations to Improve Profitability

Don’t worry if your analytics tracking and reporting aren’t up to grade yet, as every MSP starts at the beginning. The following are key suggestions you can use in your MSP to aid in making data-driven decisions that boost profitability.

Put a concrete measurement strategy in place. You can’t improve what you don’t track, so start with utilizing a reliable, consistent method for benchmarking your profitability. Key profitability components, such as service gross margin, should be one of your MSP’s most important metrics. This is calculated by subtracting the cost of goods sold (COGS) to deliver the services — including wages of technical employees delivering the services — and the cost of tools used to deliver the services from the revenue received from the customer.

While the calculations are straightforward enough, the difficulty comes from keeping comprehensive records of how much each service costs you. This becomes more challenging as you become more successful and your firm grows.

For example, you’ll need to start including somewhat “intangible” expenditures such as workforce labor allocation by hours spent on each customer and revenue category into the mix. Using a professional service automation (PSA) application effectively for all ticketing and ensuring all time spent by employees is tracked can help to allocate COGS correctly and ultimately allow you to make better judgments based on the data.

Vet your vendors. Business owners sometimes underestimate the significance of third-party providers. They will frequently shop around for services or technologies to suit an immediate demand, then jump to signing a service agreement. When it comes to vendors and third-party service providers, however, it is critical to go the extra mile.

Recognize that just because third-party vendors operate under distinct business names and legal entities, that doesn’t mean they’re entirely separate from your business. When you sign a service agreement with them, they become a business partner. As a result, you owe it to yourself and your team to thoroughly investigate all vendors through a robust due diligence process. This means you need to make sure you evaluate areas such as availability, programs, reputation, advisers, security and compliance, price and more before allowing them to become part of your business. While it might be tedious, the effort in the long term will help you scale your business and minimize vendor turnover. It also will help ensure that you’re aligning with vendors who will help you deliver excellent client results and help you maximize your profitability in a sustainable way.

Simplify and consolidate your administrative practices. The key to any business is to focus on making the best use of everyone’s time. While your most crucial responsibility as an MSP is to meet your clients’ managed IT service demands, you shouldn’t lose sight of administrative activities, as they are just as important to the success of your organization.

Invoicing, accounts payable, contract management and tax filings are just a few of the “behind the scenes” responsibilities of running a business. It may cost a bit more money or energy in the beginning, but automating and outsourcing appropriate operations can produce efficiencies that allow you to spend less time on …

… extraneous duties that divert your attention away from your “one thing.”

E-file your taxes, or pay an accountant or bookkeeper to do it for you. Combine all your insurance policies with the same company so you only have to deal with one agent. Outsource contract review and drafting to a qualified attorney. You can also save time by working with your vendors to schedule coterminous payments for all your subscription/certification payments at the same time.

Meetings provide another opportunity for improvement. Many corporations waste incredible amounts of employee time meeting for hours on matters that may be resolved in minutes or via other methods, such as by email or a one-off call. There are dozens of online tools that provide guidance for reducing meeting times.

Keep in mind who your ideal customers are. Whether you’re an MSP or not, like all businesses, you can’t be all things to all people. As you start to mature as an organization, this becomes even more palpable. In the initial stages, it’s easy to fall into the trap of believing that every prospective customer with a checkbook will be good for business. On the contrary, this will lead to chaos and hurt profitability. Instead of signing every client that walks through the door, create a target customer profile (TCP) to save you the stress and headache of doing business with a customer who might not be right for you.

If you feel uneasy about this approach, here are a few benefits that you will see overall:

One way to begin to determine your target customer profile is to evaluate the size of the market segment that’s giving you the most clients, and who is buying the most of your services. Use this information to determine what segment is the best fit for your company. You can then use this knowledge for future prospect qualifying.

Common Mistakes to Avoid

With the economic uncertainty ahead of us, it’s more important than ever to not make the mistake of leaving profit on the table.

Here are some common mistakes MSPs tend to make:

Work to Improve Performance

As noted above, automation can significantly improve the structure of your business, including customer service. Educating yourself and your team on what contributes to the success and profitability of your company is crucial. You can’t hit a target you can’t see. Benchmarking gives you insight into how well your company is really doing and where there is room for improvement.

Especially in the wake of an uncertain economic climate, knowing where you can improve and then acting on these areas will help you come out stronger.

Peter Kujawa is a vice president and technology solution provider (TSP) evangelist at Service Leadership, a ConnectWise solution. You may follow him on LinkedIn or @ConnectWise on Twitter.