How can you ensure that your MSP business is in the ‘Golden Quintile’, a term used in a recent survey by IT Glue to represent the 20% of MSPs in their survey who reported not just growing revenue but also enjoying high margins (in excess of 20% net margin).
The route to growth is relatively easy to map; the route to profitable growth is much more challenging – as I found out myself.
So here is my advice to ensure your growth turns out to be is profitable rather than problematical.
- Make sure the growth opportunity is real and you can deliver on it
You need to invest your time and resources in the right customer and service opportunities: those that play to your strengths, so you can deliver high levels of customer service– profitably.
For example, managed security is a very real opportunity for MSPs today, offering the prospect of moving into new high-margin services. The potential rewards are tantalising. BUT, even if you already include a level of security within your managed services offering, becoming a ‘real deal’ MSSP requires significant further investment; an investment that should make you think long and hard before making this transition– however appealing the prospect. The risk is you might bite off more than you can chew – and your current managed services business could be damaged in the process.
- Qualify new business hard
When we start out, all business seems to be good business. We grab it – because we want to grow our customer base as quickly as possible.
But, before you sign that contract it’s worth asking yourself a few basic questions. Is the prospect a good fit for your MSP business? How well does your service offering align with their requirements? If the correlation is low, you may have to bring in extra skills. And if you have to take on additional technicians to support a new client or new service, your cost of goods and services (COGS) will increase and your margins could suffer.
In short, if you’re not happy there’s a good fit, don’t be afraid to walk away.
- Make sure new customer numbers aren’t offset by excessive customer churn
A strategy for controlling customer churn should sit alongside your sales plan. After all, there’s little value in bringing in new customers if your customer attrition rate means that the overall ongoing customer number remains more or less the same.
- Manage service margins closely
As the IT Glue survey highlighted, ‘Golden Quintile’ MSPs are successful in growing revenues, but importantly also deliver margins in excess of 20 percent.
Service margins are determined by two things: the prices you set and the cost of service delivery. You can increase revenues by selling more services, but if you’re selling at too low a price or the costs associated with delivery are too high your margins will suffer.
Knowing the true delivery cost of your services is essential – both for setting prices and for allocating resources for new services.
If you are not sure which metrics you should be using to determine your true cost of service delivery, our simple 3-step guide could help you to:
- Calculate the full hourly burden rate
- Take account of staff utilisation rates
- Calculate service margins
- Price for profit
Selecting the right pricing model can have a significant impact on your ability to grow profitably. MSPs use a variety of pricing models – there is no golden rule for pricing your services. You need to settle on the model most appropriate to your business. In doing so, keep the following three points front of mind:
- Don’t slavishly follow competitors’ pricing; the result will inevitably be a race to the bottom and unsustainable growth.
- Pricing is not always front of mind with your customers. Many are prepared to pay a premium to partner with the MSP who aligns most closely to their business needs.
- Believe in the value of the services you offer and don’t be afraid to reflect this value in higher pricing and by not shying away from price increases where necessary. Pricing for value is a characteristic of high-growth MSPs.
Don’t undervalue the services you provide.
- Track all of the success metrics that will inform your growth
When you start out as an MSP, you tend to track just two or three key numbers: MRR, resource utilisation, profit perhaps. But moving forward, tracking a range of metrics gives a visibility into your business that can inform your growth.
For example, your most profitable clients may not be those you send the biggest bills – or those who give you the highest satisfaction ratings; your most valuable technicians may not be those with the highest utilisation rates, but those who generate most new business; and the individual services you offer will have different levels of profitability – indeed some may actually be losing money.
One of the most successful MSPs I have worked with always displayed a thorough grasp of the numbers that underpinned his business – from feeding the sales funnel right through to apportioning service costs. If you don’t have this grasp of your business in numbers, what do you base your growth strategy on?
- Manage growth carefully
Some say there is no such thing as growing too fast. I disagree – and many MSPs with me, I suspect.
If you introduce a whole raft of new clients too quickly, you risk not having the capacity to onboard them smoothly – and maintain high service levels to existing customers.
It’s one of the thorniest questions for MSPs: when do you bring in additional resources to meet anticipated growth in customer numbers or to deliver a new service? You can’t leave it until customers have actually signed up, but at the same time you don’t want technicians sitting around waiting for new business to come in. Get it wrong and you risk upsetting both your new customers and the existing client base that sees service levels slip.
Tracking your sales pipeline carefully so you have more reliable forecasts of when new contracts will be signed is important in informing this decision. And, of course, partnering with a specialist to get quick access to additional resource is also an option to bridge any resource gaps that occur.
- Don’t over-promise to new customers
You risk one of two outcomes: you under-deliver so the customer is not happy, or you have to bring in additional resources to make good on the promise – and that costs you more.
It’s unwise to risk your reputation (and your profits) by setting unrealistic expectations just to get another customer through the door.
- Grow from a healthy base
It’s important to have a solid foundation for growth. If your KPIs indicate that you’re not performing as well as you should be in certain areas, you need to resolve these before you scale up further. Problems won’t disappear – they’ll just be amplified as you grow.
- Make time to work on the business
As your business grows, so too will the demands on your time. It is very tempting to continue to dive down into the detail to resolve issues or to fire-fight – but it shouldn’t be happening every day. Profitable growth results from focussing on the business rather than being constantly embroiled in the daily minutiae. We’ve all been there!
Moving into 2019, there are so many opportunities to grow your MSP business. Achieving revenue growth is good – it’s very good. But if you aspire to number among the ‘Golden Quintile’ it’s the margins you need to focus on to ensure revenue growth is also profitable growth.
Contact us to find out how we can help you turn your growth into profitable growth by partnering for NOC.