And five ways partnering can help
The route to growth is relatively easy to map; the route to profitable growth is much more challenging.
Here are ten lessons I learned when growing my own MSP business.
1.Define the kind of growth you want – and what you need to do to achieve it
Just about every MSP I have ever spoken to says they want growth. But what do they mean by this? Do they mean scaling up for volume growth or do they just want to take on a couple of new clients every few months? Do they want to extend into new geographic locations, or move up-market by taking on bigger more complex customers? Do they want to expand into new product and service areas?
Without clear goals and a vision of how to achieve them, your growth may be problematical rather than profitable.
2.Make sure the growth opportunity is real and you are able to deliver on it
As you evaluate potential new services or customers, you need to be sure that you are investing your time and resources in the right opportunities: those that will play to your strengths, not your weaknesses; those where you are well-placed to deliver – profitably and with high levels of customer service.
It’s easy to get caught up in the hype about a new technology, but if you’re not geared up to deliver it efficiently and to a level that will satisfy your customers it could well end up being unprofitable business – however great the customer demand.
Cloud is a case in point. The latest research [1] findings from CompTIA revealed that just 37% of MSP respondents described cloud’s impact on the channel in the last five years as ‘extremely positive’, as opposed to 63% who held this view two years ago. This more tempered assessment probably reflects the reality of actually working with cloud: recognition by MSPs of problem areas – and the need to reset expectations around ROI, cost and the skills needed to deliver cloud profitably.
3. Not all business is good business
Don’t be afraid to walk away from business.
For each of your existing customers, track their value to your business. If you’re not making anything from them – or if they are actually costing you money, be prepared to say goodbye.
When talking to prospective customers, qualify hard. Are they a good fit for your MSP business? How well does your service offering align with their current/anticipated requirements. If the correlation is low, you may have to fill resource gaps or fix weaknesses to bring them on board. 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, leading to less profitable growth.
4. Focus on reducing customer churn as part of your growth strategy
Inevitably some of your customers will move on. So in addition to tracking the business that is coming in at the top of funnel – it’s important to measure this against what is going out at the bottom. The average North American MSP adds 9.6 new customers per month – but this will only contribute to growth if existing accounts are retained. MSPs apparently lose on average 2.23 accounts per month. [2]
Reducing customer churn can be a key element in your growth strategy. 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.
5. Manage service margins closely
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 current services is essential for setting prices and 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
6. Price for profit
Selecting the right pricing model can have a significant impact on your ability to grow profitably. Different pricing models are used by MSPs : you need to settle on the model most appropriate to your business. Bear in mind three points, however:
- Don’t slavishly follow competitors’ pricing – the result will inevitably be a race to the bottom and growth that is not sustainable.
- Pricing is not always front of mind with your customers. Many are prepared to pay a premium for the MSP who aligns most closely to their business needs.
- Consider pricing for value. This is a characteristic of high-growth MSPs, who have been found to share common traits, such as [3]:
- Charging more for their technicians
- Having a higher variance between what they charge for Level 1, 2 and 3 technicians
- Charging more on average for ongoing server support and maintenance per month
- Having a higher average size monthly managed services contract
It’s worth considering for your own MSP business.
7. Track all of the success metrics that will inform your growth
Many MSPs are focussing on only two or three key performance indicators (KPIs) to track how well they are doing, according to a recent Autotask study [4] – even though they are all likely to have an impact on future growth and the lower-ranked KPIs in the chart below can provide valuable insight.
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.
8. Grow your team in parallel with your growth – not in anticipation of it.
When do you bring in additional resources to meet the anticipated growth in customer numbers or to deliver a new service?
You can’t leave it until customers have actually signed up, but you don’t want technicians sitting around waiting for new business to come in – particularly if it turns out to be less than planned for.
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 to get quick access to additional resource is also an option.
9. Avoid over-promising to customers
This can result in one of two outcomes: you under-deliver so the customer is not happy; or to make good on the promise you have to bring in additional resources, which costs you more.
Neither of these options is good for your business.
It’s unwise to risk your reputation (and your profits) by setting unrealistic expectations just to get another customer through the door.
10. 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 ought to be to achieve scalable growth, you may need to put your house in order first.
Working with a partner is an option when investing in growth
Here are five reasons why:
- You can access additional expertise and, crucially, ensure that high levels of service are maintained for ‘bread and butter’ services such as Network Operations Centre (NOC) and Service Desk.
- You can redeploy your own technicians from routine monitoring, management and maintenance tasks to higher-value areas of client concern.
- It can help to control the cost of service delivery as you can benefit from your partner’s existing infrastructure and economies of scale to scale for growth without capital investment.
- A partner can even help with pricing. For example, at Inbay we take the time to understand the pricing model you use and then map our charges to this model, so you can clearly understand the cost of delivery and since your new expense will align with your new revenue, every new client you take on using Inbay’s services should be profitable.
- For services that are problematical and/or costly to resource in house (24/7 springs to mind), a partner can take over when your office closes for the day.
If you would like to find out more about how partnering for NOC and Service Desk can help you achieve profitable growth MSP Contact us or read how we have helped other MSPs.
1 CompTIA 6th Annual State of the Channel Report
2 Special Report by Intronis MSP Solutions by Barracuda and The 2112 Group, July 2017
3 Kaseya 2016 MSP Global Pricing Survey
4 Autotask: Metrics that Matter, 2016
