Unconventional MSP Wisdom: Stop Growing, Deliver 25% EBITDA
ClinicAnywhere, an MSP and cloud-based business focused on the health care market, generated managed services EBITDA (earnings before interest, taxes, depreciation and amortization) of more than 25 percent in 2012, according to CEO Mike Jones. Plus, the company quietly acquired a billing company in November 2012, and the deal has turned into a home run, Jones asserts. Many MSPs have tried (and failed ) in the health care market. So what is Jones doing right? His simple answer: From time to time stop focusing on top-line growth for your established business divisions and instead focus on further automating those divisions. Here's why.
First, some points of clarification. Jones is best-known for running ETG— an MSP that offers IT for physician practices. ClinicAnywhere, powered by ETG, offers a practice management platform for electronic health records. It's completely cloud-based.
According to Jones:
“The new division we launched last year (software and medical billing) is just on fire. We made another acquisition of another billing company based in [North Carolina] in November and it was a home run. The sales velocity we have in that part of the business is off the chart right now and I could not be more excited about it.”
Jones concedes that his business has had its “share of bumps, bruises, scrapes and cuts.” But the payoff is now arriving, and the margins and relationship stickiness are great.
“To be very candid, I am just enjoying these deals because I am having business discussions and not technology discussions. Everything we are doing there are five-year contracts, ACH payment. Beautiful. Managed services is just a hard business to succeed at compared to others. However, our managed service business is absolutely killing it producing well over 25% EBITDA in 2012.”
That huge profit margin arrived despite the fact that the company had flat sales in 2012 vs. 2011. While Jones focused on growing the new business division, he had a team member focus on efficiency in the existing business. “It has been amazing what can happen when you take your foot off the growth gas [pedal] for just one year.”
The result: EBITDA jumped about $1 million in one year — amid flat revenues. The margin lift came from retooling some staff, increased focus on root causes, less travel expenses, and better customer outcomes. Indeed, average ticket volumes dropped more than 20 percent in 2012 vs. 2011. The focus has “allowed us the time and flexibility to finally get out of some unprofitable relationships as well.
Bottom line, said Jones:
“I would recommend to anyone out there that once in a while you have to take your focus off growth long enough to make improvements and adjustments. In my case it paid big dividends. Crazy that what started off was me wanting to invest all my time in launching the new division turned into a huge improvement in profitability for the managed services side.”