MSP Metrics for Profitable, Sustainable Growth: Part 2
In our December post we discussed the metrics and key performance indicators (KPIs) that define a successful MSP, according to a recent report from 451 Research entitled “MSP Metrics for Profitable and Sustained Growth.” In this follow-up blog we reference Part 2 of that report to examine several additional metrics that you can leverage to measure and manage the health and growth of your business.
As you may recall, Part 1 of the 451 Research report focused on three categories of metrics and KPIs that are crucially relevant to MSPs like you:
- Revenue sources as a percentage of revenue breakdown
- Gross margins per revenue source and service offering
- Cost of goods & services sold (COGS)
Account Management Metrics
- Customer effective rate (CER)
- Customer contribution
- Customer distribution
- Client churn rate
- Resource utilization
- SLA compliance
Part 2 of the report drills down further to highlight three more types of metrics and KPIs (described in the abridged definitions below, excerpted from the report) that indicate how efficiently your business may be performing: Labor Loaded Gross Margin, Stale Tickets and Monthly Recurring Revenue Metrics.
Labor Loaded Gross Margin
While most MSPs monitor labor loaded gross margin (LLGM), many fail to use this metric to better manage their profitability. LLGM is calculated by taking the total revenue from an agreement or contract then subtracting the total labor and total direct hard costs to support that agreement. The resulting number is the total true margin dollars for that agreement. Dividing this number by the total revenue for that agreement results in an LLGM percentage.
Ideally, this number should consistently be over 65%. A lower LLGM percentage often indicates that the MSP may be losing money on a particular agreement or contract. Successful MSPs measure this metric month over month to ensure they are profitable on each agreement over the longer term and take proactive steps to address any problematic agreements.
Many MSPs tend to believe if they take care of the client experience, everything else will fall into place. While that can be the case, some MSPs set themselves up for failure by allowing customers’ requests to go stale. While it is important to monitor tickets by their overall age, it is arguably more crucial to monitor tickets that go untouched for periods of time. Ironically, most MSPs monitor stale ticket metrics yet fail to proactively manage the tickets representing this measurement, frustrating customers and reducing client satisfaction.
The stale ticket metric measures tickets in terms of age and when they were last worked. Some variations also include the last communication to the client about the ticket status. Unfortunately, tickets often go stale due to poorly managed ticket queues assigned to engineers who have more tickets than they can efficiently handle, possibly indicating an overburdened staff or a lack of ticket management skills.
Monthly Recurring Revenue Metrics
Monthly recurring revenue (MRR) is the key component of the MSP business model and is often cited as the top metric that MSPs monitor each month. With each new agreement you sign, your amount of predictable, ongoing revenue increases. However, merely measuring total MRR by itself can be misleading. As your business grows, it is important to track not only top-level MRR but also other data points that can provide key insights into monthly recurring revenue.
MSPs should closely monitor and manage these four individual metrics that exert significant impact on their total MRR month-over-month:
- New revenue
- Lost revenue
While customers may expand or contract their business with you for reasons beyond your control, these metrics help provide insights into trends that are otherwise often overlooked. For example, the expansion/upgrades metric can offer visibility into the effectiveness of growing business within your existing customer base through cross- or upselling, while the reductions/downgrades metric may indicate customers no longer find as much value in your services.
As the report concludes, “Metrics matter. However, there is no ‘one size fits all’ set of perfect metrics for every service provider to leverage month in and month out to manage the business. Successful service providers limit the number of behaviors and activities they measure. Recognizing that metrics are a tool, they focus on the most important metrics to guide their decision-making, pressing for positive change in the business and the bottom line.”
Get Part 2 of 451 Research Report
For a more detailed and unabridged analysis of the above MSP metrics, simply download the complete “MSP Metrics for Profitable and Sustained Growth, Part 2” 451 Research report here.
This guest blog is part of a Channel Futures sponsorship.