While building the proverbial better mousetrap should have the world beating a path to your door, experienced MSPs know that offering such a mousetrap (in the form of superior managed services at competitive prices) may not be enough to guarantee success. Understanding the metrics and key performance indicators (KPIs) that define a successful MSP is also required, according to a new report from 451 Research entitled “MSP Metrics for Profitable and Sustained Growth.”
Explaining how MSPs can “develop a disciplined focus on key measurements to track their business more accurately and make timely course corrections,” this informative report emphasizes three categories of metrics—Financial, Account Management, and Service—that every MSP should review when evaluating the efficiency, profitability, and viability of their operations.
In the abridged definitions below (excerpted from the report), there are several metrics and KPIs that are crucially relevant to MSPs:
- Revenue sources as a percentage of revenue breakdown: Obviously, MSPs should expect a majority of their revenue to come from recurring services. This is key as not all revenue streams are equal—for example, successful MSPs generate 45-55% gross margins from managed services vs. the typical 10-20% gross margins from product revenue.
- Gross margins per revenue source and service offering: Because not all revenue streams are equal, the gross margins of each revenue stream should be tracked to ensure that services are delivering as expected. Regardless of how an MSP may price its services, if it does not make enough margins it will ultimately go out of business.
- Cost of goods & services sold (COGS): Followed closely by virtually all businesses, this metric is even more vital for MSPs. COGS is the sum of the labor, material, service and delivery costs directly incurred delivering services, plus infrastructure, software, travel, training and professional service expenses.
Account Management Metrics
- Customer effective rate (CER): This equals the total amount invoiced, divided by the number of hours logged to a customer, yielding a dollars-per-hour amount. CER shows how a customer is using engineers’ time vs. what they are paying for; it helps MSPs see how many hours they spend each month on customers that are actually generating low profit.
- Customer contribution: MSPs should understand how valuable each client is as a whole to the overall organization. Customer contribution is calculated by taking the overall revenue for each customer and subtracting the cost of goods and services sold to that customer; this demonstrates how much revenue the MSP is earning per customer.
- Customer distribution: MSPs that have a small number of customers that account for a large percentage of the provider’s overall revenue are at high risk. If one or more large customers experience a downturn, the MSP is vulnerable to a significant revenue loss; often unexpected, this can be a substantial hit to their bottom line, putting a strain on the business.
- Client churn rate: Many MSPs track sales, wins and new revenue, but fail to track lost business. This includes customer business that has left the books as well as revenue lost from customer downgrades. Increasing client churn rate may indicate customer dissatisfaction, poor service delivery, increased competition or outdated service offerings.
- Resource utilization: Resource utilization is the percentage of an MSP’s employees’ billable hours to non-billable hours. This metric provides an indicator of how efficiently time is being used; idle resources are like inventory sitting on the shelf, costing the MSP money in the form of salaries and other related personnel costs.
- SLA compliance: This shows how well the MSP meets customer SLA requirements and what, if any, penalties were incurred as a result of missing SLAs. Low compliance rates may indicate that SLAs are being established at a threshold higher than the business can meet or that the MSP’s processes and procedures are insufficient.
As the 451 Research report notes, there are hundreds of additional metrics that MSPs can track to manage their business (customer satisfaction, revenue per employee, gross profitability, response time, ticket counts, sales activity). The key is striking the right balance: Track too many and you get bogged down; track too few and you won’t see a detailed picture of what’s going on in your business.
In its summary the report counsels, “Regardless of the metrics used, MSPs must ensure that the data is accurate, meaningful, timely and actionable. However, more important than just tracking various metrics or KPIs is the discipline of the MSP to monitor them, hold people accountable, and make timely, educated decisions regarding the business.”
Get Complete 451 Research Report
For a more detailed and unabridged analysis of the importance of MSP metrics, we encourage you to download the complete 451 Research report here.
This guest blog is part of a Channel Futures sponsorship.