Six Financial Tips for Managed Services Providers From Two Pros

Six Financial Tips for Managed Services Providers From Two Pros

How can MSPs and IT service providers better manage their finances, motivate their sales teams and maximize their profits? Coreconnex's Frank Coker and Service Leadership Inc.'s Paul Dippell provided some eye-opening answers during the Tigerpaw User Conference in Dallas today. Here are their top six financial tips. I don't often say this but this particular blog entry is one that you should print and re-read a few times. Take a look.

When starting the session, Dippell said top-performing MSPs make 3.4 times as much profit vs. the typical managed services provider. So, how do the top MSPs outperform average MSPs? Dippell  and Coker offered six tips:

1. The only formula that matters: More gross margin with less expenses equals better profits

2. Know your gross margins: Here are some ways to think about gross margins, noted Coker:

  • Product: Price determined by market MINUS the cost determined by vendor
  • Time and Materials: More hours X rate per hour MINUS cost per hour
  • Flat Fee: Less hours X rate per hour MINUS cost per hour
Continuing that gross margin point, Coker and Dippell said you have to have a relationship between billing and relationships:
  • You should be able to take your billable service revenue, divide it by service wages (payroll) and the minimum result should be a 2.5 multiple. A lot of service providers are at 1.9 or 2.0, and they're at break-even as a business, says Dippell. Also, don't include cloud services in the formula since it's not part of your billable service revenue.
  • For example, you should be generating $125,000 in service revenue per month, divide it by $50,000 in payroll, and the minimum should be 2.5. But here's the twist. Once you add back in benefits, taxes, training and service management, you're at 50% loaded margin. But if you spend 35% in sales, marketing, general and administration costs, your net profit is 15%, which is best in class.
3. Use incentive compensation that works:
  • Win-Win: Rewards behaviors which attain company goals.
  • Affordable: If everyone hits their goals, can I afford to pay it?
  • Manageable: Not burdensome to calculate
  • Purposeful: Attracts eagles (the real go-getters) and repels turkeys (scares away potentially bad hires before they even want to take the position).
  • Other tips: It has to be fair, understandable, measurable, attainable, and over-attainable -- if a salesperson outperforms the goal, they should earn even more faster.
Some ratios to consider, from Dippell and Coker.
  • Sales people should be paid no more than 20 percent of the gross margin money they generate, with 40% base and 60% commission.
  • On the service team, you can only afford to pay up to 2.5 times the service revenue they generate, with an 80% base and 20% incentive.
4. Use a chart of accounts that works: Coker says the chart of accounts needs to give you visibility into lines of business. A good solutions provider chart of accounts includes subdivisions. A sample, effective chart of accounts that works can include:
  • Product Revenue
  • Service A Revenue
  • Service B Revenue
  • Total Revenue
  • Product COGS
  • Service A COGS (Payroll)
  • Service B COGS (Payroll)
  • Total COG
  • Product GM
  • Service A GM
  • Service B GM
  • Total GM
  • Sales and marketing expense
  • Other expenses
  • total expenses
  • Profit
5. Known your predominant business model: Compare your performance to only those who are in your predominantly  similar business model. Franks tool determines it based on your input. There are roughly 10 different PBMs, ranging from product-centric resellers to managed services. Check in with Coker and Dippell for the entire list and the utilization patterns. Also, Coker and Dippell provided an eye-opening look at how the financial models vary from product-centric resellers to MSPs. Sorry I didn't capture everything here...

6. Qualify, Qualify, Qualify: Qualify your customers BEFORE you do a scope of work or proposal. Bottom performing teams win one-third of proposals; top performing teams win two-thirds of the time. So, how do you increase your odds of winning? Dippell says:
  • If you have given the decision maker a ballpark price and they want to keep talking, you can forecast the win at 80% likely to close at 80% of the ballpart price ... and you can write a statement of work.
  • If you have given the decision maker a ballpark price and they haven't indicated interest in more talk, then don't write a scope of work.
Bonus: There's a seventh tip. But since I've already lifted the first six tips from Dippell and Coker, I'm going to stop writing now and encourage you to instead reach out to Dippell and Coker. You can find them on twitter at @pdippell and @coreconnex.

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