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How can MSPs measure success?

Five KPIs to identify how MSPs are progressing, laying the path to competitiveness

Man in suit using touch screen for Managed Service Provider

MSPs know more than most the importance of adapting to survive. Every now and then something comes along which shakes up the entire game, resetting the players at square one. Most recently it was cloud computing, the technology so fast-paced that for MSPs, it was actually more a case of revolution rather than evolution to survive.

Cloud technology flipped the MSP industry upside down, and those not agile enough were eliminated. Leading MSPs worked tirelessly to demonstrate their worth, harnessing the cloud's power to boost their own offerings. Added to the pre-existing benefits of improved security, cost savings, and better uptime already enjoyed by clients, was the value of having a trusted advisor on board to assist with cloud migrations, ensuring the MSP's input is invaluable to successful digital transformations.

Why then, if MSPs are clearly here to stay, are some still becoming extinct? In a way, they are becoming victims of their own success. Clients often view them as being interchangeable, with similar offerings distinguishable by price alone. If an MSP loses a client, it's usually a sure bet they have joined another provider. The advancement of Software as a Service (SaaS) further lowers this barrier.

More than ever before, it is critical for MSPs to establish metrics for success. If MSPs start weighing KPIs effectively, a higher degree of predictability is given to the business, creating a platform on which they can build lasting customer loyalty.

Revenue valuation

Enterprises traditionally measure success using the values of product sold, labour, project hours and so on; however MSPs also need to incorporate recurring revenue into this equation.

Recurring revenue will carry the greatest weight of all, and so greatly impact the overall valuation score. It's also the most stable form of income and is of course predictable, resulting in a higher customer lifetime value. This also provides MSPs the ability to weather downturns and simplifies business operations, so it's important to be knowledgable as to this valuation.

The revenue valuation equation provided by Connectwise is as follows:

(Product x .12) + (Labour x .6) + (Recurring Revenue x 2.5)

Client contribution and effectiveness

With revenue valuation determined, it's possible to then calculate the value of individual client contributions; how much is earned across all business lines and what the associated costs are. Many MSPs only consider fixed fee margins, yet if a client is generating significant revenues, they should be considered in conjunction with the entire operation.

For further analysis, divide monthly fixed fees by the number of hours attributed to the client. This provides visibility as to which clients are disproportionately using more time than they are worth compared to collected revenue.

For such clients, it may be worth exploring how they can be helped with training or upgrades to reduce the time they demand from their MSP. Many larger clients have a low effectiveness score, which makes it worthwhile to persevere with non-monetary strategies, rather than dissuading them with higher prices. With such relationships turned positive, revenues will increase.

Specialisation

Being able to help clients solve their unique IT problems leads MSPs down routes towards lucrative specialisations. With established niches comes a premium pricing brochure. Whether a client is in a specific vertical or has encountered an unusual problem with a cloud migration, being able to tailor services to individual clients is very valuable.

It's impossible to specialise in everything, but having specific industry knowledge can distinguish an MSP from the competition. Further, select verticals in which to specialise, and identify the different support levels and requirements needed within each.

Revenue churn

Churn is the rate at which customer recurring revenue is lost over a specific period of time. Given recurring revenue is typically taken monthly, this time frame can be a good starting point, though for a wider view a period of years can be chosen. This metric is a basic calculation: customers at the beginning of a period minus those at the end of the period, excluding new sales over that period.

Some churn is inevitable, as circumstances in IT are often quite fluid and liable to change. For instance, a company may have merged, liquidated, or relocated. But a high rate of churn is damaging to business, as it means more customers are changing providers.

Remember that churn isn't just about lost customers in terms of sales, but also the marketing costs needed to replace them, as well as recouping initial costs.

Customer retention is the positive flip-side of churn. With an effective strategy in place to maintain customer relationships, MSPs can ensure their revenue churn remains at a low level.

Employee satisfaction

Don't forget to look internally. External problems often stem from within. Demand for skilled technicians in the industry has been stretched for some time, and shows no sign of easing, so each individual employee counts.

Just as customers must be managed and satisfied, so must employees. Even highly skilled workers need human relations. They need regular one-to-ones, an outlined career path, they need to know how they can grow with the company.

Skilled workers are also usually eager to add to their existing skill-set. So what direction is the MSP heading which will allow them to learn new things? And will the resources be available to support training schemes?

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