Using MSP Business Metrics
Using KPIs/OKRs in your MSP business
Having an objective measurement of how your MSP is performing is crucial for any business. Key Performance Indicators (KPIs), Objectives and Key Results (OKRs), or other metrics-based management tools provide essential data that informs your decision-making process.
Using key metrics is vital as they allow you to assess your performance not only against your industry peers but also based on your past performance. This dual perspective enables you to measure your progress towards your goals more effectively.
Industry Benchmarks and Context
Industry benchmarks can provide insight into what's achievable and where you stand among your peers. However, be cautious when setting goals based solely on these benchmarks. Understanding your starting point is essential. It’s beneficial to set achievable targets that create momentum, fostering an environment for further growth. If you repeatedly fail to meet targets, it can lead to a pessimistic outlook that stunts your development.
Internal Benchmarking for Continuous Improvement
Internal benchmarking can offer feedback on the effectiveness of your strategies. Not measuring your outputs leaves you without verifiable data on how changes impact your performance.
MSP Business Metrics to Track
If you are a Managed Service Provider (MSP), your primary revenue comes from providing technical support and consulting services, meaning that staff and systems costs related to delivering these services are significant.
Gross Margin on Service Delivery
Focusing on the gross margin produced from your service division is essential.
Now a small catch here is that many businesses don’t properly load their cost of goods sold (COGS) into their service division and instead all of the salary costs are further down in the P/L with the rest of the business overhead or sales and general administration (SG&A). So if you don’t have your COGS aligned with your revenue, work with your accountant to re-work your general ledger to align the service delivery costs with the revenue. This is typically tech staff salary and support tools. It does NOT include things like benefits, rent, office equipment, and other administrative business costs.
This metric can vary wildly between businesses, but you should be aiming for 40 to 70% gross margin on service delivery. 50 to 60 percent is a pretty reasonable goal for most businesses. If that seems intimidating don’t stress about how that compares to where you’re at, just set that as your guide and get to work understanding why you may be underperforming and create an action plan to fix any issues that are negatively impacting your gross margins. In most cases, MSPs that have low margins are pricing too low. Never be afraid to go upmarket. The scrappy deals that you managed to win early on in your business, may not serve you anymore. Work on a plan to target and win larger clients using a more industry-aligned pricing strategy. Typical per-seat pricing for all-you-can-eat (AYCE) MSP model is $125-150/seat. For more information on pricing strategy check out another blog post of mine, the “best MSP pricing model.”
Earnings Before Taxes, Depreciation, and Amortization (EBITDA)
EBITDA is a fantastic metric to measure the true profitability of your company. It essentially shows how much free cash flow your business is generating.
Granted there are some drawbacks to using EBITDA for financial analysis, but it’s a very common metric for calculating business health in the MSP channel. Just don’t rely on it alone as a sole indicator of success or profitability. There are plenty of ways to manipulate EBIDTA. Interest payments and depreciation schedules can be altered to make EBITDA represent the cash flow situation better than reality.
Luckily MSP channel businesses typically carry lower depreciable equipment costs, especially now with the move to cloud-based delivery, and often are taking on large loans.
Another consideration around using EBITDA as a comparative metric is that some companies may choose to invest more profit back into the business through training and development opportunities. This type of spending can be a subjective value to the business. There’s no doubt that investing in your staff is a good thing, but it could influence comparing two businesses side by side. One has engaged motivated and happier employees because they are looked after. The other has higher profit margins, but less satisfied staff.
Another consideration when looking at EBITDA as a comparative metric is to use adjusted EBITDA numbers and include the owner’s salary. In many cases, owners pay themselves dividends and their compensation may not be reflected in the EBITDA calculations. This can sweeten the EBITDA numbers, but it’s unrealistic from a valuation standpoint since it’s omitting a large cost to the business.
Client Churn
Client churn can significantly impact your business growth. Aiming for a churn rate below 5% annually is ideal. This metric reflects client losses due to switching providers, excluding those lost through acquisitions or other circumstances.
Employee Churn
Employee churn is a significant issue, much like client churn. Ideally, you should aim for under 5% churn among your staff, though market conditions might push that figure as high as 10%. Skilled tech talent is in high demand, and while people may not leave solely for higher pay, dissatisfaction can easily lure them away. Even the most loyal employees won’t turn down an exceptionally good offer.
In the past, I’ve encouraged team members to accept offers they brought to me. While I didn’t want to lose them, I recognized that I couldn’t justify a 30-40% salary increase or a significant promotion. I genuinely want people to succeed, even if that success means they need to move on from our company.
If you can’t retain your employees, you have a problem. High employee churn hampers your ability to build a high-performing team, leading to significant time spent training new hires, which can be costly. Replacing a staff member can cost between 80-120% of their annual salary. For example, replacing a technical support team member earning $65,000 per year could cost you between $52,000 and $78,000. This encompasses both hard and soft costs, making it an unnecessary expense.
Moreover, losing staff has a cultural impact. If employees are quitting, it’s essential to take an honest look at your company culture—not just the perks you offer. What is the team dynamic like? Do team members enjoy working together? Are they focused on achieving goals, or are they just doing enough to avoid trouble? Do they feel supported, and do they understand how their work contributes to their career growth? Remember, people often leave managers, not companies.
If you’re interested in enhancing your skills as a manager in an MSP, you’ll find value in the MSP Service Manager course I developed specifically for MSP owners and managers.
Yr over Yr Growth
There’s an expression that goes, “If you’re not growing, you’re dying!” Personally, I think this sentiment leans too heavily into hustle culture. There’s nothing wrong with running a well-managed business that doesn’t experience explosive growth. Sometimes, staying smaller can lead to a simpler, less stressful operation. You might not become wealthy, but you could find great happiness in your work.
That said, complacency can be dangerous for any business owner. It’s essential to dedicate some effort to growth—not just for expansion’s sake, but to safeguard against natural client attrition. Aiming for annual growth of 5-20% is a reasonable target. Growth above 20% can become precarious, requiring robust fundamentals to support it.
Many owners turn to mergers and acquisitions (M&A) as a growth strategy, which is common in the industry but comes with significant risks. M&A isn’t suitable for everyone and often takes much longer than anticipated. Successful M&A campaigns can span years, not weeks. Additionally, the cultural and operational disruptions that arise from integrating two companies can be extremely challenging.
If you choose to pursue an M&A strategy for growth, exercise patience, and look for reasons to say no. Prioritize thorough due diligence and ensure there’s a strong cultural alignment between the companies involved.
% of your revenue that is MRR
An important measure of success for any Managed Service Provider (MSP) is the revenue generated from monthly recurring revenue (MRR).
The term “Managed Service Provider” can sometimes be misapplied. My definition of an MSP is an IT company that delivers IT services to multiple clients on a fixed-cost basis, billed monthly. In a true MSP model, the majority of your revenue should come from MRR contracts. A healthy benchmark is for 75% of your annual revenue to be derived from MRR.
The remaining 25% is equally important, as non-recurring revenue (NRR) ensures you have a consistent project funnel. If you’re not generating at least 25% of your revenue from project spending and new equipment, it’s likely that your clients aren’t keeping up with necessary upgrades and environmental improvements. This stagnation can pose risks for both their business and yours.
NRR spending is driven by effective Technology and Quarterly Business Review (TBR/QBR) practices. Contrary to popular belief, these reviews don’t have to occur quarterly; they should be held at a frequency that effectively drives the client’s technology roadmap forward, facilitates budgeting, and maintains a consultative relationship. Typically, larger clients will require more frequent meetings.
Maintaining a healthy 75/25 split between MRR and NRR ensures your business has the monthly cash flow necessary to cover operating expenses while also generating additional revenue from projects.
Ideally, your monthly MRR should be close to or greater than your monthly operating expenses. Since MSP work operates on a fixed-fee, utility-style billing model, you can charge clients on the first of the month for services rendered that month. There’s no need to wait until the end of the month to send an invoice, as this creates an unnecessary lag between expenses and revenue. If clients agree to Automated Clearing House/Electronic Funds Transfer (ACH/EFT), you can receive payments on the 1st of the month instead of dealing with an average 30-60 days of accounts receivable. Additionally, ACH/EFT reduces costs associated with payment processing, such as credit card transaction fees.
Going Forward
Here’s a refined version of your content that enhances clarity and impact while retaining your key points:
Knowing your numbers is crucial for running a healthy business. Setting clear goals provides you and your staff with direction on what’s important, while using KPIs (Key Performance Indicators) and OKRs (Objectives and Key Results) keeps you on track to achieve those goals. Here are just a few essential metrics that can help ensure your business remains profitable and successful.
Shockingly, 25% of managed IT service businesses operate at breakeven or even lose money! To avoid falling into this danger zone, focus on maintaining healthy margins, minimizing client and employee churn, and growing both your MRR (Monthly Recurring Revenue) and NRR (Non-Recurring Revenue). These strategies will help you stay on solid ground while many of your peers struggle.
For insights on managing your team effectively, check out our podcast episode, ERP096 - How To Think About Security.
