Having objective measurements of MSP performance is crucial. Key Performance Indicators (KPIs), Objectives and Key Results (OKRs), and metrics-based management tools provide essential decision-making data.
Metrics allow assessment against industry peers and historical performance. This dual perspective enables more effective progress measurement toward goals.
Industry Benchmarks and Context
Industry benchmarks reveal what’s achievable and competitive standing. However, caution is warranted when goal-setting relies solely on benchmarks. Understanding your starting point matters. Setting achievable targets creates momentum and fosters growth environments. Repeatedly missing targets breeds pessimism that stunts development.
Internal Benchmarking for Continuous Improvement
Internal benchmarking provides strategy effectiveness feedback. Without measuring outputs, you lack verifiable data on how changes impact performance.
MSP Business Metrics to Track
Gross Margin on Service Delivery
For MSPs, staff and systems costs for service delivery are significant. Focus on gross margin from the service division.
The challenge: many businesses don’t properly load cost of goods sold (COGS) into service divisions. Salary costs often appear elsewhere in profit-and-loss statements under overhead or SG&A. Align COGS with revenue by working with accountants to reorganize general ledgers. Service delivery costs include tech staff salary and support tools — not benefits, rent, office equipment, or administrative costs.
Target: 40-70% gross margin on service delivery, ideally 50-60%. If underperforming, investigate pricing issues. Many struggling MSPs price too low. Never be afraid to go upmarket. Early scrappy deals may no longer serve your business. Target larger clients using industry-aligned pricing. Typical per-seat AYCE pricing: $125-150/seat.
Earnings Before Taxes, Depreciation, and Amortization (EBITDA)
EBITDA measures true company profitability and free cash flow generation. However, drawbacks exist — EBITDA can be manipulated through interest payments and depreciation schedules.
MSP businesses typically carry lower depreciable equipment costs and fewer large loans, making EBITDA more reliable. Consider adjusted EBITDA including owner’s salary, as dividends and compensation often aren’t reflected in standard calculations, which can artificially sweeten numbers.
Client Churn
Aim for below 5% annual churn rates. This metric reflects losses from provider switching, excluding acquisitions or other circumstances.
Employee Churn
Target under 5% churn, though market conditions may push this to 10%. Skilled tech talent faces high demand. Dissatisfaction drives departures more than low pay alone.
I’ve encouraged departing employees to accept better opportunities, recognizing when 30-40% salary increases or promotions couldn’t be justified internally. I genuinely want people to succeed, even if that success means they need to move on from our company.
High employee churn damages team-building and increases training costs. Replacing a staff member costs 80-120% of annual salary. For a $65,000 employee, replacement costs $52,000-$78,000.
Cultural impact matters significantly: people often leave managers, not companies. Examine company culture, team dynamics, goal focus, support systems, and career growth understanding.
Year-over-Year Growth
The expression “if you’re not growing, you’re dying” reflects hustle culture. Running a well-managed, slower-growth business is valid. Complacency, however, is dangerous — natural client attrition requires ongoing effort.
Target: 5-20% annual growth. Above 20% becomes risky without robust fundamentals. M&A strategies are common but high-risk. Successful M&A campaigns span years, not weeks, with significant operational and cultural disruption challenges.
% of Revenue that is MRR
MSPs should derive 75% of annual revenue from monthly recurring revenue contracts. The remaining 25% comes from non-recurring revenue (NRR) like projects and equipment — essential for maintaining upgrade momentum.
NRR spending is driven by Technology and Quarterly Business Review (TBR/QBR) practices. A 75/25 MRR/NRR split ensures monthly cash flow covers operating expenses while generating project revenue.
Ideally, monthly MRR exceeds monthly operating expenses. Since MSPs bill monthly upfront, there’s no need to wait for month-end invoices. ACH/EFT payments on the 1st of the month reduce accounts receivable lag and payment processing costs.
Going Forward
Knowing your numbers is essential for business health. Clear goals direct focus. KPIs and OKRs keep you on track.
A striking statistic: 25% of managed IT service businesses operate at breakeven or lose money. Avoid this trap by maintaining healthy margins, minimizing client and employee churn, and growing MRR and NRR.