Is Your MSP Really Profitable? Here’s How To Check
MSP’s and IT providers are fiercely divided on the topic of pricing models and which works the best. Is it hourly rates, fixed fee per user/device, blocks of time or a hybrid approach? Getting the pricing model right and understanding the numbers is the key difference between a profitable business and going out backwards.
It’s never been more true – labor costs continue to rise, while what you can charge per hour or per seat is under downward pressure. Services quickly commoditise in the MSP world – what your clients valued you for 5 years ago – is not perceived as so valuable today and competition is only growing.
However IT providers package their pricing – everything eventually boils back down to an effective rate per hour. Here’s why:
- If Company A delivers 10 hours of work for a client and charges $150 per hour, then it’s fair to say that the effective hourly rate of that company is $150 per hour.
- But, if Company B wins an MSP contract of a 10-user firm and charges $150 per user or per device but spends more than 10 hours working for their client each month then the effective hourly rate falls below $150. As an aside, don’t be shocked by the number – a significant number of IT providers today actually charge a lot less per user/device than $150!
Many would argue that this is the ‘swings and roundabouts’ of doing business but our analysis at Benchmark 365 shows that often there are far more swings in the customer’s favor than roundabouts in the MSP’s favor. So, whilst it’s true that MSPs seemingly benefit from reoccurring revenue, they do so at a substantially lower hourly rate than their break/fix counterparts.
Often overlooked is the real costs of servicing. Just looking at the 40 hours or so your techs are formally at work gives you only half of the cost. You have to factor in not only billable utilization (Hint: it should be at least 80%) but also holiday, training and sick days. It’s critical that staff faithfully record their hours, so you can get the real picture of that cost.
Don’t forget your own time. You should not be exempted from filling out a timesheet. It’s easy to conclude that your time is free because you are the boss. In fact, it’s the most expensive and most critical and should be spent on what’s most important. If you’re serious about growth you should be spending 80-90% of your time on sales, marketing, customer relationship management and service development – not tech support.
Overheads associated with servicing also should be added to the cost-base. It may not be easy to be exact here – but make a good guess on the proportion of your operational and administration costs associated with servicing, not forgetting to include those associated with dispatch.
So where is your MSP? A Self-Assessment
So how can an IT business grow profitably if hourly rates stay the same and labour costs keep going up? How does your business fare? Here’s a simple self-assessment to help you figure out if you’re on the path to profitability.
- Are you an AYCE (“all you can eat”) provider? Review every service contract, calculate the hours spent per customer and work out your effective hourly rate. The simplified formula is monthly contract value divided by number of hours spent per month.
- Are you an hourly rate provider? Review your labor time per customer and ensure you are billing for each hour of service ensuring your effective hourly rate is the same per customer. The formula is even simpler – hours spent servicing a customer compared to hours billed per customer
- Then look realistically at all your labor costs and staff utilisation – are staff entering time sheets? If so, what is the average billable time of each staff member (as mentioned we think 80% is about right).
- If the results mean you are working more hours and earning less per hour it’s a sign that something needs to change.
- Then model it out for your current set of services over the next 5 years for these two scenarios:
- Assuming your charged out hourly rate remains the same and your labor costs increase 5% each year.
- Assuming your charged out hourly rate reduces each year by 5% and your labor costs increase 5% each year.
- You can add a third scenario where your market rate increases – but only if you can justify extra value add for your clients by way of new service offerings.
It will become pretty clear, pretty quickly that the only way to scale profitably is by finding a way to offer client service support in a way that does not incrementally add technical headcount to your payroll. At Benchmark 365, we think outsourcing your helpdesk can dramatically reduce your labor costs and give you the flexibility to scale and on-demand. It will also free up resources and time, so you can work on evolving your offerings, so you can continue to provide premium priced services your customers will value in the future.