How MSPs Can Combat Profit Margin Erosion

Shawn Sailer, vice president, managed services strategy, Liongard
Author: Shawn Sailer, vice president, managed services strategy, Liongard

What’s the one thing on most Managed Services Providers’ (MSP) minds right now? Margin erosion. While some of the top providers in the industry continue to see sales, prices and profit margins soar, many more MSPs are struggling at the break-even point, working harder than ever but making less.

What’s the reason? And, more importantly, how can MSPs get out of this rut and combat margin erosion?

Profit Margin Erosion Amid COVID-19

Obviously, the COVID-19 pandemic has shaken up the MSP industry. Many providers are scrambling to find new earning opportunities to avoid making cuts. Further, we’re in a new economic cycle, meaning MSPs that originated in the past 10 years have never dealt with an economic downturn.

Back in 2016, MSP consultancy Taylor Business Group (TBG) recommended MSPs shoot for over 17.5% margin, with 20%+ being preferred; but many MSPs now find themselves operating at about 10% profitability, the new break-even point.

Some MSPs have been able to withstand the upheaval better than others. Those serving a cross-section of industries, and those that have been able to pivot quickly, have fared well; so have those with longer-term contracts versus project-based pricing.

Some MSPs are even thriving right now, taking advantage of the current opportunities brought on by the coronavirus crisis. Those with a strong business development process may find they’re able to accelerate while their colleagues put on the brakes.

How to Drive Profitability in this “New Normal”

According to TruMethods’ owner Gary Pica, a world-class MSP doesn’t leave money on the table. Unrealized profitability directly affects profit margin and can be the difference between break-even profits and 25%+ margins. We’re in uncharted territory, so it’s time to get creative and consider all the options that may help you increase your profit margin.

Here are a few ideas to start with:

  • Pay attention to KPIs.

    Track key performance indicators like customer satisfaction score and first call resolution, and then examine profitability metrics at the client, contract and service levels to gain insight into what you’re doing well and what needs more attention.

  • Re-examine your pricing.

    TBG recommends MSP charge an hourly rate that’s 4.5 times the “hourly burdened salary rate,” which includes taxes, supplies, insurance and other related employee costs.

  • Market with a plan.

    IT management consultancy Bering McKinley’s CEO Josh Peterson says, “High-margin MSPs tend to be thoughtful and consistent about lead generation. Lower-margin providers are far more likely to spend lots of money in short bursts on ill-considered marketing schemes.” Make sure you’re not wasting your marketing dollars and eroding your profits with ineffective spending.

  • Embrace the cloud.

    As we move into a cloud-first world, make sure your MSP takes advantage of the opportunities it presents. In its 2020 State of the Cloud Report, Flexera notes that organizational spend on cloud services is likely to increase 47% from April 2020 to April 2021. Incorporate cloud services into your MSP model to help your customers navigate this realm and ensure data and system security.

MSPs managing clients who use AWS, Microsoft Azure and other services in the cloud can also drive profitability through automation. By setting alerts in Liongard to notify you when security thresholds in these programs are not met or access rights fail to match your MSP’s policies, your staff increases efficiency and avoids costly errors.

  • Think outside the box.

    Though TitanHQ rightly points out that there is little margin in reselling Office 365 services, all is not lost here. Being able to quickly identify and show your customers unused or duplicate Office 365 licenses during the sales process and throughout your relationship with a customer can demonstrate your value and help you justify or raise your pricing.

  • Build and manage a standards library.

    Right now, many MSPs are vulnerable to ransomware and other cyber threats because they deal with security in a reactive manner. When you switch your perspective and proactively address security needs before they become problems, you save so much time and increase profitability. Setting automated alerts to help you maintain standards can also help your productivity, and efficiency, immensely.

Flexing Your Profitability Muscles

Instead of cutting out muscles from your MSP in difficult times, start flexing them. Safeguarding profitability is directly tied to choosing the right partners and tools to help you do more. Liongard helps MSPs increase efficiencies to free up time and allows for further profitability using:

  • Automated Documentation, which reduces manual tasks while providing accurate, never-stale data for you to reference.
  • Actionable Alerts, which provide notification on issues that need your attention, such as critical changes, security risks and unused licenses that can net your clients additional revenue.
  • Reporting and Metrics, which internally show you, quickly and accurately, data across customer environments for more effective issue resolution.

As an MSP provider, we’re conscious of your profitability concerns and offer affordable pricing. (For the efficiency alone it brings, MSPs across the country have said the Liongard platform pays for itself several times over. Read why Bill Knox of ES Consulting says it’s the best investment his company has ever made.) Users enjoy unlimited system inspections, unlimited user licenses and client access, a 30-day satisfaction guarantee and much more. You can quickly see why it’s no risk and all reward.

For more about combatting profit margin erosion, check out TruMethods’ whitepaper on The Science of World-Class Providers, and contact us for a demo to see how Liongard can help you achieve the world-class margins you’re targeting.

Author Shawn Sailer is vice president of managed services strategy at Liongard. Read more guest blogs from Liongard here.