Most MSPs are fairly small, and that makes for a highly competitive landscape. Many MSP owners report that differentiation is one of their biggest challenges. And the problems don’t stop there. It’s not enough to be different; you need to differentiate on the basis of something that actually matters to your bottom line. So what matters? There’s no end of opinions, but the best approach is to look at the data. IT Glue’s recent Global Benchmark Survey provides some insight into what the best in class MSPs look like.
Only around one-fifth of small businesses are sold, but we know that many more go on the market. So if you’re the owner of a small or medium-sized MSP, you need to get into the upper echelon of the business if you want to recoup your investment of time and money. Buyers want two things - they want a good, strong, stable business (ideally growing), and in a perfect world they want a turnkey business. In other words, one that doesn’t rely on the outgoing owner to succeed.
Golden Quintile MSPs: The best-performing MSPs are ones with consistent, high margins and growing revenue. Most MSPs reported revenue growth last year, so growth really should be a given for a best-in-class MSP. In fact, 20% of MSPs in our survey reported not just growing revenue but also high margins (in excess of 20% net margin), so that is where we set the cutoff. This upper 20% of the MSP business is what we call the Golden Quintile. They are the best performing, and if that performance is sustained, are the most likely to be acquired, should the owner wish to sell.
It’s probably worth noting that the rate at which older Baby Boomer MSP owners are looking to sell is accelerating, which creates an imperative for those owners in particular to ensure that their business is performing in the Golden Quintile range.
In the Global MSP Benchmark Survey, we recorded a significant amount of information, which allowed us to look at a number of different variables that might differentiate the best-in-class MSPs from the remaining 80% of performers. The good news - if you’re in that 80%, you’re still probably making money. But it’s definitely good to know that you can improve, and where those improvements might pay off the most.
MSP Company Size: The first variable we looked at was size. There is really nothing about an MSP’s size that relates to how well it performs. One-person shops, in fact, can do very well if they focus on automation. Some shops are doing less than $250,000/year in revenue, but have margins over 50%, which seems like a pretty good living. But there are a lot of high-performing larger MSPs as well, especially ones that take advantage of economies of scale. Again, automation and documentation play key roles in that.
Revenue Mix: We also looked at managed services as a percentage of revenue. We did this because most MSPs don’t just offer managed services, but have a range of IT services that they provide to different clients. The best-in-class MSPs average 48% managed services as a percentage of revenue, while the remaining averaged 43%. It’s not a huge difference, but combined with the understanding that managed services is a higher margin business than transaction-based business models like break/fix, it’s not surprising that there is a difference. Still, this variable alone is not a sufficient explanatory factor.
Vertical Market Focus: Verticals don’t matter. This was one of the more interesting findings in our survey because it’s a bit counterintuitive. In theory, specializing in a particular vertical should allow an MSP to gain expertise that in turn gives them competitive advantages that they can exploit to earn higher profits. In practice, whether an MSP specializes in particular verticals doesn’t correlate with higher margins. If anything, MSPs with vertical specializations are less likely to outperform.
Talent: Onboarding new techs does matter, however. This makes sense. The more quickly a new tech hits 80% productivity, the more efficient your service function will be. That in turn should translate directly to margin. 54% of MSPs in the Golden Quintile see their techs up to 80% within 3 months. Among other MSPs, that number is 46%. Just 7% of the Golden Quintile reported techs taking over 6 months to reach 80%, compared with 13% among other MSPs. So while these numbers of close enough that the pace of new tech onboarding isn’t a deal-breaker in terms of profitability, there is a clear trend that the best-performing MSPs are able to onboard their new techs and get them up to speed more quickly.
When examining MSP operations, onboarding should be paired with employee turnover. The more turnover you have, especially among your techs, the more onboarding costs you’ll have to incur. MSPs in the Golden Quintile report average turnover of 11%, while other MSPs report average turnover of 14%.
Customer Churn: We also looked at client churn. Churn is a key influencer of your MSP’s growth rate (and therefore the multiple you can expect to sell for). Furthermore, the more you churn the higher your customer acquisition costs will be to maintain a healthy revenue growth rate. Among MSPs in the Golden Quintile, 79% reported churn below 5%, and 100% reported churn below 10%. Among MSPs outside the Golden Quintile, 68% reported churn below 5%, but 9% reported churn above 10%. With most MSPs holding churn below 5%, that alone won’t make you a top-performer, but holding down churn definitely seems to be one of the more important things you can do to improve your MSP’s performance.
One of the things we’ve noticed is that last year, a lot of MSPs did well. So the differences between best-in-class MSPs and other MSPs are not always huge. But every little bit matters. If you’re consistently better across the board - lower churn, lower employee turnover, faster employee onboarding, more managed services - you are more likely to outperform.
The next question, of course, is how do you consistently outperform in all the metrics that matter? Stay tuned to this space, and watch the IT Glue blog, for more insights.
Tune In: For further discussion of the Global Benchmark Survey, tune into ChannelE2E’s podcast with Luis Giraldo here, where he discusses the survey results and what they mean for MSPs.