Do you actually know whether your MSP work is profitable?
There is an old phrase I’m very fond of - “What can be measured, can be managed”.
This phrase is very apt for the IT Solution Provider and Managed Service Provider (MSP) market - as many of us within the market neither measure nor manage nearly as many things as we should, and certainly not the most important thing to our business - profitability.
The Importance of Profitability
Without profits, our business at best remains at the size it is, and at worse, contracts - shrinking day by day, sometimes without business owners even noticing it.
For many MSP’s, profitability is measured at the end of each business financial year by the simple math of subtracting the businesses expenditure from the businesses income. You’re either profitable or not, right?
Well - technically that’s true, but what if 90% of your work is actually unprofitable, but is supported by the 10% of work that you do producing great profits. And that being the case, where would your business be if you lost that 10% of great profitable work?
In reality, most IT business owners have some idea of how profitable each job and each client is - but it’s usually based on gut feeling. Most business owners keep well informed of all work that’s happening - and know from delays and setbacks whether work is likely to be profitable.
Determine Your Profit
There is an immense amount of value in understanding exactly how profitable individual jobs, projects and indeed, client managed service contracts are though.
For instance, you quote for a server installation for a client. This involves a hardware and software element, and a labor element. You deliver the project, and the client pays. That’s a profitable job, right? Except, without analyzing the project fully, you can’t know whether it was just about profitable, break-even, or in reality, a loss.
A loss? Well consider this. The project was scheduled to take 2 days, but in reality takes 3. Your staff need paying for that extra day of work, but you never attribute that cost directly to the project because payroll is considered an overall business cost. End result? The project cost more to deliver than you charged the client for.
If you don’t measure this and act upon it, future server installs might suffer the same problems.
Likewise a Managed Service contract. You charge a flat fee each month for support, but if you Karen’t sure how much time your staff are actually spending on the client each month, how can you be sure the contract is profitable? By actively recording the time spent on contracted work for the client, you can analyze whether the client is profitable or not - and re-negotiate the contract accordingly.
Using Tools to Measure Profitability
The key to both of these scenarios lies within you and your engineers accurately recording time spent on activities. Once you record the time spent on each project, and for each client under contract - you can attribute a cost to that work, and, if the work is unprofitable - adjust to make it profitable.
Professional Service Automation (PSA) tools such as Autotask work on such “Service Intelligence”, helping you understand at a glance which work is profitable (or not). More generic Helpdesk tools such as ZenDesk also allow you to record time and analyze profitability, although external reporting tools are often required to crunch the numbers.
But even if you’re still using a spreadsheet and a diary, you can record your time and work out profitability accurately.
Profit is the life-blood of your business, and so is far too important to check in on just once a year. Understanding what work is profitable and what is not allows you to adjust your business in real-time, steering it away from unprofitable work, and back towards profitable endeavors.
Want to Boost Your Profits Even More?
Be sure to listen to our February webinar, "Adding Hardware as a Service to Your MSP" to learn how you can increase your MSP revenue by adding new services.
About the Author
As the former owner of an award winning IT Managed Service Provider, Richard Tubb works with MSPs to help them increase sales, take on employees and build up relationships with key industry contacts. You don't have to do it alone any more - contact Richard and have a chat about your needs and how he can help you.