IT and Business Insights for SMB Solution Providers

Metrics That Matter

There are lots of numbers MSPs could be tracking to assess their business performance. Which ones should they be tracking? By Megan Santosus
Reader ROI: 
EFFECTIVE HOURLY RATE lets you compare how an hour of managed services stacks up revenue-wise against an hour of break-fix ser
REACTIVE HOURS per endpoint per month measures the efficiency of your service delivery, and should be as close to 15 minutes or
ACCOUNTS RECEIVABLE TO GROSS REVENUE shows you how much of your annual gross revenue your clients currently owe you, and should
SERVICE SALARIES TO SERVICE REVENUES is a key contributor to gross profitability, and should be no more than 33 percent.
NET PROMOTER SCORE is the best available gauge for how happy your clients are with you.

THERE ARE MANY DIMENSIONS to running a successful managed services practice, from keeping revenues high to keeping customers happy. There’s also a seemingly endless array of ways to measure each of those requirements. The challenge for MSPs is figuring out which metrics they should be using. While every MSP faces unique challenges, here are a few numbers they should all be following, according to leading industry experts.

Effective Hourly Rate

Channel pros making the move into managed services need to be sure the change is a profitable one. If their average hourly revenue on managed services contracts is lower than their hourly break-fix rate, they probably shouldn’t be signing managed services contracts.

That’s according to Josh Peterson, CEO of Bering McKinley, a management consulting firm in Wheaton, Ill., who encourages MSPs to know their “effective hourly rate.” To figure it out, total up your revenue from one or more managed services contracts, subtract out hard costs for items like software licenses, and then divide the result by the number of employee hours spent on those contracts. If the total comes in below your break-fix hourly rate you’ve got a problem, observes Peterson, who says his best clients routinely make twice their so-called “rack rate.”

The easiest way to raise your effective hourly rate is to increase what you charge customers. Alternatively, you can reduce the amount of time you spend servicing customers and increase efficiency by assigning tasks to the people best qualified to handle them, eliminating unnecessary tasks, and reducing wasted effort.

Leverage

Gary Pica, president of TruMethods LLC, an MSP training provider and consultancy in Moorestown, N.J., recommends a metric he describes as “a high-level gut check” of how an MSP is doing. Pica calls it “leverage,” and determines it by dividing annual service revenues by total number of employees. A well-run MSP should generate $100,000 to $120,000 of service revenue annually for each person on the payroll, Pica says.

Reactive Hours per Endpoint per Month

Pica advises MSPs to use another important metric to weigh the efficiency, and hence profitability, of their service department. To calculate it, simply add up all of the time you devote to “reactive” tickets (as opposed to proactive management tasks) in a given month and divide that by the number of endpoints you support.

The result, which Pica calls “reactive hours per end user per month,” or RHEM, helps you see how much time you’re spending on unplanned management activities. High-performing MSPs spend no more than 15 minutes a month per endpoint on reactive tasks. Any more than that, Pica says, means a company is focusing too much on lower-value troubleshooting rather than higher-value—and by extension higher-margin—service activities.

“When we see companies struggle with sales, with their leverage, and their profit margins, they typically have a RHEM of 30 minutes or higher,” Pica says.

About the Author

Megan Santosus is a Boston-based freelance writer and frequent contributor to The ChannelPro Network.