IT and Business Insights for SMB Solution Providers

Scaling Your Way to Profitability

Tuning up your business operations and go-to-market strategy, investing in employees, and pricing on value are among the many things growing MSPs can do to achieve a healthier bottom line. By Colleen Frye
Reader ROI: 
THE CORE DIFFERENCE BETWEEN low-profit and high-profit MSPs is that high-profit MSPs are more operationally efficient.
SPECIALIZING AND PRICING ON VALUE are key to differentiating your MSP business and achieving higher margins.
FIND A COACH to help with management, leadership, and marketing skills.
INVEST TIME IN hiring the right people, giving them leadership training, and drafting career plans.
DEVELOP REPEATABLE PROCESSES and document them. Standardize your tools and services too.

ACCORDING TO RAJ GOEL, Brainlink International Inc. “doesn’t even get out of bed” for deals worth less than $450 per month per employee. But it wasn’t always like that. Profits were nonexistent for the New York-based managed service provider back in 2010. Then, through a four-year process of operational and strategic changes, Brainlink hit profitability in 2012 and scaled to become what Goel, the company’s CTO, calls one of the most profitable MSPs in North America compared with industry benchmarks.

What separates New York-based Brainlink and other highly profitable MSPs from those just barely scraping by or even losing money? Paul Dippell, CEO of Plano, Texas-based consultancy Service Leadership, sums it up simply: “The ones better at running their business will be more profitable.”

Dippell publishes the Service Leadership Index, a worldwide financial and operational benchmark for IT solution providers that ranks businesses’ Operational Maturity Level (OML) on a scale of 1 to 5. The benchmark includes 60 different metrics, such as revenue growth, profit by line of business, cost by line of business, sales cost, R&D, and productivity per person.

“Most MSPs don’t understand their income statement well enough to understand how much to charge to make money,” Dippell says.

Verne Harnish, founder of business coaching company Gazelles Inc. and author of Scaling Up: How a Few Companies Make It...and Why the Rest Don't (Rockefeller Habits 2.0), agrees with Dippell. “When it comes to setting prices, most lick their finger and put it to wind,” he says.

According to the Service Leadership Index, 30 percent of MSPs are at OML 1 to 2. “They don’t understand their costs. They don’t know how to sell value versus price. They don’t make money,” Dippell explains, adding that 50 percent of MSPs are at OML 3. “They are better at selling on value, they have a better understanding of costs, they charge more, and make decent money.”

That leaves 20 percent at level 4 to 5, who are charging around $495 per month per seat. “The lower-level guys will swear those guys don’t exist,” Dippell says. “They do.”

The top quarter of MSPs in 2017 achieved 18 percent or better profitability after the owners paid themselves a fair market wage, Dippell says. The median margin was 8.3 percent, and the bottom quartile of MSPs actually lost money.

So what holds some MSPs back? Barriers to scaling profits, according to Harnish, include leadership, infrastructure, and market dynamics. “Nobody took a course on how to scale a business; they don’t teach that in MBA programs,” he says. In terms of infrastructure, he adds, “You have to make sure you have scalable infrastructure—accounting system, office space, CRM system, telephone.”

About the Author

Colleen Frye's picture

Colleen Frye is ChannelPro's managing editor.

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