Given the explosive demand for cybersecurity solutions, the growing regulatory compliance for data protection and security being mandated by governments, the IT labor shortage creating a greater demand for co-managed IT, businesses continually moving toward remote working environments or automation, and general reliance on IT, there’s no reason any MSP should be struggling right now to generate growth and profits.
Quite simply, demand is HIGH for managed IT and security. A few months ago, when I spent a day with Robert Herjavec, “Shark Tank” star and CEO of Cyderes — a $1.2 billion MSSP/VAR — he said his investors expect him to generate a 65% YOY increase. 65%! He said, “That means if we merely double, we’re laggards in our growth!” Last year, according to Paul Cissel, who coaches for both Service Leadership and Taylor Business Group, the average MSP grew 16% this past year. That means if you grew only 10%, you didn’t grow but lagged by 6%.
So, this brings up a good question. How is it possible that any MSP can be unprofitable or struggling right now in THIS industry with THIS demand? Are they lazy? Stupid? Unlucky? Dealing with an unusual circumstance preventing them from thriving? All of the above? Let’s dig in …
Why Are You In Business?
We’ve often asked business owners, “Why are you in business?” Most actually have to stop and think about the answer to that question. For some, they’ve been doing their “thing” (running their business) for so long that they forgot why they started in the first place … and now, it’s just what they do, like a train chugging along the track, not really thinking much about what they’re doing, where they are going, and why they are doing it. Wake up. Make the doughnuts.
But when they finally muster up an answer to the question, “Why are you in business?” they lie and give a Pollyanna reply of “To help people” or “To make a difference in the world.” A few will say, “To pay the bills,” or “To avoid having a boss,” which are far more honest answers.
A few might say, “To make money,” but when you press them with a few more clarification questions about their answer, you’ll find out they have no real goals about “how much money” they need to make and what they want to make. They, like the others, are just chugging along day after day, doing the work but not really driving toward a specific goal of valuation or financial freedom. They too wake up every day to “pay the bills,” not to get rich, not to achieve financial freedom. That IS the extent of their ambition for running a business that drives the growth and profitability of the business itself.
Success In Business Doesn’t Happen By Accident.
I don’t have a pet parrot because I have no interest in owning one. So it goes with anything in life — if you have no interest or desire for something, you won’t possess it or pursue it. We give priority to the things we most want. So, if you start a business with the ambition to merely “pay the bills,” and you have no honest, truthful ambition to grow your valuation and secure high profits and financial freedom beyond “paying the bills,” you won’t.
I’ve been talking to MSPs about how to make more money (profits) for over two decades, giving them actual tools, templates, strategies, and example after example of how to raise their profits, but only a small percentage actually follow the advice to the letter and secure HUGE leaps in profitability. Many raise them a little and secure a bump in profitability, but not dramatically.
They hold back, even after seeing some success. Why is this? Because their honest ambition is not to “get rich” or become financially free. Their TRUE ambition is dialed all the way down to make enough just to pay the bills. Their ability to make bigger profits is throttled by the greater desire to:
- Avoid uncomfortable conversations with clients about raising their prices
- Avoid the guilt they feel in raising prices
- Avoid losing clients (fear)
- Avoid the work and frustrations that come with growth (hiring people, more complexity, etc.)
They also lack confidence in themselves and don’t feel they deserve more money. This doesn’t make them “stupid” or bad people. Far from it. But it does make them far less successful in business than they could be. So, if you honestly want to generate more money for yourself and more profits from your business, the first thing you need to analyze is your TRUE motivation.
Are you genuinely more motivated to stay safe, keep it simple, and avoid the situations listed previously OR are you sufficiently determined to push through those fears and feelings, trusting that it IS possible to raise your prices and make more money, and accept the truth that all the limitations you feel are just emotional baggage you’re choosing to carry around, not hard, immovable, concrete roadblocks that can be overcome?
Only you can answer this, but I will suggest you don’t automatically dismiss your ability to make more money and be more successful. You CAN learn. You CAN model others who’ve been successful. You CAN make mistakes, then course-correct. Very few mistakes in business are totally irrevocable and permanent “death” sentences. Thousands of multimillionaires and billionaires have gone bankrupt and recovered. You can always start again.
What Should You Aim For In Profitability?
What does “being profitable” mean exactly, and how much should you grow?
It helps to know what “good” is so you can determine if you’re above average and on track and what goals you should set for yourself. For most financial analysts and consultants in the MSP world, “being profitable” means you are paying yourself a fair market salary and you’re generating at least 10% net profit AFTER your salary (minimum), with a goal of up to 20% EBITDA (net profits).
Your salary is NOT your profits, which is a common misnomer among smaller MSPs. Your salary is a business expense. If you had to leave the business and replace yourself, or if you sell the business, the new owner will have to pay someone to do your job. How much should your salary be? Roughly $100,000 if you’re in the $500,000–$1.5 million range in topline sales. From there, your salary will increase by roughly another $100,000 for every $1.5 million in sales you add. Yes, location and cost of living play into this, but an MSP generating over $4 million should be getting a salary of at least $350,000. At $10 million, a $500,000 salary is appropriate.
Another general rule of thumb is that you should be generating at least 10% net profits after your salary. There are some best-in-class MSPs that generate 20%. Personally, I don’t like to see more than 18% net because, from my perspective, you’re taking too much profit from the business and should be allocating more money to growth (sales and marketing).
You might say I’m biased about this as the CEO of a marketing firm, but many growth-oriented MSPs running large, multimillion-dollar enterprises agree with me on this point. Some don’t like to see more than 10% EBITDA.
As for a growth goal, you should have no less than 12% growth in topline sales this year over last. That’s “par,” and anything less is truly lagging. Keep in mind, if you’re smaller, it should be easier to secure bigger growth percentages than when you’re bigger. Going from $1 million to $1.2 million is relatively easy. Adding 20% growth when you’re $40 million is much more difficult.
Again, ALL of this is situational and relative to goals you have, markets you’re targeting, and further economic developments (like a hard recession hitting). But in general, if you’re paying yourself a fair market salary and taking home at least 10% EBITDA, you’re at least “good.”
How To Raise Your Profits: There Are Only 4 Ways.
If, after reading this, you’re inspired to grow the bottom line, there are four ways to do it. Anyone can work to raise profitability, but if you stack them all, your chances of increasing the bottom line go up exponentially. It also may be best to take a nuanced approach to these, raising prices for some clients who need it or lowering some costs (like your tools) while fueling others (like marketing).
1. Raise Your Prices. Most MSPs are grossly (or at least mildly) underpriced, which is a big reason they’re unprofitable and don’t have sufficient funds to hire, grow, and do marketing. Right now, your stock “managed IT” support should be priced in the $150 per user range, more if you have advanced cybersecurity protections, and even more if you’re offering compliance services. Yes, a lot of variables impact that price, but if you’re under that number, there’s a very good chance you’re underpriced and not hitting at least 50% service gross margin.
2. Lower Your Costs. Gross margin, also called contribution margin, is revenue (sales) minus COGS (cost of goods sold). For MSPs, your COGS on managed services is your labor and your tools and should be at least 50%. Right now, with inflation what it is and engineer labor through the roof, reducing technical labor is a tough nut to crack.
Overhead walks on two legs, and you should anticipate your techs’ salaries to increase by another 6%–10% this year. Therefore, many MSPs are looking for cheaper tools as a way of lowering costs. On a recent call with 21 MSPs, many were in favor of signing longer-term contracts to get cheaper rates. Also, remember to raise your prices to clients every year by 3%–5% so when the contract comes up (and your costs go up), you’re not caught with lower margins.
3. Increase Efficiencies. Another big area for increasing profits is ensuring you’re truly efficient in your service delivery — and many MSPs don’t give it enough thought. A rule of thumb is that your techs should have at least 75% utilization, which means 75% of their hours are directly correlated to billable client work, not administrative duties, meetings, etc.; it’s also critical you’re not having expensive techs (or people for that matter) doing “low money” work.
In sales, I’ve always said that IF you have a good outside salesperson (or if you are the primary salesperson), you ought to hire an SDR (sales development rep, telemarketer, appointment setter) to sift, sort, and call through lists and follow up on marketing campaigns to book appointments, follow up on leads, and handle the administrative work of sending out pre-meeting materials, confirming appointments, moving appointments, rescheduling, etc. That way, your senior sales rep is freed up to spend more time talking to people who can give you money. That makes the SENIOR rep far more efficient.
With techs, make sure your higher-paid engineers are not doing the low-level work you can get cheaper talent to perform. You don’t need them doing admin work or fixing printers. Another way to increase efficiencies is to standardize your entire tech stack and get your clients on board.
A lot of your profit is eaten up by the complexity of the tools you use and the lack of integration. Anything inefficient in your service department needs to be carefully evaluated, given that lowering your tech’s salary is not an option right now. The more clients your techs can handle, the more profitable you will be.
4. Bill Correctly And Collect. Another big area of lost profits for MSPs is incorrect billing and not collecting money legitimately owed. Specifically, they don’t bill the clients for ALL services delivered due to time not being documented, licenses for software installed (but not billed), all new users added to support and services added, etc. A while back, a client asked for advice on how to handle a situation where a tech was not entering their hours properly, causing them to not bill over $750,000 in project fees. They discovered this mistake nearly 10 months after it had been going on with multiple clients and projects.
They went back to their clients, hat in hand, asking them to pay, but NOBODY likes a surprise months-old IT bill. One client whose bill was over $100,000 refused to pay the entire bill, citing they didn’t believe they owed that much. Some paid, but it destroyed their client relationships. Some flat-out refused to pay, and my client was forced to eat the losses. While it seems like an extreme situation, this happens more often than not. So, one area to take a hard look at is billing accuracy and using a tool like ConnectBooster to ensure you’re not doing work for free. (Complete a free demo and claim a YETI tumbler!)
As we enter into this fresh new year, I strongly encourage you to not play “blind archery,” waking up every day to run on a treadmill to nowhere. STOP confusing activity and business with accomplishment, and start getting clarity on your financial freedom goals and numbers, accepting nothing less than your desired outcomes.
It’s up to you to decide — keyword being DECIDE — how much growth you need to have, how much profit you want to make, and accept nothing less. This isn’t a hobby, it’s a business. Yes, it’s easy to wander from true productivity and profit, get foggy, and lose sight of your intentions for having a business — but if you’re going to take on ALL of the headaches, problems, frustrations, and RISK of running a business, at least make sure you have a little money to show for it.
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