At Next Level Now, we specialize in helping IT Managed Service Providers (IT/MSPs) increase profitability with transformational financial leadership by using data to drive decision-making. Next Level’s Managing Partner and experienced IT/MSP CFO, Brandi Bonds, dedicates her time to understanding what’s happening within the industry and finds solutions to the unique challenges MSPs face.
Most recently, Brandi shared her expertise on The MSP Initiative podcast. Keep reading for the key takeaways, or watch the full podcast episode to gain deeper insights into how MSPs can leverage financial data for better strategic decisions.
Overcoming the Biggest Challenge in the IT/MSP Industry
Every organization has different strengths and weaknesses, but two of the main issues we’re seeing plague the MSP industry are overstaffing and declining utilization.
This is likely a direct result of the COVID-19 pandemic, during which companies received money from the Paycheck Protection Program and the Employee Retention Credit to retain employees even when demand for services did not fully justify the workforce size.
A lot of companies used this money to increase their teams, hoping a bigger workforce would help them grow and add more revenue. But this has resulted in some MSPs being overstaffed, and the additional funding to pay for these employees is now gone. Not to mention, the way we work has changed. What employees desire from their employers has changed since Covid. Bonds mentioned the increase in team meetings, PTO, training, and shorter work days and weeks. There has been a shift to what employees want rather than what employers expect. More time for team meetings and training equals less billable time on the bench. This is affecting utilization rates across the board.
Understanding and Correcting the Utilization Issue
Before COVID-19, utilization rates in the MSP industry were typically high, ranging between 80-90%. However, post-COVID, we’ve seen these percentages significantly decrease, now averaging between 72-80%, with some companies experiencing rates as low as 40%, due to overstaffing and expectations shifting, as mentioned above.
To address and correct this issue, you have to understand what a proper utilization rate should be for your company. At Next Level Now, we’ve developed a utilization calculator that can help you determine this. The rate depends on various factors, including the roles and positions within your organization and the tools you have in place to support your operations.
To better manage utilization, some companies have started implementing phone and screen time tracking to monitor employee productivity effectively. But it’s also important not to shy away from making difficult decisions. Companies that allowed fully remote positions during COVID-19 are starting to adopt a hybrid approach, which is becoming essential to keep utilization rates high.
Additionally, the costs associated with employees have increased during the pandemic, along with the cost of equipment and cloud solutions. Because of this, now is the time to evaluate and optimize your utilization rates to make sure your business remains efficient and profitable in the current landscape.
Increasing Profitability and Sellability for MSPs
Another challenge MSPs are facing is getting the most bang for their buck in a company sale. Preparing for the sale of a business requires meticulous planning and a deep understanding of your financial standing. Knowing your numbers or hiring someone who does can significantly increase your business’s value well in advance of a sale.
If your financial house isn’t in order, your business valuation will be lower, which automatically discredits and discounts your company. Without a clear grasp of your finances, you are at risk of being taken advantage of. Potential buyers aren’t going to dig around to try to uncover what your company is worth. They’ll take your numbers at face value.
So, how can you maximize your business’s value? Develop a comprehensive strategy that clearly shows buyers how they can maximize their investment. One key metric to focus on is your EBITDA (earnings before interest, taxes, depreciation, and amortization). Ensuring your EBITDA is high enough can make your business more attractive to buyers.
Remember, selling your business is a long-term strategy, typically requiring 2-3 years of preparation (unless you are willing to accept a discount). By taking the time to get your finances in order beforehand, you can increase both the profitability and sellability of your MSP.
Flipping the Script on Traditional Pricing Models
Most IT/MSPs use traditional billing methods like project-based, fixed fee, and time and materials (T&M) work. During the podcast, Bonds introduced an alternative model: an all-inclusive, recurring fixed fee approach. While this model isn’t suitable for every IT/MSP, it can be a game changer for those aiming to disrupt the market, deliver greater customer value, and have a solid grasp of their team and service offerings. This model not only provides predictable recurring revenue but also shifts the focus from managing time to managing outcomes.
This model involves charging a higher monthly fee in return for comprehensive services. Essentially, clients are never charged separately for individual projects. This approach not only supports customers better by focusing on their needs but also places a greater incentive on MSPs to deliver superior service due to the inherent risks involved.
By adopting this model, your MSP is now tracking outcomes instead of hours. You will be seen as a collaborative, trusted partner instead of an expensive hourly resource that your customers may hesitate to reach out to. Your employees will save time by not tracking time and even tends to create higher employee and customer satisfaction. All of this will result in all parties focusing on results over costs.
Moving to an all inclusive model allows companies to track gross margin, not utilization rates. It creates a different way of viewing your business and creating a shared responsibility with your employees and clients.
How do you price an all inclusive model? There are various ways to approach this, but value-based pricing is one of them.
To offer this type of service without underpaying yourself, you’d need a deep understanding of how the business operates over time. Historical data is crucial here, as it helps in predicting business ebbs and flows. Labor costs, which constitute 30-40% of expenses, are important to look at, as well as variable hardware costs. Conducting thorough assessments to understand a company’s growth plans and initiatives will help you negotiate long-term contracts with favorable exit strategies if the partnership doesn’t work out.
It’s also important to do periodic reviews — such as six months into the contract — to make sure the pricing reflects actual business growth and needs. For example, let’s say you’re working with a company, and they told you they’re expecting to grow at 20% year-over-year. But during your review, you find that they’ve grown at 50%. With this new information, you can adjust the pricing to better reflect the true growth of the company.
Moving Forward With the Right People on Your Team
Our best piece of advice for IT/MSPs is to leverage the strengths of people around you and take time to understand how your numbers are influenced by your business. By committing to consistently measuring and analyzing your financial metrics, you unlock the potential for unprecedented growth and profitability. With this approach, the sky’s the limit — you can make the money you want and have the type of business you desire.
If you want to learn how Next Level Now can help you get there, reach out to us today. We have the expertise, tools, and commitment to guide your MSP company toward achieving its full potential.