What Qualities Separate The Top 10% Of MSPs From Their Competition
By Gary Pica, TruMethods
The managed IT services (MSP) market is thriving, with projections it will be worth US$319.5 billion in 2024, up from US$166.8 billion in 2018. That’s an estimated compound annual growth rate of 11.5 percent.
Not everybody vying for the market is claiming an equal share, however. Instead, there’s an increasingly marked discrepancy between the top and bottom performers.
“The leading 25 percent of MSPs are commanding 20-30 percent higher subscription prices than their peers and achieving growth and profitability levels never seen before. The bottom half of the market, by contrast, is struggling with prices and margins that are too low,” shares Gary Pica, President of TruMethods, a firm that specializes in MSP training and consultancy.
So, what precisely is setting the top players in the MSP market apart from their peers? And, what are some of the things that smaller MSPs can do to cross the chasm and command similar margins?
In this installment, we ask Pica to define the main qualities he believes the leading MSPs share.
Business Planning Discipline Is Key To Success
The top 10 percent of MSPs leverage around 25 percent-35 percent net profit margins, reports Pica. Much of this success is built on strong business planning and a framework of clearly defined business processes that the whole team can follow.
“The business planning process should provide a framework to make decisions, it should connect revenue with costs, and it should align short-term actions with long-term goals,” says Pica. “Have a monthly recurring revenue goal, set a three-year target, and break it down into a one-year plan, and then into a quarterly action plan.”
Pica admits that this is often easier said than done, and many MSPs struggle to dedicate the required amount of time to business planning. “MSPs often say, ‘once I clear the deck and complete this project or hire this person—then I’ll work out the plan. But the decks never clear.”
Getting Ahead Is Hard Without Well-Defined Processes
Developing a culture of process is also crucial for MSPs. “While MSPs might share the same tools—with the right process, you can really make your line of services sing,” says Pica. “Involve every member of the team in deciding the best practices. Design a process to improve your process—and institutionalize this framework.”
Updated processes should not only define technology standards but also ensure continuous technology alignment. “Your customer might have a five-year-old server that could take two days to get back up if it crashes. It may be running an old application that the customer only uses for reference, or it could be their main line of business which—panic—can’t be down for more than a few hours,” explains Pica.
A process needs to be in place to spot, record, and share this information with the customer. If the customer’s main line of business could be affected, the best solution might be a combination of new hardware and a new server or cloud-based solution with robust backup and disaster recovery.
“What you must undoubtedly have is a way of continually aligning and reassessing your customer’s technology, showing them what’s out of alignment, so that they can make the best business decisions,” says Pica.
Battling Commoditization: The Chocolate Cake Analogy
Like the big grocery stores, MSPs can offset low margins by making high volume sales, but only a few players usually succeed at this. Pica suggests a different approach and uses bakeries as an analogy.
“Bakeries are working with the same ingredients, but they combine them in different ways to offer a unique set of recipes,” says Pica. “So, when we need a birthday cake, there’s one place my wife says we need to go to. I drive past four or five other bakeries on the way, and I’m not asking whether the cake costs 25 or 30 dollars. I’m buying that cake.”
For MSPs, it’s, therefore, a question of deciding what unique process they are going to use to deliver and advertise value. “If you can’t command the price the top people command, somewhere along the line, you’ve got to assess if you’re selling great cake—or is the prospect only seeing a bunch of ingredients?”
The key then is not to sell technology. MSPs should instead sell the end results of it. “If you give your customers an infinite number of choices, you don’t control the end result anymore,” says Pica. MSPs should bundle their services and wrap their processes around this offer. “Clients should be able to quickly see that the solutions you provide will impact their business in a unique and tangible way,” Pica explains.
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Ingredients |
Your recipe |
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Combine ingredients with your recipe to create the right service offer for your customers. |
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Source: TruMethods
Get A Macro And Micro View Of Your Costs And Margins
One metric that tells MSPs how well their business is doing is leverage. “This equals the amount of total revenue, whether it’s recurring or not, divided by the total number of employees in your company. Not just techs – everybody,” says Pica.
An average MSP might make one million in services with ten staff, which is US$100,000 annual service revenue per employee. A world-class MSP can, however, generate US$500,000 more with the same number of staff, which means that they have significantly more leverage.
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Measuring Leverage |
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Average MSP |
Top Performing MSP |
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Number of employees |
10 |
10 |
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Annual service revenue |
US$1,000,000 |
US$1,500,000 |
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Leverage |
US$100,000 per employee |
US$150,000 per employee |
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Unrealized profitability = US$500,000 |
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Source: TruMethods
To understand how business is performing, MSPs need to have a macro and micro view of their numbers. “Put everybody into a service delivery role and match that role to top-line revenue. So, how much revenue does each member of your staff manage, starting from the top? How much revenue do you have before you add the next service desk person? We then take that same information and create a micro view,” says Pica.
To get a micro view, MSPs should be able to identify their gross margins per subscription, which starts with their costs per subscription. This can get tricky. “Very few people can tell me what their cost prices are,” says Pica. “This means that you’re guessing your prices and margins.”
MSPs often guess that their margins are higher than they actually are, shares Pica. “You should have 70-75 percent gross margins on your recurring revenue. If your gross margins are 50 percent-65 percent, you probably don’t have command over your micro math, and I would say – get to work on that right away.”
There are useful automation tools that help MSPs to easily tally costs in order to accurately define margins. Cloudmore, for example, handles the end-to-end billing and reporting for one-time, cloud and subscription products, allowing MSPs to manage their entire service portfolio in the platform (cost and sales margins are viewable in a matter of clicks).
Ultimately, knowing your financial performance metrics is critical to your business’s success. Once you have these metrics clearly worked out, it’s vital to actively apply the insights they offer to strategic planning.
About The Author
Gary Pica is a pioneer in the managed services field. He is one of ChannelPro's 20 industry visionaries and MSP Mentor's most influential leaders. He has already built two top-performing MSPs. Today, Gary is the President of TruMethods, a training, peer, and accountability firm aimed at helping IT solutions providers reach their full potential as MSPs and cloud providers. Gary shares the key ingredients that transformed his business and his life through his training process. Today, hundreds of IT providers around the world utilize the TruMethods business transformation framework.