When profits are down, the natural first reaction may be, “We need to increase sales.” Sometimes, this will solve a profitability problem but not always. There may be other factors keeping your business from being profitable. Sometimes, more sales can exacerbate the problem rather than solve it. Before running off to your next marketing strategy, take a closer look at whether Technical Debt affecting your profitability.
If you are attempting to sell your way into higher profits, you need to know which services are profitable and focus on selling more of those. Product margins are relatively easy to compute. Sell a product for X, buy that product for Y. The difference between X and Y is your gross profit. The profit amount divided by the sale price is your product margin.
Profit Margin Example: Sell a product for $100. That product cost you $70. You have a $30 profit. $30 divided by $100 equals .3, or 30%. This product has a profit margin of 30%.
Managed Services and especially bundled services are a little more difficult because labor is often included in the calculation. Tracking labor costs can be done with a PSA in place and accurate time entered on tickets.
MSP case study
I met with an MSP who has all customers on managed service agreements with all labor – remote and onsite – included in all plans. They have a ticketing system to capture client requests. I was astonished to learn that time is never recorded on those tickets. The ticket comes in, gets assigned, and is closed out once completed with notes on the resolution. While working together, I noticed one customer had 75 tickets over the course of the month. Here is what we found:
The customer had a managed service agreement with monthly pricing for 10 workstations at $175 each and one server at $225. The costs of services included with the MSA were $75 and $100 respectively. Labor allotments for workstations were $100 per workstation per month and $125 for the server. The combined labor allotment each month was $1,125. For 75 tickets, you can spend $15 per ticket before you begin to lose money. How many of those tickets exceeded the $15 budget? There is no way to know since time is not being recorded.
The tickets were for network connectivity, printing issues, account lockouts, and performance alerts among others. We learned that this customer’s services requests have been steadily increasing over the past six months. The server was old, and the client did not want to spend the money to replace it. Why should they? They have an all-you-can-eat (AYCE) contract with their MSP, and their monthly fee does not include a server replacement or migration to SharePoint.
Selling is not the solution
This same MSP was struggling to make a profit each month. Most months the company made two or three percent net profit. They had four technicians and a lot of clients like the one above. The technicians were overwhelmed with an average of 200 tickets per day coming into the service board. Clients were angry about the slow response to service requests. SLAs were missed daily.
The MSP wanted to increase sales to grow the company but had absolutely
no bandwidth to accomplish this.
The MSP wanted to increase sales to grow the company but had absolutely no bandwidth to accomplish this. Here is a list of the challenges the company faced:
>> Low profits with no budget to hire additional technicians
>> Supporting legacy hardware
>> High turnover of technicians due to overwork and lack of procedures
>> Excessive service requests
All the sales in the world would not help this company out of its jam. Sales are not the problem, and this company needs to fix the problem before it can hope to grow. The magnitude of the problems did not happen overnight. It will take time to fix everything. With the right action plan in the right order, you can get the job done.
In speaking with the MSP about some of the clients’ problems, I learned some stemmed from poor rollouts. A tech who left the company last year did a poor job in setting up the network. They have been slapping bandages on it ever since. This is the very definition of Technical Debt and it bears interest.
They had to respond to the problems because they created the problems.
They had to respond to the problems because they created the problems. They only did enough to get around the problem for the day, instead of taking the required time to correct it permanently. If they had done that last year, this customer may be a profitable one. Instead, month after month, they continue to chase tickets and lose money—Technical Debt.
For every problem, there is a solution. If the hardware is old, make the client replace it. If they refuse to replace it, you may need to walk away. They are killing your productivity and your bottom line.
The longer you ignore a system-wide problem, old or poorly operating equipment, the more money it will cost your company over time
The longer you ignore a system-wide problem, old or poorly operating equipment, the more money it will cost your company over time. The problems will not fix themselves. They will escalate and become very costly.
Step One: Standardize
Build your desired stack complete with hardware, security, backup, appliances, and applications. Then roll it out to all clients. Standardize everything and document the procedure so it can be replicated across clients. The standardization will help your team become efficient and successful. Require refresh rates of no more than four years, and even that is a stretch. Three is better.
If the problems at your client’s site are from mistakes your company made, fix them. Do not let sloppy work from ghosts of employees’ past continue to haunt you. Identify the problem, fix the problem, and move on. You’ll be glad you did when it’s behind you.
This first step will solve at least three of the four challenges listed above.
Step Two: Fire the noisy clients
We have all had clients who call, text, email, and open tickets because they don’t know why their Adobe files now have a Firefox logo next to them and they cannot open the document. If your customer is unable to navigate their computer system and they blame you for it, sell them training or send them to another MSP. If they don’t value their work enough to learn the system, they will never value your work for helping them. Set them (yourself) free.
When your clients’ networks are running smoothly again and the noisy clients are working with another company, you will see much more clearly how profitable and efficiently your service desk is running. You may even find your techs have time to work on projects and perhaps even onboard a new client or two.
Reduce your Technical Debt and improve service delivery and your profits will follow suit, and your employees will be more happy, productive, and content with their work.
ABOUT THE AUTHOR
Rayanne Buchianico provides MSP accounting and PSA Consulting services to IT Professionals and is the owner of ABC Solutions, LLC. Rayanne is a member of the ModernMSP community and a frequent contributor to the ModernMSP blog in addition to her own podcast, PSA Impact.