One differentiator between a good services company and a great one is that great services companies know their numbers. And, they protect their businesses by constantly monitoring and measuring every variable that impacts costs.
The good news is, most IT service providers have found their business models pretty resilient, with 95% of MSPs saying revenues remained stable or even grew in 2021. That’s according to a recent survey of more than 125 managed service providers conducted by Wingman Marketing, a technology sales and marketing agency.
The survey also asked respondents about strategies for growth through 2022. Most, 62%, expect new revenue to come primarily from new business. That raises some numbers questions: Are we spending the right amount on acquisition vs. retention? Is our pricing set so that new customers are profitable for us? Are we selling as many billable hours as we forecast?
If you don’t know, you risk falling behind forward-thinking peers that are becoming more data-driven. For example, one MSP built a custom time and profitability matrix to crunch per-client data down to the utilized hour.
“The bottom line is that we now know and can rate clients based on their utilization of our support services, allowing us to adjust their agreements accordingly so that it best benefits both the client and my company,” says Anthony Buonaspina, CEO and founder of LI Tech Advisors. “Most MSPs, however, suffer from what we call in this industry a ‘race to the bottom,’ where more and more services are expected from the MSP but for the same agreement price or many times even less.”
We’ve discussed fighting margin erosion with tactics including raising prices in smart ways, like by introducing value tiers and premium features and grandfathering longtime clients. But before you can decide what pricing makes sense, you need to measure.
Some core key performance indicators are important to all businesses, including service providers. That bucket includes revenue, expenses, net income and cash flow/operating cash flow.
We won’t get into the weeds here about these basic metrics. If you need more guidance, check out the resources below. Instead, we’re concerned here with customer-focused KPIs that IT service providers should track now, but may not be.
Over the past few years, MSPs have worked to become more proactive about managing customers.
Old: Triage service requests, restore full functionality as quickly as possible and measure number of issues and time to respond to assess efficiency.
New: Avoid outages using the automation and predictive analytics capabilities built into many of the systems MSPs use. This benefits both customers and your bottom line.
Automatically resolving problems before they take staff time is also beneficial because 77% of MSPs in the Wingman survey said their current workloads are at or over capacity. Many cited challenges in recruiting and retaining enough tech talent to service customers. And as we all know, a customer that feels neglected is a flight risk.
MSPs should use KPIs that reflect customer lifecycle stages:
Customer acquisition: At the beginning of the relationship, measure how much you spend to gain new customers or upsell current clients.
Customer service: Once you win a new customer or contract, measure how well employees deliver the promised services.
Customer experience: Perception is reality, so MSPs should adopt KPIs that gauge how customers experience the services they receive.
Customer satisfaction: Always be measuring how pleased customers are with service quality; that can predict longevity.
Customer engagement: These KPIs measure how well MSPs are maintaining healthy, ongoing relationships with customers by, for example, doing regular business reviews.
Let’s delve into each area.
Customer acquisition metrics measure how efficiently the business is signing on new clients to meet growth goals.
Marketing is typically a major customer acquisition cost. But tracking marketing spend as a percentage of overall costs or percentage of sales is valuable only if you also measure the results of marketing activities, which you might even be required to do to justify your MDF usage.
Still, return on marketing (RoM) is a challenging KPI to track because it’s often difficult to associate specific sales with a given marketing activity.
Some good news is that services companies often favor account-based marketing, a selling strategy in which marketing and sales collaborate to create personalized buying experiences for promising accounts. Thus, in many services companies, the line between sales and marketing is blurred. Marketing might craft the messaging, but sales generally delivers the pitch.
So, while you might think of SQLs as leads that are solidly in the funnel and in the realm of the sales department, to evaluate sales reps’ effectiveness, you have to look along the whole of the funnel. Track both MQLs and SQLs to see how well your team converts a marketing-qualified lead (a nibble that could, maybe, become a prospect) to a sales-qualified lead (a potential customer who’s plausibly ready to buy).
A word of warning about marketing metrics: Social media and inbound marketing have come to command a larger proportion of MSPs’ customer acquisition spending. But KPIs like “hits” and “clicks” are not actual financial results. They are certainly indicators of the possible value of certain concepts, but they don’t become results until the clicker converts into a customer.
There’s a progression here. Someone clicks on a blog post, for example, then downloads a business guide, which gives you the prospect’s business card info. That business guide ideally leads to a product demo page and eventually to a contact form. Measure each stage of this progress, and then track conversions, an incredibly valuable KPI.
To calculate customer acquisition costs, calculate what you spend to turn leads into paying customers over a given timeframe. Include marketing and advertising expenditures, sales and marketing employee salaries and benefits and related overhead.
CAC = (total cost of sales + marketing) / number of new customer acquired
Along with client acquisition, look at retention. Your percentage of contracts renewed will tell you lots about your customers’ perceptions of your service quality and thus how likely they are to give you invaluable word-of-mouth advertising by recommending you to other, similar companies.
Customer retention metrics measure how many clients expect to continue to do business with your organization. Look at both churn and contract renewal rate.
Customer churn is the percentage of customers that abandon your services over a period of time. If you see a spike in churn, it indicates a problem.
Churn rate = (# customers at
the beginning of period – # customers at the end of period)
Renewal rate measures how many customers reup for services. Here’s how to calculate your renewal rate:
Renewal rate = # customers who renew / total # customers up for renewal X 100
Similar KPIs include percentage of proposals won and lost and percentage of dormant customers per period.
Unfortunately, causation isn’t always that easy for services firms to figure out. What if you raise prices, and that’s what causes customers to drop? What if you add more features, which prompts customers to renew? When a customer upgrades its service or declines to sign a new contract, request an opportunity to ask why.
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The main reason pure-play resellers transition to the MSP business model is to achieve the services holy grail: monthly recurring revenue. When a large portion of your revenue is recurring, the initial cost of acquiring each customer pays dividends over and over again.
Percentage of revenue from MRR sales is an important KPI, and therefore, MRR revenue as a percentage of monthly total costs is also important to measure. Effectively, when that percentage meets or exceeds 100%, you are at breakeven when the month begins, a great place to find yourself.
“Besides customer lifetime value and customer acquisition costs, we meticulously measure monthly recurring revenue,” says Holden Watne, IT consultant at Generation IX Technologies. “It allows us to track our growth and value of the company most accurately. Not only should you track MRR, but also what percentage is IT support versus other managed services, like backups or a SIEM.”
To get a handle on what it costs you to service customers, ensure that your expense management system attributes each outlay to a specific client. Subtracting your costs from total sales provides an accurate evaluation of your forecasted profit from each customer.
The service delivery ideal is to complete each service event as quickly as possible with the greatest possible quality at the lowest possible cost, all while keeping the customer constantly informed. If you’re doing this effectively, you’ll also achieve the only two actions that increase your own profit: reducing costs and increasing revenue.
Reducing costs is best accomplished by regulating utilization of resources you pay for. A simple example is using remote tools to resolve issues rather than sending technicians on site.
There are several ways to increase revenue beyond selling more services. These too are best accomplished by measuring and regulating the utilization of pricey resources.
The most direct example is increasing the percentage of billable hours sold.
Calculate the fully burdened cost of each service professional and divide that by the number of billable hours in a given time period to arrive at the true cost per billable hour for each employee. Now define what you consider billable work: Prepping for business reviews? Having one-off consulting calls? Travel time to your customers’ sites?
Once you figure out your criteria for billable work, figure out what you’re dividing by. It might be a 40-hour work week, 52 weeks a year, for the standard 2080. Take into account vacations and holidays/PTO by tracking utilization over a longer time period, often quarterly. Don’t forget the time your employees spend training, prepping for the next project and completing paperwork.
Fifty percent to 60% utilization is typical for managed service providers, according to ConnectWise, with best-in-class companies coming closer to 80%. Your employees need PTO and a reasonable work week, especially in this tight job market. If you do expect employees to max out their billable hours, you’re likely looking at overtime pay or higher salaries, so it’s a balance. The point is that billable utilization percentage reveals nuances and is among the most important KPI for any MSP.
We mentioned Buonaspina from LI Tech Advisors’ time and profitability matrix. He says that MSPs should remember that one very demanding client can throw service costs out of whack, particularly for MSPs that offer an “all-you-can-eat” model. It’s so easy to just do this one little thing, take this one short call, put in these few extra hours and so forth to keep a client happy. But you have to put a price tag on all of that activity. With a matrix, his company can adjust its agreements with greater accuracy since it has data down to the utilized hour. A plus: It also allows the business to either throttle those clients who take more than they give or totally eliminate them if necessary.
Mean time to resolution (MTTR) measures how long it takes, on average, to complete a given service event, starting when your team begins work. Note that this differs from mean time to recovery, which is the total time of the outage and starts when the customer registers the complaint.
MTTR = total minutes to resolve all incidents / total number of incidents
Working to reduce MTTR can result in higher effective utilization. This effort is significantly aided by measuring how many times you interact with each customer to complete a service, a KPI called “touches per ticket,” and working to increase your first-touch completion rate, the number of services completed on the first contact.
“I really like looking at first touch completion rate as a proxy for customer service,” says Michael Wayland, managing director for security-focused MSP Byte-Werx. “We try to measure the percentage of tickets that are closed by the first person who touches or works on it. It's frustrating and expensive having multiple people try to fix an issue, so we want as high a first-touch resolution rate as we can get.”
MTTR can have an impact on your chosen business model and pricing structure. For instance, by using fixed fees instead of hourly billing for specific service events that tend to be easily resolved, you can increase profit as those events are finished faster. If your original fixed fee is calculated based on 20 hours, but your people get better at it and now take less than 10 hours, your profit will effectively double as long as you don’t change that original price. The customer is paying for the value of the action, not the hours invested. Charging by the hour eliminates that opportunity.
MTTR is an extremely valuable KPI because it can help you be more creative.
Brandon Miller, COO and CFO of full-service MSP The Miller Group, says that he looks at all of his clients from an efficiency standpoint, both individually and as a whole, to determine a couple of things.
First, what are his fully loaded costs — salary + support overhead + benefits and other — for anyone involved in supporting that client?
Then Miller calculates the overall number of hours it takes to support that client. He takes that a step further and turns his focus on the clients that use many more hours than the norm to see what he can do to reduce the number of hours needed to support them, since a major part of his MSP client base is on an “all-you-can-eat” support model versus one in which they’re charged per incident.
Many MSPs are turning to staff augmentation firms like Bowman Williams, Halexo or Indotronix to outsource the skills they need to fulfill customer requirements. While the per-hour direct cost of these external people will be higher, you won’t pay for benefits or PTO and will never incur the cost of keeping people on the bench during non-billable times.
Diving deeper, it is important to identify “frequent flyers,” those devices and software products that cause the most service calls. A proactive approach, recommending replacement of these items, can result in significant cost savings. Simply identifying the most frequently asked questions (FAQ) and providing automated responses can significantly reduce the help desk’s workload.
Another KPI to track closely is the percentage of sales coming from automated systems. Remote monitoring is a great example, as are systems like vulnerability assessment and data backup.
When it comes to customer service, automation is your best friend. The automated system performs much of what the customer is paying for, incurring minimal additional cost. And, these services can scale to accommodate more clients before additional back-end costs are incurred.
It’s healthier for your business when costs are indirectly proportional to services delivered.
This brings us to a group of costs that is critical to the quality of the services provided but difficult for managers to assess in terms of budget allocation: training, certification and updating of skills. All are smart investments.
“We provide dedicated hours during the workday for training,” says Watne. “If we aren’t finding time for our employees to develop, we are not going to grow as a company, and we are not going to retain our employees.”
With the ever-evolving skill set necessary for technologists, it’s important not to skimp on professional development. And, you need to track the hours dedicated each month to employee training and deduct them from your utilization rate. These aren’t billable hours, but rather an investment to grow your workforce and company.
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The hands-down most popular CX KPI for most MSPs is Net Promoter Score (NPS), which is a simple two-question survey. The first is, “How likely are you to recommend our product to a friend or colleague?” scored 0-10, and the second is, “Why?”
NPS promoters score 9 or 10, passives score 7 or 8, and detractors score 6 or below.
Net Promoter Score (NPS) = percentage of promoters – the percentage of detractors
While most MSPs could stand to spend more money on modern, digital marketing, the tried and true methods still bear fruit. One of the most important success factors that many companies ignore almost completely is the power of the referral.
This is not true of Justin Sampson, VP of sales and business development at ExcalTech.
“When a customer is enjoying a terrific experience working with you, they are self-motivated to share you with friends,” says Sampson. “So, when a customer refers someone to you, they are telling you how much they appreciate their experience.”
Nothing a marketer can do is more powerful than a personal referral. What proportion of your new customers resulted from a referral last year? That’s one metric you should always know and be thankful for.
Proven ways to get more referrals include standing up exclusive membership programs or forums where select reps and customers can interact with each other — no selling allowed. Done right, these efforts generate brand loyalty and goodwill. You might also consider a formal referral program that offers current clients an incentive to talk you up.
Many KPIs cross over from CX to CSAT. While your team can definitely impact the client experience, satisfaction is external. Only your customer can put a value on satisfaction, and they only do so when you deliver quality, timeliness and tangible and intangible benefits that earn it.
The most popular CSAT KPIs are scores on customer satisfaction surveys, and the most useful form of CSAT survey is a “gap” survey, in which the customer is first asked how important or valuable a specific quality or activity is to them, and then asked how well you did in providing that quality or activity.
Here’s how to calculate a customer satisfaction score:
Customer satisfaction score (CSAT) = # positive responses / # responses X 100
It’s not all that useful to know that a customer is very satisfied with something they don’t care about. The big payoff is how well you’re doing on the factors that are most important to their businesses.
As Aaron Kane, CEO of MSP CTI Technology puts it, “Happy customers equal a happy business.”
Customer churn rate is a trailing indicator, in that you measure it after you’ve lost the customer. Similar to churn but perhaps more telling of the impact for MSPs, which are sometimes not all that sad to see an expensive-to-service customer leave, is Net Customer Value Growth, which subtracts the volume of sales linked to lost customers from the volume of sales gained from new customers.
Run this calculation over a set time period.
Net Customer Value Growth = new customer total value – lost customer total value
If you lost dozens of customers that weren’t delivering profitability for your company, that’s not significant but still worth investigating. If you lost highly profitable customers — those who cost far less to service than they paid for their contracts — something needs fixing.
Ideally, the relationship you have with your customers is an ongoing conversation, a sharing of ideas and reactions that leads to mutual growth. There’s no standard formula to calculate a customer engagement score, but that doesn’t mean you shouldn’t figure out how to spot trends.
Create a list of inputs or actions that predict customer engagement, perhaps based on habits of long-term customers. Then score each input or action based on how critical it is to customer retention. The result is your unique customer engagement score. Continually rate customers while also evaluating your rating system to ensure you’re following actions that predict retention and churn. How many of your customers are willing to participate in a case study or customer success story? What proportion refuse? It’s important to find out why, in either case.
One example is content engagement. You could track the number of “likes” or “upvotes” you receive on various communications, or even use machine learning technology to evaluate the sentiment of comments about your content. Even simpler is a tally of how many people consumed your content, including not only blog posts but also podcasts, videos, other downloadable assets, social posts, published articles and more.
If you have 100 customers but only 25 engage, you need to either do a better job communicating what you offer or develop more useful and compelling content — maybe both.
More traditional engagement should be measured as well. How often do you visit with each customer? Who initiated each visit? What were the goals of each meeting? What were the outcomes? If you host or attend B2B events, how many clients stop by your booth or meeting room or join a lunch and learn?
You should be soliciting feedback from your clients on a regular basis, with check-ins at least monthly in addition to your quarterly and annual business reviews. Those reviews, especially QBRs, will help both you and the customer narrow in on the KPIs you’re both focused on to drive the engagement forward and make sure everyone is happy with the relationship. Summarize every review with hard-and-fast KPIs you can track on a quarterly basis.
A link to an explanation of how to conduct quarterly and annual reviews is below; if you don’t do these, we highly recommend starting. The customer who doesn’t see you until renewal time makes a poor candidate for renewal.
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Smart service providers don’t wait for their finance departments to deliver reports at the end of each period. They are constantly measuring all the KPIs that affect profitability, including how quickly their people fix problems, how well their automated systems are performing and how much satisfaction they earn from their customers.
They are also very aware of the Heisenberg Uncertainty Principle, a phenomenon first noted in molecular physics which states that the act of measuring affects that which is being measured. Simply put, when people know the clock is running, they tend to work more quickly, and when they know their work is being evaluated, they tend to work smarter and harder.
Kris Blackmon is the chief channel officer of industry consultancy JS Group. A veteran of the indirect sales channel, Blackmon has extensive experience in event programming, editorial and content creation, research and analysis and community building. At JS Group, she consults on go-to-market strategies for organizations in the indirect channel.