2019: A Great Year to be an IT MSP. But was it profitable?

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Wow, that was a mad dash through the fourth quarter, right? But 2019 is not over yet. – Heads up! Be Prepared for the 2020 EoL Boomerang!

2019: A Year of Big Growth for IT MSP’s

We have heard that for most MSP’s, 2019 was a year of 20-30% growth. Given that much growth, compounded with Win 7 and 2008 EoL, I’m sure it was a crazy fourth quarter.

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Speaking of EoL’s, if you haven’t experienced this already, be prepared for the boomerang effect. You know the Customers that have been telling you all along, “Don’t worry about Windows 7 or Server 2008 end-of-life, we’re going to do the upgrades in house”?

Well, now that they are in crunch time with the January ‘20 witching hour looming, they are suddenly going to pick up the phone and dump all that work back on you as their preferred Managed Service Provider “partner.”

Preparing for the EoL Boomerang

Here are a few responses to consider while you prepare to catch the EoL boomerang:

  • As we reach the end-of-life date, the world doesn’t come to an end. The computers continue working, of course, until they stop. Then the Customer is hung out to dry without Vendor support as a result of procrastination. So, simply reply, “Yes, we are aware of the EoL, and we will get to them asap, but it will most likely not be before Jan 20th.”
  • I would also recommend saying to the customer, “Let’s configure one or two computers / desktops / laptops / workstations for Windows 10 and put them on the shelf. We will complete the upgrades as we get to them, but should one die before we get to it, there will be a spare on the shelf, ready to go.
  • Block out time now in February and March for Server 2008 upgrades. When the Customer calls, let them know your first available.  If they do not call, I am sure there is other billable time that can be pulled up or will come in by Feb 1st where the time can be repurposed.  I have yet to see blocks of reserves wasted.

Growth is good, but did it hit the bottom-line?

However, the burning question that remains as we approach 2020:

“Was 2019 really profitable?”

2019 was a great year to be an MSP: just look at the number of new MSP’s, the VC funding, and the consolidation of vendors. Yet, it was also a year of uncertainty – especially when it comes down to profits.

Based on research, the ability for an MSP to be profitable comes down to 4 significant leading indicators.

Key Leading Indicators of Profitability for IT MSP’s

  1. How well Inventory is being used – Customer-Facing time vs Internal time?
  2. What is the duration of throughput from New to Completed?
    – With wait times
  3. What is the duration of throughput from New to Completed?
    – Without wait times
  4. How efficiently is the throughput process – per 1000 endpoints?

While these are leading indicators, the proof is in the pudding – the profitability reports. We hear from a lot of Owners of MSP’s using the Autotask software that they cannot depend on the profitability reports.

We’re Service Delivery Improvement experts – the best in the business – so profitability reports are not our strength, but the calculation seems pretty simple:

Profit = Revenue – (Cost of Labor + Labor Burden + Expenses + Cost of Parts)

If the calculation is straightforward, getting to good, clean, dependable data must be the problem.  As a pair of the best Autotask Live Report writers, this is an area in which we can help.

Identifying how much “Total Recurring Revenue was invoiced over any period of time” should be easy.

Getting to the Cost is a bit more difficult. It requires the HR Module in Autotask to be properly populated with the Burden Rate of each Technician. This is important because, each hour of work covered by the Managed Service Agreement has a different Burden Rate, depending on who did the work. In Autotask, the Burden Rate includes the Cost of Labor and the Labor Burden.

The Burden Rate in Autotask

At DattoCon ‘19 San Diego, Evan Welch presented the top 10 metrics that every Managed Service Provider needs to know. One of them was the Burden Rate in Autotask, especially as it relates to the cost of supporting the Managed Service Agreements.

  • Cost of Labor per Employee = Salary / 2080
    1. The “each Employee” is important because ballparking based on average salary will not be accurate enough to make Strategic Customer-by-Customer Relationship decisions.
    2. It also required Real-Time Time Entry. It is common knowledge that – the longer a Tech waits to put in his time, the less accurate the information is – including the actual hours worked, what Work Type should be applied, and proper documentation. All of these inaccuracies add up to a profitability number that cannot be trusted.
    3. I am sure you know this, but in case you don’t: 2080 is the number of hours in a work year.
  • Labor Burden is the Employee’s fringe benefits – Payroll Taxes, Insurance, Retirement Programs, Parking, Wellness Program, Career Growth program, Break Room stocking, etc.

Wikipedia gives this warning: “Many businesses fail because they focus simply on payroll and payroll taxes, and neglect to consider the entire actual cost required to enable an employee to perform the work he or she was hired to do.”

I know your head is spinning. As an owner, you are very aware of these costs – but how much of it gets attributed to supporting a Managed Service Agreement?

Do we really need to know the ratio of hours worked for MSA’s, T&M, Company, Internal, and Unknown time? While these numbers are easy to get to, they are not totally necessary.

Wikipedia goes on to say, the Labor Burden number is often 50% to 150% of salary – my guess is that your accountant should know the numbers for your MSP.  So, for the sake of playing it safe, use a number that equals Salary.

Does this shock you? It shocks me. I used to use 50% of Salary to estimate burden, but wow, I guess times have changed.

Cost of Parts Covered by the MSA

Last but not least is the Cost of Parts covered by the MSA. I’m assuming this number is also readily available. How accurate it is, I am not sure.

When looking at inventory in Autotask, most of the time, the cost of the part is not listed. This is very difficult to track – do we use FIFO, LIFO, or direct one to one? Again, we are Service Delivery experts – we understand Labor, but not the accounting of parts.

If the inventory is kept in Autotask, and the cost field is populated, then the Cost of Parts is simple. If not, it may need to come from the accounting software and be calculated based on the marked-up ratio to get to cost.

Quick Summary:  

If Autotask is populated with the Burden Rate (Salary/2080 * 2) for Each Employee and the Cost of Parts, then a simple Autotask Live Report will get you to the answer.

Even if inventory is not being kept in Autotask, the report will get you to the “Labor Only” Profitability of each Customer’s Managed Service Agreement – which is the significant portion.

Click here to subscribe and download the How-to Guide for running Autotask Profitability Reports.
P.S. For help with the Leading Indicators of Profitability, email Steve at SBuyze@SBuyze.com.
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