Lead Gen or Operational Efficiency—What’s More Important for Sustainable MSP Growth?

This month, I want to address a question I was sent from one of our MSP partners. As a smaller MSP looking to grow, they were wondering what they should focus on first: Marketing and lead gen to fill their sales pipeline? Or strategies to improve their organizational and operational efficiencies? They recognized that both areas are currently a source of weakness for their business.    

You would think as the Head Sales and Marketing Nerd, my answer would obviously be: “Marketing and lead gen, of course!”.  But it’s not. Yes, sales are important to growing any business, but if you are running an operationally inefficient organization, you are:

• Limiting the amount of quality time you can dedicate to the marketing and sales function
• Hindering your overall competitiveness in the marketplace
• You likely run the risk of churning those customers you worked so hard to earn due to a potentially lackluster customer experience

So my advice is to first focus on improving your organizational and operational efficiency, and then sales success will follow.

There is a chasm that is growing among MSPs, a disparity that is developing among service providers, that if not addressed, could potentially lead to certain MSPs being left behind, or potentially put out of business. At one end of the spectrum, we have what we term the elite and super elite MSPs, who have been growing consistently through private equity and M&A activity, and are doing really well. At the other end, we have MSPs that are barely breaking even from an EBITDA standpoint, and are struggling to generate enough revenue to reinvest back into their business. These MSPs are pretty flat-lined in their growth and profitability, or, in some cases, are even backtracking.

The difference between these two groups, is how they fundamentally run their business. 

So what are these differences? 

There are two main ones that I would like to highlight in this month’s blog: having and plan and tracking your performance.

Top MSPs Have a Plan

In our experience, the top performing MSPs spend time working ON their business, while lower-performing MSPs spend most of their time working IN their business and are taking things day by day.

The top MSPs consistently set aside time to work on their strategic plans and have developed a roadmap for their MSP that they follow. They have a clear vision and a direction for their MSP, as well as an exit strategy set out for their business, and everything they do and every decision they make gets them one step closer to seeing their vision materialize and their exit strategy goals and objectives come to fruition. They also do a wonderful job in continually surveying the market landscape for threats and opportunities and then work to adjust their priorities to reflect what they are seeing. They don’t just wing-it. They are intentional in their methodology. 

Top MSPs Track Their Performance

Again, from what we see, the top performing MSPs are constantly evaluating and measuring themselves to see how they are tracking towards meeting their growth goals and objectives. And if they are off-track, they immediately go back to their roadmap and course-correct.

One key performance indicator (KPI) that highly profitable MSPs track is what is known as the MSP Burn Rate. The MSP Burn Rate is defined when all of your operating expenses and overhead are covered by the monthly recurring revenue that is generated from your managed services customers.   

The goal is to have your MSP Burn Rate be greater than 1. If the Burn Rate is greater than 1, it means that every dollar of non-recurring services and hardware margin you earn, goes right to the bottom line and is available for reinvestment purposes.

If your Burn Rate is less than 1, it means that you are not generating sufficient recurring revenue from your managed services line of business, and therefore your MSP is relying on all that non-recurring sales revenue to pay the bills and breakeven.

How Your MSP Burn Rate Helps Drive Growth

Knowing your MSP’s Burn rate is an important metric to track because it provides clarity and direction for your MSP that will enable growth.

As an example:

If your Burn Rate is below 1, one activity you can focus on is how to increase the amount of recurring revenue you are generating from your prospects and customers. This can be accomplished in several different ways:

• Cease performing break/fix work and offering “a la carte” services, and focus on creating a minimum viable security package that every single one of your customers gets enrolled into.
• Scheduling Executive Business Reviews with every customer and educating them on the fact that you are concerned about their current security posture, and as result, they will be upgraded into your new minimum viable security program  
• Be sure that you are pricing your new minimum viable security package correctly. Be sure that you have accurately accounted for all of the software costs and labor requirements that are needed to deliver the program and that you are generating contract margins of at least 50%
• Work to continually increase your prices with each new customer you bring on board. Meaning, if you have built in a 50% contract margin in one proposal, for the next proposal you do for another prospect, build in 50.5% or 51% gross margin. Keep pushing this pricing limit until you start to feel market pressures working against you.  
• Having updated contracts that include verbiage around regular price increases
• Moving forward, only enrol new customers in your new security program and don’t allow for deviations or customizations. Be disciplined about standardizing every customer onto your new program 

Another activity to focus on if your Burn Rate is below 1, centers on how you can better manage your costs—labor and otherwise—to help improve your overall profitability. Costs such as:

• Tool Costs. High performing MSPs are much better at managing their tool costs because they have made the decision to standardize on their toolsets. They don’t manage four different endpoint protection products or five different backup products. Instead, they consolidate and standardize on one specific toolset and build their tech stack around that. 
• Operations Costs. High-performing MSPs also focus on building highly efficient service delivery models to lower their cost of operations. For example:
  • They separate their tech roles—NOC vs. Helpdesk—to keep their technicians specialized. For the HelpDesk, they outline roles and responsibilities and create escalation procedures, so they don’t hang onto an issue for too long.  
  • They also don’t have technicians doing work that they are not trained to do; nor do they have experienced or more highly skilled techs performing lower level work that they are overqualified for. Level 1s do Level 1 work; Level 2s do Level 2 work and Level 3s are reserved for billable project work that make the MSP money.
  • They also create and follow standard operating procedures (SOPs) and invest in a centralized documentation system to ensure that Level 1s and 2s can handle the issues on their own—in as efficient means as possible—limiting the need to bring in Level 3s.
  • They have created a culture of automation within their MSP where they focus on automation wherever possible to lower their labor costs, so that labor can be utilized elsewhere (for more billable project work, pre-sales etc). This affords them the ability to scale and bring on more customers, without having to hire new technicians. They scale by leveraging their toolsets, processes and procedures, not with additional labor

The benefit of knowing and tracking your MSP Burn Rate is that once you know it, you can use it help you determine what steps are needed next so that you can begin improving it, whether that’s by focusing on ways to increase your recurring monthly revenue, or whether that is from focusing on ways to improve your operational efficiency to reduce labor costs or both.

Three Steps to Help You Unlock Success in Your MSP

 So what lessons can you learn from top-performing MSPs that can be incorporated into your business, starting today, to help drive your own success?

• Plan a mini-offsite for yourself to give yourself time to think—without distractions—so you can strategize around where you really want to take your business in the coming 12-24 months.
• Conduct an assessment of your MSP so you can begin benchmarking yourself.  You want to baseline where things stand today, so you can set some realistic goals that you would like to achieve in the next 12 months.
• Then build a roadmap that outlines your priorities and activities that will help you get there.

And the Head Nerds have a variety of resources and boot camps to help, if you are looking for assistance:   

1. Cracking the Code to Growing Your MSP
2. Operational Efficiency Boot Camp
3. Organize Your Technicians for Operational Efficiency Boot Camp
4. Automation/Powershell Cookbook
5. Business Transformation and Benchmarking Program

So if it comes down to focusing on lead gen or becoming more operationally efficient, I will pick becoming more operationally efficient every time, as it will only help to fuel your revenue and customer growth, and will help create customer ‘stickiness’ and avoid churn.

If this is something that is new to you, it is all about baby steps. Just make the time, plan your direction, and be disciplined and intentional in following your roadmap. You will be in a much more organized and clearer headspace for when you are ready to tackle the marketing and lead gen tasks, and operationally, you will be in a better position to compete to win, and to scale profitably. 

Stefanie Hammond is Head Sales and Marketing Nerd at N‑able. You can follow her on LinkedIn