Kyle Christensen, a renowned speaker, coach, and founder of K7 Leadership, recently delivered an insightful session on managed services profitability at the XChange NexGen 2023 conference. During his talk, Christensen emphasized the importance of strategy, budgeting, and efficient service team management for MSPs looking to scale their businesses.
According to Christensen, many MSPs struggle to identify the right key performance indicators and effectively manage their service teams. To address these challenges, he advised MSPs to understand the metrics that truly matter, align their service management team’s goals, and redefine profitability based on their company’s strengths.
During the session, Christensen guided MSPs on planning for the upcoming year, learning from past mistakes, and igniting growth. Here are some key takeaways from his talk on deconstructing managed services profitability:
Managed Services Definition:
Christensen emphasized the need for a common understanding of managed services within the MSP community. He defined managed services as a practice of outsourcing various IT functions to enhance operations and reduce costs. He also clarified that managed services encompass availability, consulting, help desk services, vendor management, and operational efficiency, among other aspects. However, he pointed out that hardware leases, cloud storage, cybersecurity insurance, security software, SaaS resell, and procurement are not considered part of managed services.
The Methodology:
Christensen highlighted the shift in the methodology of managed services from a reactive model to a proactive one. He explained that the original methodology focused on fixing issues and collecting fees, while the newer approach involves setting agreements, actively managing services, and maximizing profitability. He stressed the importance of understanding the relationship between margin (gross profitability and revenue) and markup (gross profitability and costs) for effective financial management.
The Problem:
One of the major challenges faced by MSPs is the misconception that service management solely revolves around technology and technical challenges. Christensen urged business owners to view service managers as crucial contributors to protecting profitability. He emphasized the need for business leaders to mentor and guide their service teams to ensure alignment with profitability goals.
Creating and Measuring the Budget:
Christensen highlighted the significance of cost management and meeting profitability expectations while serving customers. He encouraged MSPs to rethink the traditional revenue minus expenses equals profit equation and instead consider revenue minus profit equals expenses. This shift in perspective enables MSPs to ask different questions and set limits on their spending to serve customers. Christensen provided an example of how this approach can lead to more productive conversations about servicing customers within a specific budget.
Measuring Variable Costs:
While fixed costs are unavoidable, Christensen advised MSPs to focus on measuring variable costs through key performance indicators (KPIs) that reflect business outcomes. He suggested that MSPs prioritize KPIs such as percent closed by automation, effective hourly rate, Tier I kill rate, and agreement gross profitability. By measuring variable costs effectively, MSPs can work towards achieving a 65 percent profit margin.
Kyle Christensen’s session at XChange NexGen 2023 offered valuable insights into managed services profitability. His advice on strategy, budgeting, and team management serves as a guide for MSPs of all sizes looking to scale their businesses successfully.