A few weeks ago I attended HTG's IT Channel Summit, an event designed to help vendors maximize their relationships with HTG peer group partners. The two-day event was eye-opening for me, because I'm always on the lookout for relevant and actionable content for our MSP readers. While there were many sessions and panels of note, I found that the business value creation discussion, led by Paul Dippell, CEO of Service Leadership, Inc. (SLI), was perhaps the most illuminating.
HTG utilizes SLI to track their members' performance according to several benchmarks and then offers recommendations on how to improve it. Here are two performance concepts used by SLI that you can apply when measuring the financial stability of your managed services business.
1. Predominant Business Model© (PBM)
There are numerous players within the IT channel, each with their own specific business focus. This focus is what SLI refers to as a Predominant Business Model© (PBM). Before you can determine how to grow your business, you have to understand what kind of work generates the majority of your revenue. Note the distinction here. You may perform a combination of break/fix and managed services, for example, but your PBM represents the primary driver for your business. Here is a list of common PBMs for IT practices:
- Product-centric - largely based on hardware resale
- Project services - separate billable IT projects
- Managed services - subscription-based, proactive IT support
Now, since this is the MSP Blog, we can safely assume you fall into the managed services bucket, but identifying your PBM is only the first step. Next, you should apply the best practices that align with this PBM. SLI stresses that “behavior that supports one PBM may be ineffective, or even counter-productive, in another PBM.” Apply this concept when planning financials.
As an example, your operating expense spend should comprise a smaller percentage of your total revenue if your business is more product than services-centric. The correct PBM should also be a consideration when evaluating your technology stack. MSPs tend to have stronger vendor/solution preferences and therefore exert stricter technology standards than the typical value-added reseller (VAR). According to Dippell, it makes more sense for you to do so!
Once you’ve established your PBM, you can accurately compare results and apply best practices. It's important to focus on comparing like-to-like businesses in terms of PBM before drawing any conclusions about your business when networking with other IT professionals or browsing industry literature.
2. Operational Maturity Level© (OML)
The other SLI performance concept you need to be familiar with is your Operational Maturity Level© (OML). This benchmark can be broken down into the following five stages:
- OML 1 – Beginning
- OML 2 – Emerging
- OML 3 – Scaling
- OML 4 – Optimizing
- OML 5 – Innovating
The higher your OML, the higher your valuation upon exit. Ideally, any business would love to classify itself as OML 5, but that’s not always the case. So what do MSPs in each OML look like? Read on for descriptions of each level.
OML 1 – Beginning – You operate on a trial-and-error basis. You may struggle with cash-flow management and you’re unable to plan long-term growth because you’re constantly trying to keep your head above water.
OML 2 – Emerging – You have a basic understanding of how to lower your operating costs and influence other profit levers. You’ve implemented a few controls and recognize the need to begin forward budget planning, but haven't been successful.
OML 3 – Scaling – You have enacted basic controls and have successfully participated in forward budget planning, yet struggle to track progress against goals.
OML 4 – Optimizing – You have keen awareness of profit and loss (P&L) management and have employed robust controls, as well as budgeting and goal tracking processes. Additionally, you may compensate employees based on their attainment of these goals.
OML 5 – You meet the criteria of OML 4, but are exploring other ways to add value to your company. This may be done through extending your lines of business to services adjacent to IT, such as VoIP.
Where do you fall along the OML spectrum? If it’s lower than you prefer, don’t lose hope!
Above all else, Paul urges MSPs to work with IT management solutions that decrease support costs. If you spend too much time and money maintaining your managed IT services tools, your profitability will suffer. This should be a key consideration when assessing IT management platforms.
Beyond this, Paul had the following suggestions:
- Institute technology standards - Accommodating client demands and working with technology you're not familiar or comfortable with can increase support costs, putting downward pressure on your margins.
- 100 percent buy-in - Work to get 100 percent of your clients to buy 100 percent of your stack offering. The IT management platform provider you work with should offer the account management support you need to cross-sell and upsell existing clients.
- Plan, track and review - Invoke annual budget planning and review your performance against your forecast quarterly (at minimum)
In order to strategically plan for your business growth, you need to set benchmarks and measure your success to achieve your goals. In order to plan where you want to be in one, three, or even five years from now, you have to understand where you are today. By applying these SLI concepts, you can chart a path toward long-term scalability and profitability.
To learn more about Service Leadership, Inc. and their methodology, check out their website: https://www.service-leadership.com/
By Carlos Borges
By Ray Vrabel