If there’s one constant in the IT industry, it’s change. For many managed services providers, this change presents a significant opportunity in the market to expand. Being poised for growth is a key component to your profitability, yet scaling your MSP effectively can be a lot trickier than it sounds. Whether it be struggling to meet your current demand or securing your IT platform, there are a handful of barriers to face when seeking to take your business to new heights. To capitalize on this opportunity, though, you’ll need to be sure your own organization is prepared to face the challenges that exist when growing your business. Here are four common mistakes you should avoid when scaling your MSP business.
1. Assuming Growth and Ignoring Churn
One of the worst mistakes MSPs make when trying to scale for the future is assuming growth before it’s present. This can lead to instabilities like allowing expenses to exceed revenue. If you make business estimates based on your projected client base and estimated revenue rather than the realities, you’ll end up falling short, and probably in the middle of a serious cash-flow crisis to boot. Instead, wait until your growth warrants increased expenditures and adjust accordingly at that time.
It’s also important to factor in the churn rate of your clients. It’s a fact of business that not every client will stay with you forever. There will be some clients who leave for one reason or another, yet some business owners don’t factor this into their budgets and growth plans. You hopefully have some clients that love the work that you do and wouldn’t leave you if they were paid to – but don’t assume all clients feel this way. Be sure to measure your client churn rate each month and factor this into your growth plans.
2. Hiring Before Proving a Growth Model
Let’s say you plan to bring on 10 new clients in the upcoming quarter. To fulfill your services to these new clients, you’ll need to hire two new technicians to your team. But remember that each of these new techs is an investment in time, training and onboarding, salary, benefits, infrastructure and more; all of which can cut into your profit potential and slow your operational efficiency. While it’s great to plan for these new hires and possibly start recruiting new talent through interviews and networking, you shouldn’t hire them until you can prove that you will bring on 10 new clients for the quarter. Similarly, if you don’t hit your goal of 10 clients, you’ll be stuck with under-utilized technicians, which just ends up costing your business.
In order to prove your growth model, you should be tracking everything. Ultimately, you want to be able to find out which areas of sales and marketing you can put more money into in order to increase the number of deals each month and each quarter.
- If you increase the number of calls your reps make each day, does that lead to an increase in leads?
- What if you spend money on paid search? Does the drive more qualified leads to your website?
- Are you spending more time at local events? What kinds of leads are you generating there?
- Are you sales reps having trouble closing more deals even if though leads are increasing? Is this a result of low quality leads or poor sales performance?
Tracking all phases of your sales and marketing process allows you to find out where you’re falling short and where you can improve. If you can say with confidence, “if I spend ($) more in marketing, I get ($$) back in new revenue”, you’ve found out something very valuable for your business, which helps you prove your growth model.
In reality, there are only small windows of time where your organization may be reaching its full potential—those moments where capacity is truly met and the organization is running smoothly, right before you’re forced to hire additional staff and begin the process again. Before you start hiring, make sure the projected workload warrants the extra staff and you’re considering those costs most MSPs don’t think about before moving forward.
Although there are a number of challenges with handling the current IT talent gap, thinking outside the box can help you grow your workforce in parallel with your expansion rather than in advance of it. Consider more cost-effective, flexible options like scaling your services with a NOC to meet fluctuating staffing needs.
3. Overpromising to Clients
When you overpromise to clients, you face two outcomes:
- You under-deliver and upset your client for not doing a satisfactory job
- You need to over-perform to make up missed services, which ends up costing you money
Let’s face it, neither of these options is good for your business. Either you end up costing yourself money, or you lessen your reputation as a services provider. If your talented techs are spending most of their time completing favors for clients, the result is that service delivery is slower, costlier and increasingly inefficient as MSP operations scale.
Make sure you set reasonable expectations with your clients for projects and monthly services from the start. Don’t promise a bunch of services you can’t deliver on just to get another client in the door. Ultimately, this will hurt your business operations and your reputation.
A good way to set clear expectations is through your Service Level Agreement (SLA). Make sure your SLA is well-structured, clear and most importantly, reasonable. This will help you build a sound foundation to build business relationships with your clients.
Helpful White Paper: MSP Guide to Managed Services SLAs
4. Adding Unprofitable Services
Adding new services can be a good strategy for finding new clients and staying competitive in the industry – just make sure that these new services are profitable for your business.
MSPs can be so caught up in adopting new technologies and adding new services, but if the solution stack in place is too noisy and inefficient, you won’t be able to consistently provide the same level of service needed to keep your clients happy. Long story short: performing unprofitable services are unsustainable. In order to ensure service profitability and keep your operations as cost-efficient as possible, log your labor costs using your Professional Services Automation (PSA) or Customer Relationship Management (CRM) systems. These tools can help you see the cost benefits of helping each client. To this end, there are a few other steps you can take to keep your overhead low and your profit margins comfortable, like ensuring that your clients’ equipment is updated, and your services are pre-paid. Clients shouldn’t cost you money; they should make you money.
Every company will run into a few pitfalls along the path to profitability, and MSPs are no exception. By avoiding the common mistakes above, you’ll see drastically reduced costs that promote natural, profitable business growth.
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By Gretchen Hoffman
By Gretchen Hoffman