As an MSP, what is your most important business goal? When I ask that question to our partners, the answer is always “growth!” All MSPs (and all businesses for that matter) want to grow, and they think the key to growth is by increasing their revenue. This is true to a degree, but increasing your revenue does not always mean increasing your profitability. Sometimes, the hidden costs of acquiring more clients or growing your business outweigh the actual revenue you generate.

MSP business owners must be aware of and work to minimize the costs associated with owning a business in order to improve your profitability. So what are examples of expenses that you should be tracking and scaling? Here are the five most important ones.

Before we get into the actual hidden costs, I want to make an important point: These costs don’t always need to be eliminated, but rather, planned for. When running a business, you have to spend money to make money, but these expenditures need to be managed and ideally, predictable month-over-month.

1. Employees

Let’s get one thing straight – employees are a necessary expenditure. It’s hard to achieve growth without adding employees to power that growth. However, you have to be aware of some hidden costs to hiring and retaining your team members.

The costs of employees go far beyond just salary and bonuses. It can cost a lot just to find the right people. Most companies will budget for the salary of a new employee, but what does it cost to find and hire them? Advertising, networking and interviewing all cost money and time. Are you budgeting for that as well? This doesn’t mean you should skimp on recruiting and hire the first person that walks through the door. Take the time to find the right person and plan for these additional costs.

Once you find the right employee, you have to train them. It’s going to take a few months of ramp-up time before your new hire learns the required skills and is actually worth their rate. After training new employees, you must also retain them. Employee churn can be extremely costly, because you have to repeat all of the steps above to find and replace the person who left.

Dealing with employee turnover hurts your margins, so what can you do to prevent it? One way to achieve stability is by adopting a fixed cost, outsourced model. This allows your employees to focus on more rewarding, revenue-driving activities – rather than getting caught up in mundane tasks. In the long-run, this will help you retain and incentivize your valuable employees because they will feel more fulfilled with their everyday work. Another added bonus is that when working with an outsourced team, members already possess the certain skillset required to support clients. This means you don’t have to waste time and money training your in-house staff.

2. Employee Utilization

Sports teams need deep benches so they can quickly replace any broken or missing pieces. The associated costs are significant, but many sports teams take on this cost as insurance against injuries. The same cost can be associated with your unused technicians.

Unfortunately, you’re not the Boston Red Sox, so having a deep bench of under-utilized tech talent will quickly sap your business of morale and money. The Sox might be able to handle it, but can you afford to have techs on the bench?

Instead, you need to find the right balance of employees that can service your clients and handle unpredictable IT demands. Staffing too many technicians is costly – but having too few can lead to a poor level of service, which may cause clients to leave. It can be difficult to strike the right balance, which is why outsourcing is a popular option for MSPs.

3. Time

Time is money. I know this is a cliché, but it’s because it’s true. Make sure you understand the cost of your time, and the time of your technicians. If you and your employees are not utilizing your time in an efficient manner, you’re wasting money! Focus on the important tasks at hand and prioritize the work of your techs. If they’re being bogged down by daily maintenance tasks, perhaps its better to outsource that work to a third-party Network Operations Center (NOC). This will allow them to handle more devices and focus on solving problems, rather than closing mundane tickets. Not only will this help drive more revenue for you, but it will keep your technicians more engaged and aid in their professional growth.

4. Client Support Costs

Yes, clients are what earn you your revenue – but they also cost money. Sure, they may be paying you each month to perform your IT services, but what does it cost you to deliver those services?

Many MSPs will throw in extra services at no additional costs to the client, simply to “keep them happy.” However, this can lead to scope creep – when projects slowly grow in scope, yet no additional compensation is offered. Some best practices to prevent these types of situations include having hard caps in your service level agreements (SLAs) as to how much time can be allotted to services under your current contract, and being upfront with your clients by making sure they understand how they’re costing you. It’s obviously important to make your clients happy, but they shouldn’t be taking advantage of your services and draining your profits.

Here are some low-cost ways you can keep clients happy:

  • Give them a call and ask them about their business. A little interest goes a long way and helps make clients feel that you’re there to understand them. Don’t be afraid to show them some love.

  • Send them relevant articles and news stories. Again, this takes very little time to do and shows that you have their best interests in mind.

  • Send occasional gifts. This could be as simple as a little keychain with your logo on it, or just a bottle of wine saying “thanks for being a loyal client.” This is not a long term cost, but it can lead to long term revenue by building better client relationships.

  • Schedule regular visits. Nothing beats face-time. Your clients want a technology consultant and a strategic business advisor, not just someone to buy a server from. Make sure to go see them, talk to them regularly and understand their business goals.

If a client is costing you money, be transparent with them. They are business owners just like you, and they will most likely understand. If they value your services, they’ll be willing to pay to keep you as their managed services provider. If they refuse to pay, don’t be afraid to drop them as a client. That’s right, if they are costing you money, what’s the point of having them around? This can be a hard decision for many businesses, but ultimately you have to eliminate dead weight in order to excel and be successful.

5. Costs of Sales

Let’s make this point again – spending on MSP sales people is an essential investment! You want someone on your team who is devoted to finding and closing new clients for you. But, it’s important to understand all of the costs associated with closing new business.

The price of a salesperson (salary, commission, benefits etc.) is not the only expense. There are a lot of different sales costs that many MSPs don’t realize. Are you supporting your sales people with marketing efforts? This is yet another necessary expenditure, because sales without marketing is like asking a wide receiver to go out and throw passes to himself. Where are you spending money most effectively on marketing? Are those efforts ultimately leading to more deals? Make sure you identify and understand all costs involved in your sales and services. Once you do, you can factor them into how you price your managed services.

One of the best ways to track your investment in your sales efforts is to measure everything your sales team does. Consider using Salesforce or another CRM program to develop measurable processes and monitor sales activity.

Some important metrics to track are:

  • Average time from first contact to closed deal

  • How many conversations did it take until they became a client

  • How many contact attempts did it take your rep before they first got in touch with the prospect

  • Reasons why certain prospects are not becoming clients (look for patterns and fix these patterns!)

  • Frequently asked questions

Note: The sales process doesn’t stop once they become a client! It costs much less to sell more to an existing client than it does to go find new ones. Perhaps your sales reps are wasting too much time chasing down new leads, versus checking in with your current customers to see if they need any additional services.

If you want to be a successful and growing MSP, you need to be aware of the hidden costs that exist within this business model. Understanding these costs helps you immensely when budgeting for your MSP business and determining the pricing for your services. Make sure you are planning for these hidden costs so that you can better evaluate ways to save, reduce and/or increase your revenue return.

How can these costs translate into pricing your managed services?