Increasing profitability is a key priority for all MSPs. In theory, this is easy to do. In practice, it's hard to know where to look. However, analyzing your financi
als is one of the best ways to find new revenue opportunities and increase your profitability.
On this week's episode of MSPradio, we chat with Larry Cobrin, Co-Founder of MSP CFO, a dedicated MSP tool that allows you to easily analyze data from your PSA and find ways to increase the profitability of your clients. Tune in now and learn how you can find meaning in your data.
Tune in this week and subscribe to our podcast on iTunes.
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Nate: Hey, folks, and welcome back to another episode of MSP Radio. I’m your host, Nate Teplow. We have a great guest here on the line with us today. He’s got a very interesting company. We’re going to be talking about financial analysis for MSPs and how you can find opportunities within your financials. I think it’s a really interesting topic and an important topic for MSPs here.
Before we get in to it, I want to remind you to subscribe to our podcast on iTunes. If you search in the iTunes Store for MSP Radio, you can find us there and subscribe. We are also available via the Stitcher app for Android users, you can again search for MSP Radio and subscribe to our podcast to get it straight to your smartphone there. Last I want to remind you to follow us on Twitter using the handle @FollowContinuum and you can let us know what you think of the show with the hashtag, MSP Radio.
So as I mentioned, we’re going to be talking today about your financials, how to look into them and find opportunities within them. I don’t think MSP’s do this enough, and knowing where to look in your financials can help you understand what’s working for your business and what’s not working for your business. I’d like to welcome Larry Cobrin. He’s the director and co-founder of a company called MSPCFO. So Larry, welcome to MSP Radio.
Larry : Thanks, Nate. Thanks for having me.
Nate : Yeah. We’re excited to have you. I took a look at your tool the other day, you gave me a nice walkthrough. I think it’s a very interesting tool. What you told me was that it’s a financial tool for more efficient account management, and as I mentioned before, I don’t think MSP’s do this enough and I think it will be a great topic for today’s episode.
Larry: Great. Looking forward to it.
Nate: Same here. So before we get into it, can you tell us a little about just your background, your expertise and kind of where you came from?
Larry : Sure. My background is I’ve worked in various organizations. I’ve worked at hedge funds, I’ve worked at consulting firms and private equity, at investment banks and most recently, a few years ago, I was with Morgan Stanley for about five years. My background is in analyzing companies and understanding what the drivers of their success is, whether it was an investment company to see if you can get early read as to whether an investment do well or not, or private equity trying to maximize the value of our portfolio companies. I came to the MSP space about two years ago, working with my partners, two of which are MSP owners. And what we realized is that there is a great opportunity here to deliver that kind of information to the MSP space, to unravel what’s driving the financial success of MSP’s.
Nate: Yeah, it’s interesting. I mean, you have a financial background. A lot of the people we speak to on this show, they used to run an MSP or they have some, you know, IT experience, but you’re really coming from a finance background and then obviously mixing in the MSP expertise of your business partners.
Larry : Exactly. So the perspective that I try to bring to everything here is that the MSP space, while it does have its unique issues, it really is a business. And what’s going to help that business make more money, help the owners take home more money? And it’s a similar type of analysis done for different types of companies. Over the past two years, we’ve done a great job ascending a learning curve and really getting to the bottom of what those drivers are and then educating our clients on how to identify those drivers and see if they’re going in the right direction.
Nate: Yeah, absolutely. We’ve talked about a lot here on the show about being a business owner versus a technician, and it’s something MSP’s struggle with a lot. So give me the quick elevator pitch of MSPCFO. What is it? What do you guys do?
Larry: So MSPCFO, we’re a MSP-focused business intelligent and financial analytics dashboard. What we do is we take the key metrics. We take every, all the information from a client’s PSA, auto-test or connect-wise. And we analyze that data and report it back to the clients in terms of a dashboard to help them identify what’s driving profitability versus what’s a drag on profitability. We give them the KPI’s needed to understand what’s working for the business and what isn’t.
Nate: Yeah, cool. I think we’ll talk a little more about the actual solution later in the show and get a little more granular. But why don’t you start with just kind of general. How do you define financial analysis and why is it so important to business success?
Larry: The way we define financial analysis is its business intelligence. It’s understanding what you’re doing and what’s working and what’s not. We believe that data is critical to running a successful business whether it be an MSP or any other business. But MSP’s are really great businesses because there is so much data. The PSA’s capture just a mountain of information that you can then analyze and understand what’s really going on. We give insight to where it … Insight to understand where and when an MSP is successful. There’s so many different revenue streams that are out there and you have to understand which ones are working, which ones are not. We work with businesses and one of the things we do is we help them benchmark not against the industry so much, but against themselves. Where are they doing well versus not doing as well.
One of the things we focus on is contribution per hour. So that is how much money they’re making per hour that they contribute to a client. They’re all service companies. They have a finite number of hours. Their goals should be to maximize the profit for the number of hours they contribute. And once you do that, you can really benchmark your own clients against each other. The feedback we’ve gotten on this kind of, these metrics and KPI’s are really doing quite strong for our clients.
Nate: You showed me that tool and you do a lot of that very seamlessly and in a very nice dashboard, you know, for MSP’s to look at their financials. So where do you find MSP’s are going wrong with financial analysis? It could be something they’re just flat out not doing or it’s just something they’re potentially doing wrong in terms of looking at their own data.
Larry: As you say, sometimes it is they’re just not doing it.
Often enough, many MSP’s will look at their financials casually, but really only focus on it for quarterly peer group reviews. We argue that’s just not often enough. So they don’t really spend the time to understand what’s going on in their business.
The second thing is they don’t invest in getting the proper information. We think information or we believe, we have proven that information really pays for itself. It’s an investment that pays for itself many times over. The MSP’s that grow and succeed and do so with high efficiencies are the ones that pay attention to what’s working in their business.
Other things that they do or is they’re using a recording that exists in the PSA’s and I’ll tell you the PSAs from many, many features are just fantastic, but for reporting, everyone we’ve spoken to, they say it’s fallen short of what they’re trying to accomplish. So they’re using a tool that just isn’t sufficient.
And the last one you know is obviously just that they’re not doing anything. They just don’t have the time. These are harried business owners. As my partner often says and he quotes one of the industry leaders, a lot of the MSP’s are focused on the origin instead of the important. Dealing with the client issue, dealing with the blow up here or there and they miss the focus of their business. So they just aren’t spending the time.
Now there’s a great quote from Stephen Levitt who wrote Freakonomics. What he said is, and we believe this to be a very much sure message, showing itself to be true. ‘These organizations that are resistant to data will survive, but in fact they’re not thriving.’ So they may be in a false sense of doing okay when they really should be doing great and we try to make okay, bring “okay” to great.
Nate: Yes. Absolutely. Another thing that I think is aligned with what you’re talking about here and something we’ve said on the show before is working on your business, not in your business. And like you said, I think MSP’s can get too caught up in putting out fires and focusing on technical issues when if you’re the owner, you have to be a businessman and focus on your business and not get in the more granular aspects of it.
Larry: Exactly. And we recognize that there are some MSP’s that aren’t large enough, that allow the owners to disassociate from working in their business. So we allow them to, by using MSPCFO tool and by using our services, we allow them to quickly and efficiently get into working on the business as opposed to spending a day or two a month on discovery to understanding what’s going on in the business.
Nate: Yeah, absolutely. So I wanted go back a little bit to what you said before. You talked about investing in information. What do you mean by that? How do I invest in information as an MSP?
Larry: As an MSP owner, you’re time constrained. You know, there’s various investments. Just think broader than the simple investment of money. Your time is critically important.
The number of issues that you have to face on a monthly basis, on a daily basis is far more than you can probably, than you can accomplish. What you want to do is more than you can do.
So what you need to do is make that investment and information so that when you want to understand what’s going on in your business, you can efficiently make an investment, set up the ability to understand what’s going on in your business and then the ability to act on that requires less time, but you need to make the initial investment in understanding what’s going on in your business.
Once it’s … Too many MSP owners take a shotgun approach to fixing their business and that’s inefficient and that is a poor return on their effort. We try to maximize return of effort by investing in making an upfront investment in understanding what’s going on in their business. We can increase their return on effort. You’d say that every time, every moment that you put in to fixing your business will result in an improvement.
Nate: Yeah, no, that’s a great point. So we’re coming up here on our commercial break. Actually, you know what I think; we’re going to take a commercial break right now. Coming up next, we are going to talk with Larry a little more about how to look at your financials to find opportunities and really optimize them in order to grow your business and become a better business owner. So we’ll see you all in a few minutes after this quick commercial break.
Nate: Alright. Welcome back folks, from our commercial break. You are here on MSP Radio. We are talking with Larry Cobrin from MSPCFO. We are talking about MSP financials, how to use them and leverage them in order to grow your business and become a better business owner.
So Larry, we were just kind of talking about the problems that MSP’s face when it comes to their financials, what they’re not really doing, you know, they’re not doing enough with them. How can MSP’s use these financials to find opportunities? What sorts of things should I be looking for as an MSP owner within my company financials?
Larry: That’s a great question, Nate. So the way that we approach this is we work with clients to segment… we work with MSP’s to segment their clients. We put them into them quintiles, into five groups. Number five is the ones that are the best clients. Number one are, you know, as we say, it’s, we try to find a nice way that means the opposite of best.
And we do that by looking at their contribution per hour because again you want to know where you’re getting the best return on the time that you’re investing in your clients. What we then do is we look at the bottom quintile clients; the ones that are in group one. The ones that need the most work. The ones that you’re investing time in but not just making enough money on.
And we work with clients to try to help them understand what’s the difference between a quintile loan client and a quintile [of fourth 0:12:59] client. These clients are the same to you. Quintile five are your great clients, we found this one time and time again. You don’t aspire for quintile five. You’re thrilled that you have quintile five and these are the ones you take out to steak dinners and you protect because they’re the ones that give you so much return for so little investment. It happens at every company and just be thrilled that you have them.
So the question is, the aspiration is, how do you go from the lowest grouping to one or two higher? This can be a significant difference. This could be the difference of $3 an hour in contributions to one client, you put in a hundred hours and you make $70. Another client a group higher, you make $70 an hour. Another group higher, you put in a hundred hours and you make a $100 an hour. That’s a significant amount and these numbers are obviously much, much larger for larger companies.
The question is what’s the difference between the second group versus the first group? And the answer there is different for every company. Is it because you need to sell more product? Is it because the account management program that you have is different for the different groups? Is it because there are projects that are lower profitability? And when I say it’s different for each company, I mean that sincerely. We have found clients that had great success selling more projects into their clients and those are the ones that have a higher contribution per hour. We’ve also found clients that have had poor success with projects. We don’t give you a prescription in terms of, you have to sell 30% projects and 60% recurring revenue and try to have the balance being break, fix and product. We don’t do that. What we tell people is, “You know what’s working for you. You have these clients that you earn an extra $30 an hour of gross profit for everything that you do. What are you doing right? You know these clients. These names mean something to you. Look at the ones that are lower clients. What do they mean to you?”
You need to have a road map between what you’re doing right and what you’re doing less correctly. And that’s how you find the opportunities. You say, “Well, I have this group of clients and I know these characteristics and this other group of clients that aren’t as good. I know these characteristics.” What’s the road map from the less good to the better? And that’s where the opportunities are. You start with the clients where you’re not earning enough money, you try to make them look like the clients that are earning more money.
Nate: Yeah. Where do I start when it comes to figuring this out? Let’s say I have five clients that are in my bottom quintile. And then I have my five clients that are in my top quintile. What sort of things do I look for between the best ones and the worst ones? And I know this might be a difficult question because, like you said, it’s not a one size fits all. It’s very different based on just the structure of your business and your clients’ businesses and all that. But what are some things, even just high level, that you kind of start to look at once you’ve identified your top echelon of clients versus your bottom.
Larry: So the first place we generally look is recurring revenue. What’s your fixed fee agreement situation? What’s your effective rate? And the effective rate we decompose into two parts. We look at the number of machines that you’re managing and determine how many hours are you putting in per machine and how many dollars are you earning per month per machine? Because effective rate is really just dollars per hour so if you divide it by machines, you can figure out was your effective rate not where it needs to be because your client is over utilizing you or because you’re under charging. And each one of those could have a potential result. If they’re over utilizing, perhaps there’s an opportunity to sell them a project to improve their technology so that they call you less. While you may be an MSP owner, a wonderful, wonderful person to have on the phone, they really don’t want to be calling you about problems with their machines.
The second issue is looking at the dollars per hour, dollars per machine, rather. If you make on average $75 per machine and there’s an equivalency there between work stations and servers, let’s say it’s $75 per work station and your bottom quintile clients, you’re only earning $40 per work station, that’s an opportunity to go back and re-price that agreement because that agreement might be below market. The next place we can look is how much products are being sold. There might be another opportunity to find out if there are products that you can sell those clients.
Products are generally seen as a low margin activity. You know, I’m only making 5%, 10%, 20% on this versus my labor, I’m making 60%. So I want to not focus on the products. But we look at a different perspective. A lot of time the product just drop ships so there’s no real financial investment in your part for selling the product. But it may only take ten hours or five hours to sell $20,000 worth of machines. If it takes you five hours and you have a 20% gross margin on $20,000, you just earned $4,000 on five hours of work. That’s fantastic! And that’s the way that we want people to look at it. How can you maximize the growth profit for hours that you do?
And then we just look for anomalies. In one client, we often thought that projects are incremental to the business and they should be driving profitability. What we found was that projects were associated with lower quintile clients. The client then went back and realized, “You know what? We’ve been pricing our projects all wrong. We’ve been allocating, let’s say, four hours for an install and it’s actually been taking us eight to nine hours for an install.” And they then go back and re-price their project, the project prices.
So there’s some very basic issues to look at in terms of fix the agreements in terms of how much projects you’re selling, how many products your selling. But beyond that, you really need to look at is there something that’s different about the bottom quintile versus the other ones and then say, “Well, maybe that’s an issue that I need to look further into.”
Nate: Yeah, absolutely. I mean, data doesn’t lie. And looking at the numbers, I think, could tell you a lot. And MSPs just don’t do enough of it. So I actually want to go back to the topic of pricing and …
Nate: You talked about how to read, you know, you look at your numbers and you find out you have to re-price your services. Is this something you go back to your current clients and talk about changing prices, you know, with them?
Larry: What we do is we identify where there’s going to be, where the dollars per machine metric is lower than it is on average. And it’s frequently the case that its lowest in the least performing quintiles. That’s the driver of them not being a high performer. And we highlight all of these situations to which, the clients, our MSP’s will go back to their clients when it’s time for a renewal and state, you know, ‘we have prices below market, you have increased the capacity at your site and we haven’t increased our prices alongside that.’
So at the time for contract renewal, it’s something that they can bring to the table right away to identify as an opportunity to make more money. Obviously this is something that you can’t do overnight. If you see ten opportunities on a Monday night, you can’t go Tuesday morning and change all your prices. You have to… it has to roll out as contract renewals come up. But we’ve already seen clients go back. MSP’s go back and get increased money.
We think the opportunity per MSP ranges between you know, 95% of the range between $3,500 a month and $10,000 a month of additional profit really because it falls straight to the bottom line; it’s more money for doing exactly the same work, $3,500 to $10,000 per month, just on re-pricing. Obviously, not all of that is achievable.
Sometimes there are relationships that don’t allow you to change pricing and there are extenuating factors that the pricing is low because you have additional business you’re doing with them. But we’ve already seen our clients go back and get a portion of that and it’s going to continue as time goes on and it actually makes us really, really happy because it means that what we’re doing … It proves to us that what we’re doing can have an extremely positive effect on the running on the business.
Nate: Yeah, absolutely. And even in you just get in the habit of looking at your financials and backing up your pricing with data, it’s going to be better and better the more you move forward. Like you said, you just can’t go to them on Tuesday after discovering this on Monday and you know, just change all of your contracts. But the more you get in the habit of this, the better it’s going to be for you moving forward. So I wanted to leave some room here to actually talk about your, your software solution. Can you go a little bit more in detail? I know you gave us a brief high level overview earlier, but I’d like to hear a little bit more about just the software. What it is and what it does for MSPs.
Larry: We built our software; we built it over the course of about a year now. I’m working with a handful of charter of clients. We try to deliver the real time information that they’ll need for account management so that the process is … I’ll take you through the process. We start by pulling the information from the PSA.
Right now, we have connect wise auto test is something that we hope to have in Q4. The data comes into our database so that we can do analysis on it. Clients, once a client … When a client is onboard, they need to help us a little bit with classification of agreements because in the PSA you can assign work to an agreement and that agreement might be a true fix fee agreement. It might be an agreement to subscribe to certain cloud services or email filters or antivirus or it could be an agreement to purchase hours at a reduced rate.
So we need to classify those as what kind of revenue item. The out process for an onboarding client shouldn’t take more than maybe half an hour and for them it’s pretty straightforward. Once that’s done, our data is then updated several times a day from the PSA’s and it comes in to our system and we present it back to the client in several ways.
The first way is we allow them to build a custom PNL per client or for their company as a whole. Now our PNL stops at the gross profit line. So we’re not focused right now on how much you’re spending on rent, how much you’re spending on legal, what your overhead expenses are in general. We’re focused on what’s your profit per client because that then can give you an idea of differentiating your better from your worse clients. So in the PNL, we built [inaudible 22:58] you want trailing quote months, you want current year. That’s all available.
The next thing that we have for you, for the clients, is we have client segmentation where the clients have been broken into the quintiles. And we have a threshold so you don’t really … Your quintiles aren’t crowded by some of your smaller retail type client, you can see what the different quintiles look like. I’m looking at one right now and you can see from quintile one the contribution per hour is only $82 per hour, but as it goes up, quintile forces as high as $222 per hour. Quintile four in this particular one I’m looking at, they made, looks like $930,000 for trailing 12 months on 4,000 hours. That compares with quintile one where they made $700,000 on 8,000 hours. They made less money but used almost twice as, over twice as much time.
And then you can look at how quintile one and quintile four are different; how many hours you put into for 60 with the effective rates for the different ones or the hours per node or the dollars per node. And you can expand each of the quintiles to see the companies are within it. In doing so, you then have a better understanding of, “Yes, I know what my good clients look like. I know what my “less” clients look like. And I can build a road map to make my “less” clients, good clients try to look more like my good clients.”
Take an ever more of a rightful shot of approach in looking at the worst clients or the least best clients that we said, try to keep this on a positive tone. The least best clients in terms of contribution per hour, the least best clients in terms of effective rate. Again, you may have a bad effective rate client that has might be not better quintile because of other business that they do. But these then are also the clients that you get, you take directly back to your account managers, and you tell them, “These are the clients that we want to try and determine how we can maximize profitability, how we can increase our profitability.”
Again, the underlying goal of our system and how we’ve able to help the clients we have so far is maximizing return on effort. If you see that your effective rate for your business is, let’s say it’s 130 and you want to get it to 150. You really shouldn’t focus on improving your whole business because that 130, that $20 loss you’re having is due to a handful of clients. You should spend your time focusing on those handful of clients. If you fix those clients, your effective rate will get to where it needs to be. If you work on the entire business, you run the risk of:
- A) Offending your better clients and….
- B) Not getting the return that you’re hoping for because some of those clients may be doing everything right and why are you even focusing on them?
You want to identify the ones that need the most work.
Nate: Yeah, that’s a great point. And I think the great thing about your system is that it’s all data that you have. I would say almost every MSP … I mean, if they don’t have a PSA, they should have a PSA. And it’s all data you’re collecting. It just runs in the background and it allows you to see where things are working and where they’re not. So we’re coming up really short on the end of our program here. I just wanted to ask you one last question. What’s the feedback been like so far, Larry, on this technology?
Larry: From our existing clients, the feedback has been fantastic. We’ve heard things like … As I’ve said before, we’re already making $2,000 a month more from one client than we are otherwise [inaudible 26:09] a lineup of clients we’re going to work through. Other ones have said that their finance [inaudible 26:14] … Should they have a finance team, because not every MSP is large enough to have a finance team. They said this is reporting that I’ve tried to accomplish but it takes me one to two days a month to do it; I now have it at my fingertips.
I think many finance teams are extremely fond of what we’re doing, in a sense that we’re saving a lot of time to focus on doing something with the information rather than preparing the information.
And lastly, from the account management groups, in a sense that there is an account management function, and there’s not always an account manager. It could be that different people have different roles and they assume so much account management functions. The feedback we’ve gotten is that they sit in the meeting, goals that they were trying to accomplish with account managers; they had gotten pushed back from frequently. And once the data is presented, the push back is gone. They can then move forward to working towards a resolution. Other feedback that we’ve gotten has been from people who’ve attended peer groups and said that they were far better prepared and far, had far better understanding of their business than others in the room.
So we’ve gotten feedback that’s been extremely encouraging to us and we’re pretty happy with it.
Nate: Yes. That’s great to hear. Just to reiterate, Larry, it’s a great product. I think it’s very useful for MSP’s. Thank you for joining me here on MSP Radio today.
Larry: Thanks so much for having me, Nate.
Nate: If people want to learn more about MSPCFO, where can they go?
Larry: We have a website. www.mspcfo.com. You can sign up on the website. We are right now looking to add a handful of our clients and we’d love to have you listeners join us.
Nate: Great. Well definitely check out, Larry and MSPCFO at www.mspcfo.com and thank you all for tuning in to MSP Radio this week. I thought it was a great topic. I think MSP’s can be doing a lot more with their finances. And a solution like this is definitely a great way to get started and be more of a business owner than a technician. Again, thank you for tuning in to MSP Radio this week and we will see you all next week.