We are inundated with information. Our PSA and reporting tools give us great reports, dashboards and insight into profitability of clients, how available hours get used and what the effective hourly rates are for our service agreements. This is invaluable information and key to running a good business today.
As an MSP, there are a few critical success factors that need unwavering attention. None of those is more important than effectively managing our most valuable and limited resource: People. Specifically, our engineering talent that drives the quality of our service, the satisfaction of our clients and much of our revenue and profit.
We spend a lot of time and money on recruiting, retaining, equipping, and managing our technical service teams. We can all agree that good talent is hard to find, and turnover is expensive. The number of open positions in IT is staggering, especially in Cyber Security. We each build our culture and our compensation plans to attract and keep the kind of talent that fits our company.
- So how do we know if we are using the service team effectively or efficiently? Do we understand “why” they are or are not meeting expectations?
- Ask that same question about each individual engineer and the answer can get really challenging but insightful.
- Does each of our engineers clearly understand what success looks like and what is expected regarding billable time?
There is a way to make your service team management PURR like a Lamborghini. A simple equation leads us to some very interesting insight and sometimes, to difficult questions about the way we manage our team. Let’s jump in.
What is PURR?
Target Services Revenue (TSR) = P * U * R1 * R2
P = Potential Services Revenue
U = Utilization
R2 = Receivable Collection
We will explore each of these as a measuring stick and later, as a communication tool for an individual billable resource. We will also take a macro view and the implications on the leverage that services have for our company.
P = Potential Services Revenue
This is the total billable potential of an engineer for the given period. For our purposes here, I will assume 2000 billable hours per year. If our hourly rate is $150 per hour, then our total billable potential for 1 engineer is 2,000*$150 or $300,000.
Notice that if $150/hr is our standard billing rate then our potential revenue is always $300,000 for a full-time engineer. We can use different time periods, such as pay period or month, so long as we are consistent.
U = Utilization
This is total hours charged by the engineer divided by the total hours available to charge in the same period. Many of us use, use differently and mis-use the term utilization. For our purposes, utilization simply represents the percent of a person’s time that they record as chargeable to a client. Don’t confuse that with billing … that comes next. Research reports that 50-60 % is normal for most MSP’s. 75 percent utilization is generally accepted as a good target although many believe that great services organizations should be at 80% or better. I like 75%.
In our year with 2000 hours available to potentially bill, we also have vacation, sick time, meetings (oh boy, do we have meetings), think time, training and other things that keep us from being productively charging our time to clients. We must pick a target utilization rate and communicate to each engineer. I don’t believe they need to be the same for every engineer. We will dig deeper into the implications of our utilization targets as it has a big impact on our culture and employee morale. It cannot be taken lightly.
This is the total hours billed divided by the total hours charged in the period. Realization is powerful concept … we do work for clients, we capture and record our time, but we don’t always choose to bill that time as charged. This may be the single hardest thing for us to manage. We will dig in deeper to this topic later, but a simple example will shed some light. A client calls and a new engineer gets assigned to work on a problem. The new engineer jumps right in and fixes the problem in 3 hours. He enters his time into the PSA and is fully utilized in those 3 hours. The problem is that the client has had this problem before and the senior engineer who knows them well fixes it in 15-30 minutes each time. So, what do we bill the client? The Service Manager catches this situation and knows that we can only bill 30 minutes or risk having a very unhappy client, making our Realization = 16.7% for those 3 hours (.5 hours/3 hours). Although that doesn’t sound good, it is only one of the variables we must consider. More on that later.
Realization can also be greater than 1! Consider a fixed price contract that goes well (it can happen) and takes advantage of our intellectual property and experience. We may bill an equivalent of 10 hours (Value-based pricing) but only require 5 hours of charged labor to that project … Realization equals 2! Even better, we can sometimes outsource part of the project services to multiply the power of your engineer’s time. You can see the potential and the risk here—good service managers are priceless.
R2 = Receivable Collection
This is straight forward. The Dollars Collected divided by the Dollars Billed (hours * rate) in the period is our Receivable Collection. If the service manager didn’t catch the situation above and that bill went out, then it becomes a collection problem. Timely billing has a huge impact on this number as clients forget the value that was brought to them when they needed urgent help and then we don’t send them a bill until a month later, to their top notch, penny-pinching accounting department.
Example for a single engineer for a full year:
Target Services Revenue = $300,000 ($150/hr * 2000 hours) potential * 75% Utilization * 95% Realization * 100% Receivable Collected = $213,500
That is, we could reasonably expect to exceed $200,000 revenue per year from a well-managed engineer billing $150/hour with limited “write-offs” of time.
I wish life in the services business were that simple! When we look under the covers (each of the elements) of the personal performance of an engineer and of our entire team we get great insights into why we are or are not achieving our potential.
Should an engineer bill 2 or 3 times their salary? I hear lots of opinion … Let’s look:
If TSR is $213,500 and the engineer in question has a $75,000 annual salary then the Services Multiple is simply $213,500/$75,000 or a 2.8 Multiple. That seems reasonable for a senior engineer.
What about a beginning engineer that costs $40,000?
A TSR equation may look more like:
P=$300,000 (same billing rate, same potential hours)
U = 60% (poorer time recording habits and time management, more training, etc.)
R1 = 80% (inefficient, over-recording time to look busy)
R2 = 95% (billing write-offs from unhappy clients that react to slower resolution time)
TSR = $136,500
Service Multiple = 3.4
So, the beginner can create more leverage in this example. Less revenue, but more leverage on their salary.
A word on using fully burdened costs:
I believe we should always use the fully burdened cost of an employee in our internal analysis but when we are speaking with our employees, that is not a language they speak regularly. It is much clearer to use their base salary when we discuss their targets and performance. The whole company services multiple below gives an example of using fully burdened costs.
Company Services Multiple
This gets to heart of our profitability of our services business.
8 full time engineers, $150/hr billing rate, 2,000 hours per year gives us:
TSR= P (8 engineers * 2,000 hours/yr *$150/hr) * U (70%) * R (90%) * R (97%) = $1,466,640
Cost of services = (8 *$60,000) * 1.25 + $75,000 + $60,000 = $735,000
Fully burdened: Salaries (Average $60,000), 25% burden rate (taxes, insurance, etc.), Service Management Overhead ($75,000), Non-billable resources (e.g. Client care, dispatch) ( $60,000), Service Delivery tools costs(not included here)
Company services multiple= 2: TSR / Cost of Services = $1.467 M / $735 K
This can be real sobering but also very encouraging when we see where the leaks in the services revenue stream are … we can’t fix what we can’t see … and remember the leverage works both ways! We can create an incredibly profitable services business when we understand how to gain leverage on our resources … that’s next.
We will dig deeper into each of the elements in future blog posts. I have learned that most performance issues can be enlightened by looking at these elements. The insight and ideas for leveraging our team’s skills and time are extraordinary—stay tuned!
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