MSPs spend a lot of time and money on recruiting, retaining, equipping, and managing our technical service teams. That talent ultimately drives the quality of service, client satisfaction and much of your revenue and profit. The problem, however, is that good talent is hard to find, and turnover is expensive.
In Part 1 of this blog series, we explored how to use your service team effectively and efficiently using a simple equation called PURR.
Now, we'll go a layer deeper and break down how exactly to optimize each factor and maximize the return, driving profitability and scalability in your MSP.
How to Get the Most Out of PURR
Here's a quick recap of what comprises this equation.
Target Services Revenue (TSR) = P * U * R1 * R2
P = Potential Services Revenue
U = Utilization
R2 = Receivable Collection
If we can optimize each factor, we can maximize the product!
P = Potential Services Revenue
Total billable potential of a resource: Total Hours/period * Billable Rate per hour
We have two levers to pull here—our hourly rate and the number of hours. In the U.S., we generally use a 40-hour work week and 52 weeks per year ... 2080 hours. This is the standard for the hours per year. I often assume each employee gets at least 2 weeks of PTO so 2,000 hours works well, and I can do the math in my head. Be Careful … 2 weeks of billable time per year could be leaking out when I do that.
To maximize our Potential Revenue we must our hourly rate right. Hourly rate is most affected by the value we bring, our willingness to ask to be paid appropriately for the value we bring, and lastly, by competition. Think about:
- Skills – We must continue to invest in our teams to move their skills to areas of more client value. There is a natural life cycle of technology and of the skills required to make that technology productive. As a technology ages or is replaced, the value of the skills become less. For example, are you investing in security skills, like a CISSP, networking and IOT skills today? Break-fix work can be hired at under $75 per hour while security consulting can command over $200 per hour. Investing in skills will help improve employee satisfaction and retention and maximize your potential billing rate.
- Confidence – It takes guts and wisdom to raise rates. Most MSP’s don’t charge enough! We need to increase our hourly rates. You see or hear of another firm that undercuts your rate and think you better match that. Don’t fall for it. That company is not your competition in the long run and when they go away, you can have your client back.
- Worms - Labor margin gets eaten up slowly by annual pay raises and by salary inflation in our tight labor market, if we don’t raise our rates. Do we increase salaries for existing employees when we have to pay more to hire the newest employee? If we don’t charge the appropriate rate for labor, we expose ourselves to higher than needed turnover and poor employee satisfaction.
- Grit - Raise your rates regularly. Make the rate change, don’t make a big announcement, you may receive a few calls from unhappy clients, but not as many as you fear. The President takes any unhappy client call, then listens empathetically, states how much we appreciate the client, reviews briefly our commitment to service and the value of providing top notch service, adjusts the current invoice in question to the old rate and states that the new rate will be in effect going forward. You will know you are charging the best rate when you really do lose a few clients who don’t appreciate the value your team delivers.
- Competition – Around 70% of SMB enterprises are not using managed IT services. If we are all stacked up on the same prospects, it is a race to the bottom. We need to invest in understanding our markets, our unique value proposition, our marketing and sales in order to educate and win prospects that understand and value what we bring.
- Review your hourly rates immediately. Plug in a $10-$20 per hour rate increase into the PURR equation and see the impact on your potential revenue, it is great motivator.
- Assess where you can move lower value but critical work to a Master MSP like Continuum, allowing your best and brightest to develop higher value skills, not be bogged down with mundane tasks, and become challenged and motivated by providing more value to clients.
- Review the hourly rates you assume in your ‘labor-included” packages and make sure you are pricing those packages correctly.
- Semi-annually, review potential revenue vs fully burdened costs.
U = Utilization
Total hours charged by the engineer divided by the total hours available to charge
Utilization simply represents the percent of a person’s time that they record as chargeable to a client or client project. Effectively managing utilization of billable resources is core to our business. Our stated expectations send a loud message about our priorities to our team. Our actions speak even louder. PSA tools certainly help with recording, tracking and reporting labor hours but there is a lot to understanding the drivers of utilization. Think about:
- Employee Motivation: Find driven employees and hold onto them! Behavior assessment tools like DISC can improve our hiring but each employee has different motivators and willingness to work hard.
- Skills: Building skills that are unique or are in high demand make it easier to stay busy serving clients.
- Experience: Developing the ability to transition from one assignment to another quickly has a significant impact on chargeable hours.
- Inexperience: Many beginners want to impress their bosses by showing how busy they are and may add more chargeable hours to their time cards, or their inexperience makes them inefficient in getting meaningful work done. Good oversight and coaching are needed.
- Time keeping: We must make time entry as easy and natural as possible. Engineers forget their day quickly and will under-record chargeable time. Both incentives and punishment can work here but not everyone reacts the same to these stimuli.
- Completeness: Every hour needs recorded! Chargeable or not, we need a record of how our employees’ time gets used. At least 8 hours need recorded each day and all overtime. This can become a legal issue if we don’t manage it well. Additionally, under-recording of total hours can happen when we state that only 8 hours need recorded each day. That may impact chargeable hours and certainly impacts morale if an engineer is putting in a lot of extra, unrecorded hours over longer periods of time.
Seeing extra hours can encourage us to look deeper to see if demand on a single person is too high (and ask why) or if efficiency is an issue and extra hours are needed to get their work done, effectively trying to manage their reputation while destroying our realization and credibility with a client. Or just maybe we found a motivated engineer and need to reward them and coach them for the long term.
- Enforcement: Beware. This has a huge impact on morale, especially if enforcement of utilization goals is not consistent. Your delivery team culture and motivation is at stake, choose carefully how aggressively to enforce your objectives.
- Communication: Employees want to know how they are doing. Set utilization targets and report their performance regularly.
- Deployment: Assess the skills you need and get the right people in the right places to maximize their utilization. Deploying the wrong skill to an opportunity looks dull to a client and is inefficient use of the engineer’s time. Poor management is not an employee’s mistake.
- Automation: As tasks get automated it will take less time to do the same work, putting downward pressure on utilization. For example, we spend a lot less travel time today than only a few years ago thanks to better RMM tools. We may need to adjust our workforce or redeploy people to keep utilization up.
- Pre-sales: Engineers, VCIO’s and IT Architects have a huge impact on sales. Make a clear decision and communicate where pre-sales hours go. Are they chargeable? If not, they will put downward pressure on Utilization. If they are chargeable but not billable, they put downward pressure on Realization. We can also recognize them as a cost of sales and remove these hours from the total available. Be careful, a lot of poor time management for engineers and covering for a poor sales team can get hidden in this bucket.
- Masters: Highly talented or technical people create unique opportunities and challenges. Utilization may be low, but their impact may be very high. Setting expectations for them and their teammates is critical. We address this again in the next section.
- Write down your expectations in the above categories. Have you communicated it clearly to your team? What are the unintended consequences of your current policies and practices?
- Discuss with your Service Manager the enforcement expectations and style for enforcing. This will have a huge impact on morale. My preferred style was the “velvet hammer” … soft, empathetic but direct and substantially firm.
- Weekly, review Utilization and understand the “why”. Educate and coach each teammate on how to improve consistency.
Total hours billed divided by the total hours charged
Effectively optimizing our billing is a powerful and tough factor to manage consistently. Get good at this one and your ROI on service labor can grow substantially. Think about:
- Client expectations: What were they told this would cost by the sales team? Estimates often become limits on what can be billed.
- Value: Are we pricing to value? Clients may be willing to pay more than our hourly rate for the value provided by a specific project. Are we willing to ask for the value? For example, if we get great, consistent and efficient at Office 365 migrations, are we billing per mailbox rather than on the hours it takes? Always look for opportunities to seize on our intellectual property, differentiation and efficient processes.
- Labor-included contracts: We capture the benefit of improved efficiency and quality of service when our labor is included in a fixed monthly billing agreement. Regularly review the assumed and the effective billing rates for labor on managed contracts. There are great reports available directly from PSA and reporting tools. I find it best to review effective labor rates on a 6- or 12-month average.
Caution – This is a place to hide hours that engineers don’t want billed or don’t want noticed. Consistent management attention to this bucket is needed.
- Minimum billing interval: Some tickets get opened and closed quickly. There is always transition time between tickets. The work has value and we need to set a minimum billing amount per ticket, never less than 30 minutes.
- Timeliness: Invoice at least monthly, preferably at time of service for emergencies. Clients quickly forget the value provided. What am I willing to pay when the repairman shows up in the middle of a cold Nebraska winter night to get my furnace working? A lot! How do I feel if I get that bill a month later, sitting in my cozy house, along with my regular bills? Accounting departments are great at disputing bills and are resistant to discuss value.
- Maturity – Too much turnover kills productivity and efficiency, leading to many write offs and poor client experience. Both kill realization. Hire and keep great talent ... culture and competitive wages are key.
- Deployment: Are we getting the right person to the right job? Did we have to deploy an over-qualified, costly engineer to a simple task? Did we send an underqualified engineer to perform a task, creating a lot of unbillable hours?
- Pressure: Are chargeable hours being reported accurately? Pressure on techs to charge hours can create chargeable hours (utilization) that cannot be billed. This will cycle as discussions move from pressure to bill and pressure to stay busy.
- Seasonality: Keeping people busy in a slow period and adding value to clients, without billing all the hours may be the right thing to do in the short run.
- Reuse and Rework: There is a great opportunity to improve our efficiency and billing by reusing previous work or leveraging experience gained on earlier engagements. Who knows where that information is kept? Conversely, engineers do not like learning during or after a hard-fought battle that their time cannot all be billed because the same issue had been solved before by a different engineer.
- Confidence – Each person that touches billing and our clients must have supreme confidence in the value of our services work and be willing to share that with clients. Project billing with multiple engineers and project managers can add up quickly and may need to be defended with a client. Likewise, a 10-minute phone call to fix a problem is worth the 30 minute ($75) bill as it keeps the client’s employee productive.
- Grit – Clients don’t like surprises and big services bills. We should expect some of these calls and have the ability and determination to communicate our value and not give away our employees’ valuable time.
- Leverage – Service Leadership, Inc. did a study and found that MSP’s that used a Master MSP, Continuum, significantly outperformed those firms that do not. They concluded that while these MSP’s spent more on outside services, they got more done with fewer people, took advantage of global labor economics, moved their people and utilization risk to Continuum, focused more on high-value offerings, and made their labor costs more variable. All these things highlight the power of high realization rates.
- Weekly review of billing vs charged hours gives us great insight into current challenges in our business of turning time into money.
- Identify one key area of proficiency or process maturity and develop an offering with realization greater than 1. Repeat.
R2 = Receivable Collection
Dollars Collected divided by the Dollars Billed
We need to convert our receivables to cash quickly to help our cashflow and to maximize the percent of our invoices that are collected fully. Many of the issues in realization come back to haunt us in collection if we don’t address them before an invoice gets created. Setting expectations, timely billing, confidence, and grit each impact our ability to collect on the work we have performed.
- Review short-payments and write-offs over the past 6 months. Are there issues that could be addressed before invoicing? Are there consistent issues or personnel causing write-offs? Do you need to speak to a few clients or a service manager to understand the root cause?
- Review incentive plans and consider aligning pay to collected revenue not invoiced revenue if there is a significant gap.
PURR as a Management Tool
Our technical talent wants to understand how to be successful. Hopefully, by having regular, meaningful conversations with each of them using the underlying factors of PURR, we can help them understand the why and the how of becoming top contributors. The danger of focusing primarily on utilization, as I was once prone to do, is to miss some great coachable moments.
Our teams are made of people, not machines. Keep and take care of those who make their job and our job look easy. Move the others forward toward becoming more successful in our companies or help them to find that they may be better suited for different role here or somewhere else.
I met a great operating executive who kept a 3X multiple challenge in front of every engineer and consultant. If you made that bar 3 quarters in a row, you got a pay raise. Of course, that pay raise changed your multiple to below 3 … and the opportunity for an increase was 3 good quarters ahead of you again.
So how can you do that? Raise your value and billing rate to clients, maximize your utilization (work extra hours if needed), maximize your realization (leverage the billing on the hours you do charge) and finally, do great work so the client pays the bill. You can go as high and far as you are willing and able. His team was some of the earliest and highest paid cloud consultants in the Northwest U.S. and they haven’t stood still.
We spend a lot of time as leaders doing the hard work of understanding our business environment and developing strategies to drive success and reduce business risks in our fast-changing industry. We see more opportunity than ever before as digital transformation accelerates. We must turn strategy into action, or it is worthless.
Action in our service business comes down to people. We want to get our team pointed in the same direction so we can maximize the return on our people’s valuable time and talent. When we do that, we are in position to attract, reward and retain the people that fit our business. Most service management and performance issues can be more clearly understood by looking at the factors in PURR. As we often find out, the devil is in the detail and execution happens one person at a time.
- Build a spreadsheet with every billable employee in the first column and each of the factors as a column. Fill out the spreadsheet each week from your PSA tool. Totaling the rows for individual performance and the columns for company performance.
Dig into each factor using some of the suggestions above. Discuss your findings, communicate expectations and revelations with each of your people weekly. It won’t be easy at first but soon you will have a fine-tuned services machine that really PURRs.
Digital transformation is impacting each of us, our businesses and our clients’ businesses. The need for our services has never been greater and most of the SMB market remains unserved or underserved by good managed service providers.
Leveraging artificial intelligence, business intelligence and a global workforce to meet the skills gap and growing security threats through a company like Continuum creates great leverage for your team. Moving operational risk at a fixed monthly cost to Continuum is smart. Focus on leading your people well and maximizing your return on that talent will help you be one of the winners in our exciting industry.
Interested in learning how the right RMM solution can increase profitability? Check out our RMM Savings Calculator, designed to give you a direct line of sight into the savings you could be experiencing, using Continuum Command.