It goes without saying that one of the primary objectives for every MSSP is delivering superior security and protection for their clients, regardless of the specific security objectives and challenges that might characterize those clients. However, depending on a variety of customer factors (regulatory requirements, existing infrastructure, multiple locations, number of employees, internal policies and procedures, etc.), providing security services to a particular client may be much more difficult and costly than usual...and that can lead to big problems.
That’s because another primary MSSP objective is to be profitable—obviously, it doesn’t really help anyone if you provide superb security services to your clients but ultimately go out business in the process! To ensure sustained profitability, you must be able to closely track and monitor the metrics and key performance indicators (KPIs) that define successful managed services providers, according to a new report from 451 Research. While the paper specifically references MSPs, its findings and service-centric insights are also relevant to MSSPs.
Entitled “MSP Metrics for Profitable and Sustained Growth,” the report explains how MSPs can “develop a disciplined focus on key measurements to track their business more accurately and make timely course corrections.” It emphasizes three categories of metrics—Financial, Account Management and Service—which every managed services provider should review when evaluating the efficiency, profitability, and viability of its operations.
In the abridged definitions below (excerpted from the report), there are several metrics and KPIs that are particularly germane to both MSPs and MSSPs:
1. Revenue sources as a percentage of revenue breakdown: Obviously, service providers should expect a majority of their revenue to come from recurring services. This is key as not all revenue streams are equal—for example, successful MSPs generate 45-55% gross margins from managed services vs. the typical 10-20% gross margins from product revenue.
2. Gross margins per revenue source and service offering: Because not all revenue streams are equal, the gross margins of each revenue stream should be tracked to ensure that services are delivering as expected. Regardless of how a managed services provider may price its services, if it does not make enough margins it will ultimately go out of business.
3. Cost of goods & services sold (COGS): Followed closely by virtually all businesses, this metric is even more vital for managed services providers. COGS is the sum of the labor, material, service, and delivery costs directly incurred delivering services, plus infrastructure, software, travel, training, and professional service expenses.
Account Management Metrics
4. Customer effective rate (CER): This equals the total amount invoiced, divided by the number of hours logged to a customer, yielding a dollars-per-hour amount. CER shows how a customer is using engineers’ time vs. what they are paying for; it helps service providers see how many hours they spend each month on customers that are actually generating low profit.
5. Customer contribution: Service providers should understand how valuable each client is as a whole to the overall organization. Customer contribution is calculated by taking the overall revenue for each customer and subtracting the cost of goods and services sold to that customer; this demonstrates how much revenue is being earned per customer.
6. Customer distribution: Service providers that have a small number of customers that account for a large percentage of the provider’s overall revenue are at high risk. If one or more large customers experience a downturn, the provider is vulnerable to a significant revenue loss; often unexpected, this can be a substantial hit to their bottom line, putting a strain on the business.
7. Client churn rate: Many service providers track sales, wins, and new revenue but fail to track lost business. This includes customer business that has left the books as well as revenue lost from customer downgrades. Increasing client churn rate may indicate customer dissatisfaction, poor service delivery, increased competition or outdated service offerings.
8. Resource utilization: Resource utilization is the percentage of an employees’ billable hours to non-billable hours. This metric provides an indicator of how efficiently time is being used; idle resources are like inventory sitting on the shelf, costing the service provider money in the form of salaries and other related personnel costs.
9. SLA compliance: This shows how well the service provider meets customer SLA requirements and what, if any, penalties were incurred as a result of missing SLAs. Low compliance rates may indicate that SLAs are being established at a threshold higher than the business can meet or that the provider’s processes and procedures are insufficient.
Regardless of the metrics used, the report concludes by emphasizing that managed services providers “must ensure that the data is accurate, meaningful, timely and actionable. However, more important than just tracking various metrics or KPIs is the discipline...to monitor them, hold people accountable, and make timely, educated decisions regarding the business.”
Get Complete 451 Research Report
Get It Now: For a more detailed and unabridged analysis of the importance of managed services provider metrics, we encourage you to download the complete 451 Research report here.