Rex Frank the founder and CEO of Sea-Level Operations is here to talk about the four profitability levers a service desk manager can pull to affect gross service margin either up or down.
Rex has been a service manager, a CTO, a VP of managed services, and a director of operations for various MSPs over the last 20 years. He has helped grow these companies and teams using a keen focus on some of the metrics we’ll be diving into today.
But first, the news from Richard Tubb and Karl Palachuk.
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What’s Going On
[01:31] ConnectWise has acquired HTG. This marriage has been a long time coming. HTG is a peer group run by members.
[02:48] Richard and Karl were both early HTG members. It wasn’t a hard rule that you had to be a ConnectWise user to join HTG, but it was certainly encouraged.
[03:54] HTG is the premier league of peer groups. Top industry MSPs are part of HTG. Vendors show up because these members spend money and invest in architecture.
[05:02] ConnectWise and HTG will be targeting larger MSPs. Though there are still small shops who are members of HTG—no one has been kicked out.
[05:47] HTG has gone through periods of expanding and setting limits. They’ve grown, stabilized, and grown more.
[06:50] HTG was a great thing for Richard’s business.
[07:04] There won’t be much change for current members because of the acquisition. For new members, it’s a move to get them into ConnectWise.
[07:36] The growing ConnectWise base is also a growing base of potential members for HTG. This can only be a good thing for ConnectWise members.
[08:34] The only real effect on other vendors is that some HTG members who are not ConnectWise users may leave the group.
[09:22] ConnectWise IT Nation and HTG WorldWide Summit will be coordinated moving forward.
[09:59] Datto has combined DattoCon with Autotask Community Live to create what they’re calling the largest MSP-centric event. That title used to belong to IT Nation.
[10:27] Hard to say which event will be biggest.
Interview with Rex Frank: The 4 Profitability Levers a Service Desk Manager Can Control
[16:01] The first lever is set when you’re deciding how much to pay your engineers. The second lever is your billing rate. The third lever is billable utilization. The fourth lever is the flat fee agreement ratio or agreement efficiency ratio.
[16:48] The fourth lever is the magic lever that can really set your profitability.
[17:03] MSPs are used to managing the first three levers.
[17:18] Every engineer has a bunch of non-billable time for things like sick days, vacation days, travel time, meetings, and so on. Altogether, it amounts to about 24% of their time.
[17:33] Payroll wrap is unaccounted for non-billable time that you put on your day to bring your timesheet up to eight hours. It should only amount to about 30 minutes a day. In some companies, Rex has seen payroll wrap of 4 and 5 hours per day. That’s crazy and not sustainable.
[17:57] A lot of service desk managers make a mistake with utilization.
[19:12] You can make a chart with the first three levers that tells you how much utilization you need.
[20:30] Being able to bill out your engineers at three times their pay is very doable yet many companies don’t achieve this. Inefficiency and a lack of focus on managing the business with financial metrics are the culprits.
[20:54] The time and materials model versus flat fee contracts.
[21:31] The fourth lever is an agreement efficiency ratio. Rex looks for a 1.25 efficiency ratio, meaning you’re doing $800 of work to bill $1,000.
[23:09] Factoring this ratio against billing rates can put you in the best in class when it comes to business margins.
[23:22] Getting a good efficiency ratio comes down to people, process, and technology.
[24:09] Margins are better with professional services. The work is scoped.
[24:43] Managed services can be even better margin because you leverage standardized products, tools, and processes. You can also leverage lower-cost engineers to do the work.
[25:31] Use the agreement ratio to stack your agreements from best to worst efficiency. Then examine the worst ones for things you’re doing wrong. Why are they under water?
[27:10] If you aren’t managing the fourth lever, you might be doing way more work than you’re getting paid for.
[27:58] Before hiring another engineer, fire bad clients—the ones where your efficiency ratio is the worst—to get those hours back.
[29:00] Usually the client doesn’t want to lose you, and they end up paying more to remain a client.
[30:10] Rex’s number one piece of advice: Know your numbers and manage to them.
[30:25] In a couple of days, we’ll be publishing a companion blog post from Rex Frank that digs even deeper into the math on these 4 levers, and in particular the fourth one that we’ve been talking about: the agreement efficiency ratio.
Links from this episode
What’s Going On
- ConnectWise Acquires HTG
- DattoCon Combines with Autotask Community Live to Create the World’s Largest MSP-Centric Event
The Hosts
- Karl Palachuk: Small Biz Thoughts
- Karl Palachuk (Twitter)
- Richard Tubb: Tubblog
- Richard Tubb (Twitter)
Interview
- Sea-Level Operations (Now part of Pax8)
- Rex Frank (LinkedIn)
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