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Managed services: The ebb and flow of client profitability

In a recent conversation with SearchITChannel, Michael Maddox, president of ASK, discussed issues that managed service providers (MSPs) can face in regards to client agreements. One area he addressed was client profitability, which he said some MSPs lack a clear picture of.

“The No. 1 mistake I see MSPs making is not understanding or having enough tools or metrics to truly understand their revenue and costs from a managed services client,” Maddox said. These MSPs will only evaluate their monthly, quarterly or yearly revenue numbers, with some companies going a step further and looking at their direct costs, such as what they owe Continuum or Kaseya, he said.

MSPs should be evaluating their internal costs, as well. For example, the MSP’s staff is “the biggest cost factor,” Maddox said. “Unless you break it down … to that level, you don’t really know if you have a profitable agreement or not.”

Sometimes determining whether a client agreement is worth keeping can be difficult. During the first several months, especially, when clients tend to unload their IT baggage on MSPs, clients may be only marginally profitable, he said.

Other MSPs can attest to this. “When we sign up a new customer … we normally get bombarded with all these small issues that they’ve had for years, that they just simply didn’t feel were important enough to pay hourly to have someone solve,” said Ryan Giles, partner at AGJ Systems & Networks, an MSP based in Gulfport, Miss. The relationship is profitable during this period, but “not by much,” he said.

Maddox said he expects a period of six months on average before the customer has stabilized and becomes profitable, but “every customer varies.” “Some customers meet our metrics, fall within our … profitability range right out of the gate. Some fall well below,” he said.

Additionally, some clients look like they will fall within the target range, but things change. “One of our guys said, ‘When you take over an environment that’s been neglected, you’re going to kick up some dust when you start fixing things, and that’s going to create some problems,'” Maddox said. As a result, those problems create more work, which makes the customer less profitable.

This makes it all the more important to vet your customers before signing them up.

With the right metrics and tools in place, Maddox pointed out that MSPs can sometimes discover that the relationship is too profitable, which he believes MSPs have a duty to correct. “That may [sound] crazy, but a lot of what we do is esoteric,” Maddox said. “Most of the work that goes into managing a managed service client is proactive, and so [the clients] don’t know about it. It’s done behind the scenes. It’s done in the middle of the night. It’s done without them calling in.”

“If you’re charging them at a level that’s well beyond what your cost factors would dictate or would be fair, you need to correct that, because it’s unfair,” he said.

But Maddox reminded MSPs that they have to look at client profitability from a long-term perspective. “As long as you see the progression toward stabilization and profitability,” MSPs can let a client be unprofitable, “or at least below your metric,” for several months, he said.

“Our best customers want us to be profitable and … successful. If they have that mindset and we likewise feel that way about them and we’re both in it for the long term, you can ride out a period of [unprofitability].”