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Dynamic Duo and Word Problems

In early October of 2010, Coreconnex's Frank Coker and Service Leadership Inc.'s Paul Dippell turned up at the Tigerpaw User Conference in Dallas and raised some eyebrows with some pretty hefty challenges to MSPs on how to manage their finances from revenue to profit to reinvestment.

Here are two of their most salient points. Accordingly MSPs should do the math.

The Formula: Monthly Billables/Payroll Expenses = good finance.

Take your monthly billable service revenue, divide it by your payroll and if you don't have a multiple of at least 2.5, you need to drum up more business, adjust pricing or streamline service level agreements. According to Paul Dippell, a good number of service providers, if they plugged in this formula are or would be at about a 1.9 or 2.0, which is essentially breaking even because benefits, training, marketing and service management aren't even in this formula.

The Formula: Price - cost = the difference between success and mediocrity.

Billable revenue, should translate to profit after all the bills are paid, especially if, as is the case with most IT Service shops, the cash position or line of credit for continuing operations is nominal or only for emergency use.

This brings us to price, which can be determined by local market for your products and services of course minus the cost determined by vendor materials: Then you take the amount of man hours it would take to deploy the services and subtract the cost of the hourly rate not to the customer, but to you for your manpower. If you're charging the customer a flat fee, say once a month, all of those internal costs should be rolled into what you charge the end customer.

You're not passing along the costs, but you're being realistic based on how many end clients you service.

If you're discouraged by these "word problems," you should remember as a small IT service provider, you're not Infosys and you should only compare your financial performance to competitors who are in the same vertical or have similar business models. At some point though, if you'd like to grow to be an Infosys or similar company, it pays, literally and figuratively, to do the math.

Posted by Jabulani Leffall on October 18, 2010