4 Approaches for MSPs to Manage Hidden Costs That Erode Profitability

In the traditional IT channel model, business costs are fairly straightforward. Resellers source products from vendors and distributors, mark them up and sell them to end customers. Additional services, such as troubleshooting and maintenance, incur extra fees to cover the added expense.

But in the managed services model, calculating costs is less straightforward. Due to contracts and SLAs, MSPs often have to project costs and profit margins as much as two or three years down the road. Of course costs and pricing are different for every company, but it’s important to remember that one miscalculation here and another one there can result in margins so thin that it’s hard to stay in business. MSPs must carefully balance the fixed and variable costs of doing business, the ratio of staff to customer work load and keep an eye on SLAs and customer profitability.

That’s why MSPs – especially if you’re new to the business model – must not ignore hidden costs that impact profitability. They can trip you up in the future.

Unavoidable Costs

Understanding hidden costs, however, doesn’t necessarily mean eliminating them. Some costs are unavoidable, incurred in the course of doing business. That includes time spent on recruiting talent or finding new business; turning on the lights, the heat and the AC; running technology platforms; and time and effort involved in delivering services.

So, you really can’t approach these with ax in hand. Instead, you need to make sure you know where those costs are, why they exist and account for them appropriately. Properly estimating and managing these costs will ensure correct service pricing that will both ensure you can properly protect your customer and your bottom line.

Going Deep

Still, if you dig deep enough, you’re bound to find costs you can eliminate or minimize. For instance, how long it takes to access information can have a real impact on business expenses. If you’ve made manuals and other technical information easy to access through an internal portal, that’s less time your engineers spend on finding the information they need when they need it.

The same goes for documenting processes and procedures. Companies that neglect documentation condemn their staff to a lot of wasted time in figuring out how to complete a task. If, instead, they can consult a document that explains everything step-by-step, they could save precious hours to get it done.

Staff Utilization

But what if the problem isn’t wasting time on avoidable tasks but on doing nothing? If employees have too much downtime because your current number of customer accounts isn’t enough to keep them busy at all times, you’re paying for underutilized staff.

Staff utilization is a delicate balance. You don’t want to be stretched so thin that your customer service starts to suffer, but you want to have enough work to keep employees busy when on the clock.

This is an area where technology can make a difference. If you can capture and analyze data on how much time employees spend on tasks that directly touch end customers, you can better price your services and staff up appropriately. Tracking this data is possible by running a PSA (professional services automation) platform that records staff utilization and helps manage employee schedules.

Costly Customers

In uncovering hidden costs, an MSP may realize that keeping certain customers costs more than the revenue they generate. This could be a result of project creep, outdated systems a customer refuses to replace with newer technology, or mismanagement of systems by giving access privileges to users who shouldn’t have them.

If your engineers keep getting sidetracked to resolve these issues, it won’t take much before a customer starts to cost you money. In such cases, you must renegotiate the customer’s contract, persuade them to make the necessary investments, and be ready to walk away if they refuse.

It’s impossible to run a business without incurring expenses. But having a thorough understanding of those expenses, and keeping hidden costs under control, will make you a better MSP.

To learn more about understanding hidden costs and practical advice on running your MSP business, download our free guide, MSP Matters: A Roadmap to Enduring Business Success. This guide and APC’s managed service providers program are designed to help you succeed in your competitive market by providing your customers with Certainty in a Connected World. This proven strategy helps you provide enduring value to differentiate your offerings and grow your business.