How Successful Businesses Scale (MSP Version - Based on DATA)

Probably the biggest surprise to me is how many owners are out there that are quarter in and quarter out content with barely breaking even or losing money. And when I say content, I don't mean that they show up and say awesome, woohoo. We broke even again. But I see it all the time in peer groups and I see it all the time with clients we work with. And so what I mean by content is at the end of the day, are they willing to do what you need to do to fix it?

Excited to have you on and talk about what you guys do, the data you uncover. This is coming at the end of all kinds of deep dive discussions I've been having with folks about choosing the right KPIs. What are the metrics that we should look at and what are the actions we should take based on those? I know you've got a whole business around them and we were just chatting a little bit about the idea Connectwise has of the different modes with startup Balance Builder, Empire Builder, Value Builder. What I'm curious about is I talked to so many folks where they're trying to figure out where to focus. Does where they focus change based on which of those stages or modes they're.

Sure it definitely can. Thanks for having me on, Scott. By the way, within each mode, with the exception probably of startups are exactly that. They're startups. Your goal is to try to get your business off the ground, get some revenue in the door and have some paying customers and that kind of thing. But once you get out of the startup mode and you get into Balance Builder, Value Builder, Empire Builder, whatever mode you select, there's no right or wrong mode. The mode is your mentality as an owner and what you're trying to really achieve as an owner. And within each mode though, there's going to be a different level of performance. So if I'm a balance builder and my goal is to build a business, that's a lifestyle business and I want to really enjoy my life and have happy customers and all of those things. I want to run my business in a way that's going to optimize quality results and that's going to lead to my ability to not be in my business 80 hours a week, I'm also going to want to make sure that my business is sufficiently profitable that it's going to deliver the results I need to sustain my lifestyle, whatever that size is. And I think there's a misconception that a lifestyle business has to be a small business. I worked for an owner in a Past life who owned a 300 employee $60 million business. And if she was filling out Moats questionnaire, pretty confident she would be a balance builder. And she got calls all the time from private equity. And we want to see you invest so you can double the size of your business in the next three years. And her answer would be why would I want to do that? That doesn't sound very enjoyable. And so you can be a larger business or a small business and but within each mode you want to optimize your profitability and you want to optimize your operational maturity level so that you're delivering the best possible results. And whatever mode you're trying to be in or whatever mode you are in that you're as good as you possibly can be in that, we've referred to that often as best in mode. We don't technically have that classified or defined yet. But basically if I want to be a value builder, be the best, most profitable value builder you can be. It'll help you be a value builder for longer and be more successful and all of that.

That's interesting. It reminds me back in my consulting days, I actually had a client that they were a billion dollar lifestyle business. The business, it had all kinds of opportunities to grow, but it did have a single owner and that single owner was. They were good with it.

Yeah, there's molds are, they're the headspace of the owner. There's not a right or wrong. There's again, you don't want to stay in startup. I think everybody would agree that's not a great place to be for long. But every business is in startup by definition for a period of time. But you can be a balance builder forever. You can be a value builder forever. Oftentimes balance builder businesses get passed on generationally. You'll see they don't want to take on a lot of risk, they don't want to bet the farm and but they do need to be successful, they need to be profitable. They need to do the things that build quality leadership teams, legacy team, the ability to transfer and build legacy. So you've got to do the right things in each mode.

Yeah, that makes sense. So we're, you mentioned profitability and when we first spoke and we were talking KPIs, you highlighted that you guys have found that when is incredibly important and yet it seemed like it's not focused on a lot or maybe enough by some businesses because you talked about some of the different things you can do, whether it's projects and things of that nature. That if you've got a managed service provider business, you may not be thinking of as much or you may be concerned that, my gosh, this isn't recurring revenue. Can you talk a little bit about what are the more surprising things you've seen that maybe people aren't aware of that go into helping you be a best in class, best in mode business?

Huh? That's a great question. What has surprised me? There's not much that surprises me anymore, but probably the biggest surprise to me is how many owners are out there that are quarter in and quarter out content with barely breaking even or losing money. And when I say content, I don't mean that they show up and say awesome, woohoo, we broke even again. But I see it all the time in peer groups and I see it all the time with clients we work with. And so what I mean by content is at the end of the day, are they willing to do what you need to do to fix it? And the answer is oftentimes no. So we measure operational maturity level on a scale of 1 to 5 and what we find is our bottom quartile companies and most of which are losing money. Those companies tend to be an OML2. 8 or 2, 9 or so or lower and many of them will live there for years. It's miserable and it doesn't have to be that way. But ultimately as an owner you've got to make a choice and that's no different than in your personal life. If you decide to get in shape or run a marathon or do something, you're going to have to give up some things that have been habits of yours and make some changes in your lifestyle to be able to achieve your goal. And so I've been surprised at how many owners are tolerant of not. I've also been surprised pleasantly of the opposite. I've worked with a lot of business owners who, who will build their business. And in our industry there's a lot of technologists who own MSPs, entrepreneurial technologists. But at the end of the day they got into the business because they were good at tech and it's been really fun working with a lot of them and seeing them really dig in and figure out what to fix in their business. And looking back six months or a year later and seeing the tremendous results that they're getting, it's really enjoyable and amazing to see. Oftentimes we had a company who in one of our peer groups who came in this quarter to the meeting and met in May and had made a Remarkable jump in profitability. Amazing. And when we talked to them as to what happened, they said they had sick of it. In November, at our peer group meeting, they looked at their results compared to the rest of the group, but also compared to best in class, which is what we benchmark. Do they top quartile profitability? And they said, enough, we're working too hard. Every quarter we show up here and we're mediocre, we're going to fix it. And they spent all of December fixing it. They made a bunch of tough decisions on staffing, pricing, customers, and their Q1 numbers were amazing. And I'm pretty confident based on how they fixed it, Q2 is going to be great too. So there's not much anymore that surprises me seeing hundreds of different scenarios. But those would be two things that do both the good and the bad.

Are there a few? So I know profitability is one and I know you've got an entire like how to double click through all these different KPIs to make changes. Do you ever get questions like I know in the music world, like I would hear people like, do you have just a couple, like a handful of things to do? Do you have a favorite top? I don't say top five or six KPIs that you can share or. And I'm using KPIs as a proxy for like where do we focus but. And how do we make it measurable?

Yeah, Peter, what's the one secret to fixing this thing? The answer is there's no one secret. There's a lot of littles that if you turn the screwdriver quarter turn here, a quarter turn there, that over time will make a difference in your business. So from a KPI standpoint, a couple things that I would highlight. Number one is at service leadership, we focus first and foremost on gross margin. So when we're doing our comparisons, we're looking at every quarter the most profitable 25% of companies in each business model and work. Those are our best in class KPIs. And when I'm talking to providers, when I in person, oftentimes in peer group meetings or at IT nation events, what a lot of providers who are not really dialed in on their metrics talk to me about is revenue that we've been adding. We just added a bunch of customers. We've been growing revenue really well and our managed service revenue is up and I'll hear a lot of those kind of things. Revenue is interesting, but not really what really drives profitability is gross margin. First and foremost, Every provider out there needs to know what their product gross margin is and what their service gross margin is at a high level. Current best in class service gross margin is, let's just say for sake of discussion, 50%. Okay. Within that though I'm going to want to know. And that and service gross margins, the most important for an msp, just given the nature of the business majority of revenue being service. So I'm going to want to look at that and say, okay, so I know my service gross margin and where it's at, but what about the subcategories? How am I doing on projects versus managed services and how am I doing if I still do any break fix billables? How are those? What's the profitability? So really by going more granular, it helps me to understand where I'm doing things right and I want to keep doing them right, but also where I need to tweak things. So if I need to improve, where are my opportunities to improve? And the more granular I can get on that, the better the guidance and the better the change, the more effective the changes I can make in the business. The second thing I would say is for every MSP out there, understand your service multiple of wages number and what that KPI is. That's a service leadership KPI that we show right on the dashboard when you log into our system and what the equation is. For every dollar of service wages, I should be generating X dollars of service revenue. So current we've historically taught target 2.5. So if I'm spending a million dollars on service wages, I should be generating 2.5 million of service revenue today. Best in class is up more like 2.9, 2.89 to be exact. And they're continuing to get better with hyper automation that's going to continue to push up. We'll see that break three pretty soon. We'll see three and a quarter, three and a half in a few years. Bottom quartile folks tend to be sub 2. So they're generating less than $2 for every dollar of service wages. So why is that so important? When I look at somebody's financials for the first time, the first thing I look at is their adjusted ebitda. The second thing I look at is their service multiple wages. And the reason being is it's not going to answer questions for me, but it's going to point me in certain directions. I'm going to know if they're charging, should I be looking at what they're charging for their services? Typically if you have a low service, multiple wages, you're undercharging for your services. Second, it's going to point me in the direction of staffing. Are they overstaffed? Are they staffing too many level 2 and 3 techs relative to level 1 techs? Are they paying too much for their techs? So I'm going to have a better understanding of that. Third thing is, are they efficient enough? Are they automating where they can automate? And that ties into them being overstaffed. So it's not going to necessarily tell me. If I look at it and say they're a service multiple of wages of 1.8, I'm not going to necessarily know right away that they're overstaffed or that they're charging too little. It's probably a combination, all of the above. But I'm at least going to know that they have an issue and I'm at least going to know where to start looking.

Yeah, it sounds like it. It gets you exactly. Oh, here's a thing I need to double click.

Yeah. It's also a really good metric for the service team managers to be held to. One of the rules of life and gravity and physics in this industry is service managers always want more bodies. How do you know you need more bodies? I don't think I've ever heard a case of a service manager going to an owner or CEO and saying, hey, I think my team's a little overstaffed. I think we need to shave one or two FTEs out of our team and we'll be more productive. You never hear that. Right. How do you know? And what do you use as an objective barometer of whether you, whether you're staffing? Right. So I really like that KPI. I think it tells a lot quickly about an msp.

That makes a lot of sense. And yeah, I've rarely heard we should cut our staff from. In any venue, a manager with a team. Do you find when you are surfacing these, are there forms of pushback? Oh, no, we don't want to pay attention to that. We're doing. We're going to focus on this other area of the business. Do you hear patterns come up at all?

Oh, sure. Commonly it's on pricing. There's no way we could charge that what you're saying we should charge in our market. The answer is there are people who are. In every market that we benchmark, there are providers charging more, sometimes 50, 60% more than other providers are charging. So we had a lot of pushback in terms of that, go to market strategies where we measure operational maturity level. You'll hear there's some religious discussions. You'll hear like higher OML companies charge for pre sales assessments and lower operational maturity level companies do not. That's one that generates a lot of pushback. There's a lot of companies that feel that they shouldn't be doing that. It's an impediment to sales. And why would I put a barrier in the place of sales? There's a lot of reasons why it's best business practice to do it. But sure, you hear pushback on everything possible. Probably the most frequent pushback that we hear is one that we tackled this year in our annual profitability report, which just came out last week. We have a slide in there that shows the breakdown by revenue size of best in class, median and bottom quartile. And the reason that we ran that data and put that slide together was we continue to hear that. And it's an excuse, it's a coping mechanism for folks that are bottom quartile typically, but sometimes median folks as well. That I'm X size. I can't be best in class because my size of X has too little salespeople or too many salespeople or doesn't have the scale or has too much back office or whatever it is. Everybody who's. When we hear that every size range who thinks that other sizes have it better, we also hear big city folks tend to think the rural folks have it better and vice versa. And so the data we showed by revenue tranche is sub million 1 to 3 million, 3 to 6, 6 to 10, 10 to 15 million, 15 to 25 and 25 to 50 and greater than 50 million in every size. At least 22% were best in class, top quartile, at least 22% were bottom quartile. So there's a little bit of difference between the sizes. But generally speaking, no matter what size you are, you can be best in class or you can be bottom quartile. It's really up to you.

That resonates. It's a thing I've seen again across industries as well. It's. We would call it the special snowflake syndrome. Oh, there's a practice that works, but it can't work here because occasionally that's true, but far less than people usually believe.

Look, I ran an MSP for 11 years prior to joining Service Leadership. And for nine of those years we were members of a service leadership peer group. And almost 10 years. And Paul Dipple, who was my Predecessor who founded and ran Service leadership until he retired a couple years ago. Paul and I used to frequently spar about some of these different concepts. And I look back and think, how stupid was I? The data's the data. You can fight the data all you want, but at the end of the day, you're only hurting yourself. Our job, we're not going to go in and make those decisions at an msp. The MSP has to make those decisions. They have to be the ones who decide to change how they do business. Our job is to tell them what the data says and tell them what the best way to do it is. But ultimately it's their choice. Right? And so you can choose to do things in whatever manner you choose to do it. It's one of the great things with owning a business. But if you want to be successful, there's better ways to do things and worse ways to do things.

I'm thinking of so many conversations I've had over the years and yeah, ultimately it comes down to does the founder, does the CEO want to make the changes? Do they want to change how they do things to make those changes, and do they believe they can? That seems to get in the way of a lot of people, yeah.

And I've talked to CEOs who, they know the data. They know, for example, what they should be spending on their team, but they've chosen to do a more generous, let's say, profit sharing arrangement, or they have a more generous retirement plan for their executive team, or they're doing other things, but they know full well that they're doing those things and they're making a conscious choice on what they're doing, I don't love that necessarily. I still want to see everybody perform at a top level. But, but at least if you know what you're deciding and you're making an informed decision about it, I'm much more comfortable with that. So my advice to every, every owner out there is at a minimum, you should be benchmarking. You should know exactly what your data tells you. It doesn't mean nobody's going to come through your laptop and grab you by the neck and force you to make decisions you don't want to make. It's going to be up to you, but at least know what the data is telling you.

That aligns very much with our beliefs and what we work on with people. You mentioned you got into this after running an msp. I'm curious, are there differences running an organization, MSP from what you do now? Are there similarities how did your day to day change as a leader? Because I feel like there is some insight there into what is really different about running an msp.

So I'll put it this way. Is it different being President of an 85 employee business within a 300 employee company versus running a business unit within a 3500 employee global company? The answer is yes. Yes, it's a significantly different business. And when you're running an msp, first of all, it's a difficult business. All business is tough. But running an MSP is, it's almost a minute to minute, if not hour by hour pivot that you're doing throughout the course of your day. You go in and all of us have this happen in our work days, but you especially have it when you run an msp. You think you've got your day planned out and you have a good idea of what it's going to look like and then a customer has a massive outage or you lose a couple of key employees and have to figure out how to backfill or whatever happens. If you're going to run an msp, it's not for the faint of heart. You better be somebody who is pretty resilient, able to work through challenges as they come up real time. I think almost employees who are really successful at msps, especially leaders at msps. Adrenaline junkie is not the right word, but maybe it is. You have to be somebody who really thrives to a great degree on the energy that comes with rapid change and challenges that change often. And so I loved it. I loved the team we had, I loved the customers that we worked with. I was a huge believer in the mission of what we did for our customer base. And I found running an MSP to be an extremely rewarding exercise. It was just, you look back with nostalgia and rose colored glasses a little bit. But it was a great run. We turned around a failing MSP and With less than 20 employees, we sold it a couple years later to a larger copier dealer, a family owned business. And we grew it. At that time I think we had 32 employees when we sold it, we grew it. When I left we had 85 employees and we had grown it from 2 million of revenue when I got there to about 17 million of revenue. And so it was a great 11 year run. We achieved things that I never would have thought we could have achieved. And the team, and probably most importantly, we built a really great team. There's the leadership team that's there today was a team largely that was around when I was there early on. And we grew together and we grew a lot of employees into not only successful careers at our business, but successful careers at a lot of other businesses. Managed service providers are a tremendous launching pad for employees to come in, both technical and sales employees, and build up their skill set and go out and do great things out in the world. So that was a really great run here. The bigger challenge at Service Leadership is how do we do what we do at a worldwide scale. We're not doing consulting. We benchmark using Service Leadership Index. We issue two annual reports a year, our COMP report in March and our annual profitability report that just came out. And we have Sleek, which is our online operational maturity level assessment and coaching tool. So our mission under ConnectWise is don't do consulting, don't do individual engagements. Get out to the masses. So get out to events, get on webinars and podcasts like this and engage with the partner community as much as possible. And the reason is we want to lift as many boats as possible. And so the bigger challenge I have here is just figuring out how to do this at scale and how to really take the time with peer group communities, get in, do one on one. My, my colleagues, Rob Bufano and Aaron Boone, we travel all over the country, in some cases all over the world, to be in front of different peer group communities. We go to events all over. And the purpose is to help providers get better at scale, which is, as somebody who ran an msp, that's a pretty cool mission. It's great to be able to work with thousands of MSPs a year and be able to see them improve and see a lot of them take on the concepts that we're teaching and the data we're providing and run with it, and not only make their life better and their future better as an owner, but make the feature and the opportunities for their employees better. So that's really cool, but radically different than running an msp.

There are so many good bits in there. I do want to go back to that journey that you mentioned, because that's an interesting journey. You said that MSP, when you took it over, was it 2 million 2.2.

In the prior 12 months?

2.2 to 17 million. That's a transformation because the business at 10 million doesn't look like it did at 2 or very rarely. No, I don't think they. It's almost like a different business most of the times I've seen. What were some of the changes that you recall that helped made the difference, some of the challenges you found. I'd love to hear more about that journey.

Yeah, it's interesting. You're spot on. You. We typically see plus or minus 10 million MSPs, really have to reinvent a lot of things that have gotten them to that point. And if they don't, they're going to struggle to get to the next plateau, which will. The next tier up we typically see is around that 20 to 25 million range. And so actually in our data, what we saw was slightly lower, best in class in the 6 to 10 and 10 to $15 million revenue range. And the reason is largely because of some of those reinventions and investments going on. What you have to do as you grow is recognize the stage you're in and what got you there, including in many cases some of the people, is not going to be what gets you to the next level. And so you're going to have to make some changes and you're really going to have to make some changes as an owner or CEO, because at that 2 million size owners are selling. They're out there. They are the salesperson, they're the spokesperson. They're going out and doing QBRs oftentimes in an MSP. Because most MSP owners started out technical. They came from a technical background. They're probably doing some tickets, they're probably doing some project management and some onboarding of new customers. So around that size, they're doing a little bit of everything in their business. But to grow, they've got to let go of some of those things. So as you get to that 10 million size, you probably at that point have to bring in a controller or VP of finance, somebody who's going to effectively run the number side of your business and help you execute on that so that you're getting accurate financial reporting and your billing is going out on time and all of the things that can really affect your cash flow that you may need to bring in somebody to help with hr. For sure, around that size, you're going to need a sales manager. You're going to probably by now have at least, at least a couple of salespeople. And that doesn't mean as an owner that you bring those people in and all of a sudden you can work 10 hours a week. You're going to work just as hard. You just need to work on the business more than you're working in the business. And so as you grow the business, you're going to really focus in. You're not going to be on every sales call you can't, you're not going to be in every qbr, you can't be working tickets. So you just need to start letting go of some things when you get up to that, when you get up to 15, 16, 17 million, your service manager can't be working tickets anymore, right? Let alone you can't be. And so you start to get those delegation needs and those next level leadership needs as you grow as an organization. And so you don't want to become top heavy or bloated on your leadership, but you do have to recognize that to get, to get to those kind of growth numbers and be able to really absorb it, you have to have some organizational structure built in and think of it as the foundation of your building. Right. If I'm adding a second third story onto my building, I need to make sure that the foundation is pretty solid. And if I'm going to grow the building out and expand the square footage of that building as I'm growing, then I need to expand the foundation. And it's the same thing when it comes to growing your business. I think the only thing I would mention is just anybody who's not benchmarking today and is thinking about it, the best way you can really engage with this stuff is to join a peer group. Get a hold of Evolve. Evolve has peer groups. They have service leadership peer groups under Evolve that tend to be for a little larger MSPS and bars, but they'll find a group for you. So reach out. You can reach out to service-leadership.com and to our team. Go on our website and reach out to our team. We're happy to get on at any time and show you what these products look like. My point is, don't be intimidated. Whether you sign up and benchmark on your own, we'll help you with that. But a peer group. I can't overstate how transformative the peer group experience was to us every quarter, being able to go in and not only compare notes on challenges that we might be having and talk through those, but also be held accountable. I don't want to go back next quarter after I committed to a couple things I was going to do and have to report back to the room that I didn't do them and some of the change that we were planning on making that I didn't follow through with it. These are the kind of things that peer groups really can help you with. And if you're six, eight employees, you're big enough, you've got a legit business, you're big enough to start benchmarking and start really taking on some best practices. Don't make the mistake a lot of providers make. Which is the thing. I've got to be 5 million first or 10 million first before I really get serious about this thing. Life doesn't have to be as hard as it is running an msp. If you're doing things right earlier on, it'll make your life a lot easier later.

I see that a lot. I see. Because it's avoidance of change. Okay, we're gonna, we're gonna change when we're this big. We're gonna change how we do things or what we join, et cetera once down the road. Because I can tell myself it'll be easier than actually think. The changes are what enable you to get down the road. Making these types of changes, doing these types of things earlier, accelerate your path.

Just like you're saying, yeah, today's the day you don't wait to get going.