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3 Project Indicators of MSP Profitability

Josh Peterson : Oct 5, 2023 12:59:15 PM

MSPs MSP profitability

3 Project Indicators of MSP Profitability

3 Key Project Indicators Driving MSP Profitability Margins

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Projects are critical to MSP’s overall revenue mix. A solid revenue mix for a modern and healthy MSP is... (drum roll):

40% Recurring
30% Project
30% Hourly

That might seem counterintuitive to most MSPs as we all want a massive bucket of recurring revenue. We want that too!

Sadly, even today, many MSPs don’t understand their Agreement Gross Profit (AGP) margin. When we dig into AGP on many Managed Services Agreements, we find they are not nearly as profitable as anticipated.

The ability to obtain healthy margin's on recurring and project-based services are the basic ingredients of MSP profitability. The most common method of determining profitability is through gross profit margin - which highlights the revenue that remains after replacing direct service delivery costs - such as software, labour, and license fees in his case- here in described as the "direct costs". The industry average gross margin for a sustainable business is 25% gross margin on product, 50% on service, and an overall gross profit margin of 65-75% gross profit margin are meaningful benchmarks that can contribute to a liability cushion for unplanned expenses and varying levels of demand. Even more crucial and forward-looking is the net profit margin which is the revenue leftover after accounting for all expenses including: overhead, labor, and operating costs. A good net profit margin target for MSP businesses falls within the range of 20-30%, while allowing for a sustainable level of reinvestment in to the business.

3 Project Indicators of Health & Profitability for MSPs

Projects are a large part of the solution. Here are 3 important reasons why projects are imperative to a healthy MSP:

Projects indicate how well we are forecasting and refreshing our client’s hardware.
Projects indicate how well your technical team is identifying out-of-scope work from your managed services agreements.
Projects indicate how well the sales department is bringing in net new business. Onboarding projects and remediation projects are typically where MSPs start with any new client.

Those same people who are not managing their agreements and are not selling projects and managing asset replacements end up spending more time fixing old equipment - it's a downward spiral.

The inverse is true - think a car dealership with an amazing sales team and mostly does warranty service on their client's new cars - way easier. This reason alone makes MSP Projects THE MOST IMPORTANT of the 3 buckets to get correct.

As you get better at identifying and selling projects, you will see that percentage of revenue ratio begin to move. Don’t be alarmed; it’s a good thing!

FAQs

What does profitability mean for an MSP?

Profitability means an MSP's ability to make net income after paying all costs and expenses. It is usually measured with margins such as gross profit margin, net profit margin, and EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).

Which project indicators should MSPs track to improve profitability?

Key indicators include project margin, engineer use, scope creep, project completion time, budget versus actual hours, and customer satisfaction.

What are healthy profit margins for an MSP?

Industry benchmarks suggest:

Gross profit margin: 50-60% is standard. Top performers aim for 70% or higher.

Net profit margin: 20-30% is a healthy target. Averages range from 8% on the low end to 35% on the high end.

How often should MSPs check their profitability?

Regular monitoring is essential. Many MSPs check margins each month in the early stages. They then shift to semi-annual or annual evaluations as their business grows.

About the Author & Bering McKinley

Having 20 years in the industry and working with hundreds of MSP owners, Josh is the owner of Bering McKinley Consulting Services. His team helps MSPs helps break down the excuses and falsehoods that keep success at bay, delivering a formula that has been implemented thousands of times for IT company success. The BMK consultant-guided programs combine IT business, financial principles, sales expertise, and service management know-how, helping MPS reach achievable targets. Discover a guided path to growing your business.

Josh Peterson, CEO & Founder

Bering McKinley