Many Managed Service Providers (MSP) operate on the premise that hiring service desk professionals is required any time their existing staff says they are overworked. While this could be an indication that it is time to fill a new position, the evidence could be misleading. Excessive hiring can be disastrous for the profitability of the MSP by taking a big bite out of margins. Labor is the most expensive “cost of goods” for the MSP and their service gross margin is determined by how well they balance the needs of the client with the accurate spend in service labor dollars. So, why is it unsafe to look at your current staff workload and make a decision to hire based on that information? Well, the first answer is Parkinson’s Law. This is a theory made popular by economists in the 1950’s that states that “work expands so as to fill the time available for its completion.”1Parkinson, C. N. (1955, November 19). Parkinson’s Law. The Economist. https://www.economist.com/news/1955/11/19/parkinsons-law This means that no matter how much or how little work you give your staff, it will expand to fill their time. Healthy MSPs have a strong time sheet management process to thwart much of the influence of Parkinson’s Law but it does not eradicate it entirely.
The next reason, and probably more important is, that workload should not determine head count when it comes to service management. The most common MSP product model is to charge a flat rate for all the tools and unlimited support. This puts considerable risk on the side of the MSP to manage labor dollars closely. If there is not enough labor to do the work, understaffing could be the problem, but it does not mean that it is. Other options could be product pricing, a lack of standardization (causing a higher volume of support calls), or a lack of proper documentation (making calls take longer to resolve) just to name a few.
Using Metrics to Determine Staff Load
The industry has determined the best way to measure staff levels is through what is referred to as a “service multiple of wages” metric.2Service Leadership uses the term W2 multiple and is a registered trademark of their organization This metric is a simple measure that should give you an idea of whether you are staffed appropriately. This is based on the idea that your staff payroll should be determined, not by the amount of work, but by the amount of revenue being paid for those services. The practice is a good management tool but is not without its flaws if care is not taken to adjust for other influencing factors. Let’s look at how this works.
The service multiple of wages metric is determined by dividing the service revenue dollars by the service payroll dollars, including all benefits and payroll costs. Best-in-class, as defined by Service-Leadership,3Service Leadership is an organization, owned by Connectwise, that aggregates data from MSP’s to determine industry trends and standards. should be 2.8. If your service revenue is $100,000 for the month, and your service payroll (including benefits and payroll costs) is $40,000 then your service multiple of wages metric would be 2.5. If your payroll was closer to $60,000 then your metric would be 1.6. Anything lower than 2.8 is considered overstaffed and anything higher than 2.8 is considered understaffed. Certainly, seems simple enough. So why don’t more MSP’s use this metric? Probably because it is not as simple as it may seem.
Product Pricing and Salary Influences
The service multiple of wages metric is a great start, but there are a couple other areas that should be examined before making hiring/firing decisions based on this metric. The most prominent of these is product pricing. Remember, best-in-class is determined by aggregate data from thousands of MSP’s across North America. While it is helpful to have a benchmark, if your product pricing is not the same as those other MSP’s you may find it impossible to staff what you need and hit that best-in-class number. Further, there are regional differences to pricing of services and while you can assume an average in the data used to determine best-in-class, you may consider your own town and benchmark against the local MSP’s as well as the best-in-class number to determine if your pricing is in the mean. If the average MSP nationally is getting $175/seat for the service that you are only charging $120/seat, there will be a discrepancy in the service revenue dollars for the same amount of work, artificially lowering your service multiple of wages metric.
Salaries work the same way. You must ensure that you are paying industry standard salaries to compare your own company against a national best-in-class number. Maybe you have that one employee that has been with you for a long time, so you reward them with an “outside of the norm” salary. It is certainly within your power to do so and the employee most likely is very grateful for your support, but you do have to know how it is throwing off your numbers. Salaries work hand in hand with pricing. If your pricing is 20% below the national average, and your salaries are 20% below the national average due to the geographical area you work in, then your service multiple of labor metric will probably be close to accurate. If, however you are charging 20% less for services but your salaries are in line with national averages, your metric will be off. Rightsizing both your pricing and your salaries is a prerequisite to using the service multiple of wages metric effectively.
Knowing When to Hire
What do we do with this information and how do we know when it is right to hire service desk pros? Here is a good start.
- Determine your current service multiple of wages metric (service revenue dollars/service payroll dollars)
- Analyze your current pricing model and compare it to national standards. If your pricing is not at the same level, work with your sales/marketing teams to see how you can raise rates for new clients, and institute annual increases for existing clients.
- Analyze your payroll dollars against salary surveys to determine how you compare nationally, and in your local market. If you are not in line, discuss with your leadership team ways to correct this over time through the new hire process or other cost cutting measures.
- Once you have right sized both pricing and salaries, run the metric again and determine your staffing level. This should tell you if you need to hire staff.
While the service multiple of wages metric is a great tool, it cannot stand alone and must be used in conjunction with the analysis of pricing and salaries. There are other issues that influence this as well that are beyond the scope of this article, but the information provided should get you started on your way to building a more profitable MSP and help you determine when it is right to bring on more staff.
As always, let us know if RedVine Operations can help you to an analysis or provide any further guidance.
- 1Parkinson, C. N. (1955, November 19). Parkinson’s Law. The Economist. https://www.economist.com/news/1955/11/19/parkinsons-law
- 2Service Leadership uses the term W2 multiple and is a registered trademark of their organization
- 3Service Leadership is an organization, owned by Connectwise, that aggregates data from MSP’s to determine industry trends and standards.