For some Managed Service Providers (MSP), getting projects done means the difference between making money or losing money. Most MSP’s produce 60% or more of their revenue directly from managed services, where the remaining is a blend of hardware/software, cloud services, and project sales. For Technology Service Providers (TSP) that sell projects as their predominate business model, projects may make up more than 70% of their revenue and managing the business is a game of dollars for hours; making sure every dollar that is worked (and paid to the employee) is billed to the customer. With the right hourly rate and discipline in this area, profitability is achievable. For an MSP though, projects are more challenging to manage.
The managed services model is not based on exchanging dollars for hours, but building automation and stability into environments to lower the hours worked in support, thus raising margins. Since the models are quite different, some MSP’s find managing projects an afterthought. Less effort is put toward driving this side of the business and even less is spent measuring the profitability by project. But it does not have to be that way!
Successful MSP’s have figured out a few things that help when it comes to managing projects. Here are 3 tips for running profitable projects as an MSP that will help you maximize profitability.
MRR Coverage Percentage
The first tip is about managed recurring revenue. As an MSP with more than 60% of revenue from Managed Services, it is important that you can cover as many of your monthly bills and payroll with the revenue that is considered monthly recurring. Most MSP’s charge a flat monthly rate for services, providing huge leverage over their “project based” cousins who need to bill a certain amount of hours every month or risk negative margins. If you can align your bills to be equal to the amount you bill out every month in managed services, this makes the project revenue “gravy” as they say and will allow you tremendous flexibility in your ability to plan, execute and bill for projects. It takes the pressure off if you know you have all your bills covered even if you didn’t do a single project in a particular month; especially months like December that are usually filled with many staff vacations. While 90%-95% coverage rate is not uncommon, the closer to 100% you can get the better off you will be.
To make this work it will require you to be tenacious about keeping your project management and project engineering staff equally matched to your regular workload of projects. Being overstaffed in this area can wipe all of your margins.
Fixed Fee versus Hourly
This is always a long debate among those that are passionate about project management. Is it better for an MSP to charge hourly for projects or fixed fee? That depends. If you are good at managing your staff to ensure projects are done on time and under budget when it comes to hours, then fixed fee billing makes the most sense. It is also the most profitable way to do it as your estimate of hours should be high to include all project management/account management time and compensate for unforeseen delays or complications. As you do more and more projects, your engineers should get more efficient over time. This is more in line with managed services, where efficiency works in your favor.
If you are not very good at managing staff or projects, then it is probably safer to estimate hours to customers and bill hourly as the projects progress. This limits your profitability but ensures every hour worked is an hour of revenue earned. Customers may not love the open ended-ness of the arrangement, but you can utilize “not to exceed” pricing as a way to calm their nerves. As quickly as you can master the management of staff to complete projects on time and under budget, you should move to a fixed fee model. Attempts to do so before you are ready can be disastrous so make sure you are tracking project deliverables, timelines, and budgets very closely.
Project Manager for Hire
Some MSPs hire a certified (PMP) project manager to manager their projects. While this may make sense if you are large enough to have at least 5 or more engineers working full time on projects, it rarely makes financial sense for the smaller MSP. Most projects that are completed within an MSP are small, take less than 90 days and involve very few resources. A “true” project manager would be bored to tears in most MSP’s today due to the size of the projects. There just isn’t that much work to be done for the project manager in Office365 migrations, antivirus deployments, or virtualization projects.
The reality is the level of skill necessary to plan out one of these projects should be able to be accomplished by anyone with basic organizational skills. And if you have engineers that you pay large sums that cannot seem to build a simple project like these and manage them to completion, you may be better suited to train or replace that engineer with someone that can. The bottom line is, save your money and invest in teaching some basic project management skills to your engineers before plunking down six figures for a well-seasoned project manager.
Projects are a necessary evil in today’s MSP, but they don’t have to be as daunting as some MSP’s make them. Using these 3 tips can greatly improve your chance at success when it comes to managing projects within your business. Project Success is a company that does great work training project managers. If you need more assistance, feel free to contact us at RedVine Operations and we can point you in the right direction.