The U.S. economy had unprecedented growth from 2009–2019. It was the longest economic expansion without a recession in U.S. history. It was also the economic swan song of the baby boomers.
The greatest productivity and earnings of your career will generally be the last 10 years you work before retirement. The baby boomers had started retiring before COVID-19, but we saw the bulk of them head off to retirement between 2018–2021, and the successive generations’ replacement birth rates have not been sufficient to fill the workforce. I have bad news … there is not a 20-year crop of humans coming to save us. Let’s hope AI and automation can ramp up quickly to ease labor market issues.
Based on the data we monitor in our Simple Numbers® model, the overall market is stuck and cannot grow because we do not have labor to produce to demand. When demand exceeds supply, we get price increases (i.e., inflation), and we expect that to continue until we see excess labor in skilled categories. Even though your revenue might be higher, has your “output” gone up, or are you just charging more?
While the economy might be stuck, your MSP can still grow because you are in one of my favorite categories: “necessary businesses”! When the economy is disrupted, the first spending turned off is discretionary expenses you can delay or even do without. IT services have become the most important utility businesses spend on. While your customers may push back and try to lower costs, they will always need to keep a core level of services.
Before you decide to grow your business, you need to assess your ability to be “profitable with what you got.” Our models show the overall market is behind in pricing adjustments by an average of 5% to pre-COVID-19. I want you to grow your business, but you are usually in denial if you think growing will make your unprofitable business suddenly profitable.
Getting Profitable With What You Have
The great thing about MSP business models is you can measure your LER (Labor Efficiency Ratio) very easily, and the magic target is $2 of gross margin for every dollar of labor you spend (direct and management). You can be heavy on direct labor and light on management or vice versa. That is your call. But at the end of the day, a dollar of labor spent needs to produce $2 of gross margin (MRR plus projects). If you are below that target, it could be any one of the following problems:
- You have not raised prices enough to cover labor increases.
- You have expensive labor that cannot produce enough to justify salary (management and direct).
- You lack the focus to push projects through to completion and billing, even though you have the work.
- You have an insufficient backlog for the current team.
Whatever the issue is, we recommend fixing this first before you try to start adding on work, especially if your issue is underpricing. We have started noticing (and recommending) all companies develop and own their training process and start to develop boot camp-style rapid onboarding and continued development of their team. With the ability to use Zoom to record screen sessions, it has never been easier to create your own training content.
But content without validation will not get you where you need. You must add the testing element to your content — both written and in-person thesis review type testing — to make sure they paid attention to the content. You can only expect what you inspect!
COVID-19 left us with a workplace gift where we found out we could go home for two weeks on lockdown and the world did not end. That has led to significant declines in workforce productivity. Workers consistently quit for the day without “playing through the whistle.” What does not get done today gets pushed to tomorrow, next week, or even next month. MSPs can combat this by using LER to track success every week from the first day of the month.
An MSP knows monthly recurring revenue on the first day of the month; they also know a good estimate of labor for the month. On day one of each month, you can measure how much gross margin still needs to be produced to hit your $2 LER target. Each week, you report to the team progress and a new remaining target for the three weeks remaining. Then two weeks, then one week. It won’t be hard to determine if it is a production issue or a sales issue.
Where Will The Growth Be?
The overall economy will be struggling for a while, so you cannot rely on an expanding economy to add new businesses. You will have to grow mainly by taking business away from a competitor. There will continue to be small competitors giving up as they cannot find labor, and they typically do not adjust pricing, so many will become unviable to continue.
You are not immune to your customers’ issues, so select customers and markets carefully. You will continue to see your good customers get bought as M&A activity will continue to be strong. I still like to target customers that are necessary businesses, but other businesses are good if they are in the upper echelon of their industry. If you get a shot at a new big customer, do your due diligence to make sure they are financially strong, as a big customer that fails can be a big hit on you as well.
Innovation is the next way you can win new business and expand your current customer list. Keep an eye and an ear out on the market to look for the next idea that solves a customer need! It is great to sell them what you do, but the highest form of innovation is coming up with a solution to an unmet need.
The final conclusion is that the next 5–10 years will be the greatest separation of the good businesses from the weak. The economic growth pre-COVID-19 allowed even the bad businesses to grow. Those days are gone, so which group do you plan to be in?
To discover more on how Greg Crabtree’s teachings can help you become more profitable and set pricing strategy, visit https://mspsuccessmagazine.com/2022/10/higherprices/