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As with all the metrics I have been talking about over the last week it is not just the act of tracking metrics that is important it is the interpretation and the use of the information that is critical.
If you track metrics and you are not educating your people on how to interpret them you are missing a large piece of the value of tracking them in the first place.
You want to put careful thought into the metrics you track on your team as the simple act of measuring and reporting a number will create behavior. You want to make sure you are driving the behavior you are looking for.
The key sales metrics we find critical to track are:
Activity - you should have a point system
Number of new leads
Cost per lead
Cost per client
30 day pipeline
90 day pipeline
These numbers should be tracked closely and available for everyone to see.
We find these metrics create the sales behavior we are looking for month over month.
You should put together an easy to read dashboard that is updated regularly to monitor the financial health of your business. Try not to over complicate the dashboard, a simple spread sheet that is updated daily will do.
You should include baseline and goal targets in your scorecard so that you and everyone in your organization knows how you are doing.
Once you have a baseline, set goals, and start measuring you should also set aside specific time weekly, monthly, and quarterly to review your progress towards goal and to set strategic initiatives to keep you and your team on track.
Ultimately you want to make your results known to your team good or bad. The engagement of your team will drive the metrics to places you never thought possible.
Financial metrics to monitor:
Total recurring revenue
Gross margin %
Revenue per service employee and employee
Revenue per client
Effective hourly rate
Gross margin per client
If you monitor these metrics regularly and constantly work to drive them in the right direction the health of your business will steadily increase.
It is important to think about the metrics we measure as they directly drive the behavior of our teams. In general you want balancing metrics such as customer satisfaction and gross revenue. Either of these metrics alone could cause an imbalance in your teams focus the same way only driving hold times could dramatically affect your average time to close a service request.
Service metrics that your team should always be tracking and looking to improve:
Customer Satisfaction - we use Net Promoter Score
Availability / response - hold times
Average ticket age
% of tickets resolved same day
Open tickets per service employee
Employee utilization rate
Customer churn / retention
If you measure these service metrics regularly you will be able to see how your service levels are across time. Start by measuring and getting a baseline then make your entire team aware of the one or two metrics you want to drive by posting them on the wall daily and watch them dramatically change for the better.
It is often striking to me how we assume so much of what we want to happen will happen just by giving people a job.
Today was one of those days for me. We have been focused on communication both internally and with clients as a way to make sure we are demonstrating the value of our services. We have mantras hanging on the wall and being passed around our team such as:
Communicate, Communicate, Communicate
If you did it and the client doesn’t know you did it you might as well have not done it
We have created communication templates for our team to use both with the client and with our internal organization to keep everyone up to date on emergencies.
And yet today we had one of our Jr. techs send out an email to our entire organization that our client was down and four hours later none of our team leaders or account managers knew the status of the situation.
Luckily when I investigated the engineer had found the help he needed the situation was resolved and the client had been communicated with, but what happened internally.
Well in my opinion it was a misjudgment by my team leads, a poor job of communication by the entire team, a lack of follow up or urgency to communicate from the team, but most importantly it is a failure on my part to set clear communications.
Sure I have told people what my expectations are for emergencies, I have created communication templates, and I have hired smart people with good common sense to execute the systems. But at no time have I put in writing exactly what I would expect and shared it with the team and thus it is my failure.
In this situation there was no harm done but I am sure we all can point to a few situations where it has cost us real money or perhaps even a client to have gray area in the way your team executes around emergencies.
The lesson here is that we need to document, share, communicate, and reinforce our expectations so that our team can execute what is in our heads without hesitation.
We’ve had several requests recently to be able to get our posts by email so you don’t have to remember to return to the blog as frequently.
This has been set up.
Please look on the right column of the blog page, right below the MSPCoach ad, and you will see the box to submit your email address. It looks like this:
Don’t get me wrong I believe there is a good deal of value in the certification process as well as some bragging rights but I have yet to have a customer ask if my business was a certified manage service provider.
That being said there are many certification programs popping up out there so what should you do? In my opinion a good certification program can provide value to your business but the service / business processes that you need to outperform your competition need to be an ongoing work. At Everon we started working on identifying, documenting, and constantly refining and improving our service delivery processes over 5 years ago and today we spend more time with what is working and not working than in the past.
Any provider that thinks they can write out a book of processes without making it part of the culture to constantly follow and improve these process is in for a rude awakening when they get their butts kicked by a competitor.
I received an email earlier from the folks at Ant Farm, if you have not worked with them they are fantastic. They bring a level of knowledge to service delivery and product development process that is rare. Check out their free upcoming webinar.
I pasted the email below as it is talking about MSP certification and their opinion, which happens to be similar to mine, that you have to use certification as the impetus for building enduring business value for it to be worth the time or the paper it is written on.
Josh
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Remember the end of the Wizard of Oz when the scarecrow receives his diploma? The wizard explains that the scarecrow, the cowardly lion, and the tin man had the qualities they had been searching for (in the scarecrow’s case, intelligence) all along. They just needed validation, or “certification”, by others.
The recent announcement by MSP Partners of their Managed Services Accreditation Exam, following on the heels of the certification program sponsored by MSP Alliance, has the blogs a-buzz discussing the values of certification for MSPs.
Most visible among the touted benefits is the potential distinction that certification offers to prospective clients - validation by a competent source that the MSP has the infrastructure and business processes necessary to provide continuing high-value services to their client.
However, the benefits of certification potentially go much deeper than this. Companies that have participated in tenured certification programs over a period of years will tell you that the enduring value is derived only partially from the credibility that certification brings. The real value from certification is that it makes your business better!
Effort that you put into the initial certification can rust with time. If you haven’t institutionalized the business capabilities and processes driven by the initial certification, you will find yourself reinventing the wheel preparing for each re-certification. At some point you will ask yourself if the effort is worth it.
On the other hand, if you use certification as the driving factor to design and implement robust service delivery processes, and to continually improve them, the certification event becomes recognition of what you already have - sound business capabilities that bring value to both your clients and to your business.
In fact, institutionalizing your service process capabilities actually makes re-certification easier with each passing year. Simply include the “hooks” for certification (such as metrics definition or customer satisfaction programs), into the processes that you follow daily, and point to them when it comes time for the certification audit.
Are you becoming certified with “straw man” processes, or will certification be the impetus for building enduring business value?
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Ant Farm Inc website - check them out if you have the desire to see what your service delivery could be
For anyone that has been hiring you have probably noticed that the caliber of employee out there looking for work these days is a bit higher than in the past. During the last recession they said you could tell how the market was doing by whether or not you got stock advice as the cashier handed you your Dunkin Donuts each morning.
Below is an unedited, names and emails have been removed to protect the innocent, request for employment we received that I absolutely had to share with you all.
On the positive side the gentleman has lots of confidence and is not shy about calling attention to his perceived strengths, which is a key in getting noticed in the ocean of resumes businesses are receiving.
On the down side - well I will let you read it and figure out the downside. Needless to say he is not our typical job candidate so if you are interested in an introduction for your organization let me know……..
Josh
saw your ad on craigslist. I never provide personal information to anyone
for any reason.
However, I have been a programmer for 30 years, consultant for 20.
I can handle all of the IT, Legal and finance requirements for any size
company. I can take a company public, do complete business plans
including risk assessment, payback, breakeven analysis, proformas, etc;
I develop in postgresql, php, css, xml, javascript/jquery on Linux/BSD Only.
I don’t use CMSs or Flash, they are for amateurs. Flash has it’s place,
but in my opinion that is pretty much only for video and music sites
that don’t expect a lot of hits. Flash is extremely slow, buggy as hell,
but has a few cool features if you really need them; I used to develop
in Flash but found it was far more trouble than it was worth.
I will not touch a Microshit box. All microshit software and os platforms
are pure crap and I won’t touch them, except to convert someone over
to a Linux network. I also work in Sun/Solaris. The best way to do this
is to let me know what the specifics are of a project and I can tell you
exactly how I’ll do it, if I can do it. My skill set is massive, far beyond
your average consultant.
Frankly, most people are pussies and have no idea what they are doing.
They regurgitate the crap that is the technology of the day; Ruby and
Python being an example, or those crappy CMSs like Joomla, Mambo, etc.
They very well might know something about IT, but they know nothing
about the law, or how to calculate marginal revenue/cost/profit analysis;
or inventory acceleration models; or how to do an M&A, or business
valuation for tax purposes. I am capable of all of that.
So if you want someone to handle some business in the XX area,
and have the need for a near eidetic polymath, let me know.
Often entrepreneurs try to run their business completely on their own. This certainly has it’s merits in the early going of any business but you are fooling yourself if you think it is scalable.
You must invest in infrastructure and administrative help and you must build these costs into your model.
I have seen more and more companies utilizing virtual assistants to help them make the transition from doing everything on their own to hiring full time help.
“A Virtual Assistant (VA) is an independent entrepreneur providing administrative, creative and/or technical services. Utilizing advanced technological modes of communication and data delivery, a professional VA assists clients in his/her area of expertise from his/her own office on a contractual basis.”
No matter what path you take the sooner you acknowledge that you cannot do everything needed to run the business yourself if you are going to have any chance of growing the sooner you will start to grow.
We are at the point where we have a number employees dedicated to running the business so that Mike can spend time working on the business as Michael Gerber says.
I would love to know how you are making the transition from doing everything to putting people in processes in place that will allow you to scale.
I know I often have a strong opinion on all the things I think Dell is doing wrong in the marketplace but tonight I applaud their continued effort to be the greenest technology company on the planet.
I pulled the paragraph below from a letter from Michael Dell talking about the initiative and the commitment behind it. I have no doubt that Dell can make it happen and look forward to seeing what it does to our industry and to business around the globe.
Josh
Committing on World Environment Day to make Dell the
greenest technology company on the planet. More than ever
before, we are integrating consideration of the environment
into our business processes and product design to deliver the
industry’s most energy-efficient products, save energy and
deploy green power at our own facilities, and maintain our
recycling leadership. We know that people of all ages around
the globe who care about protecting the Earth expect no less.
Link to the full document outlining the initiative
I know we have written about Paul Dippell in past blog posts but if you are not familiar with him he is one of, if not the smartest guy working in our industry. Paul does a great deal of benchmarking of our industry and is a veteran of working in IT.
I came across this article on the cost of getting a customer the other night when I was reading through some industry blogs online. I was shocked to see the participants arguing that despite the thought out way Paul has walked through true costs associated with acquiring a customer they were indeed able to bring in customers for far less cost.
I submit that if you are unaware of the true costs associated with bringing a customer into your organization you are setting yourself up for failure. Nailing the sales and marketing model in the managed services space is the holy grail that we are all after. Some providers are making progress while others seem to be in denial about what it takes to grow beyond a lifestyle business.
I hope that you all have a good handle on the cost of acquiring customers as well as a filter or process that allows you to identify high dollar low gross margin customers early in the relationship. Your process should allow you to eliminate these clients from your client pool, prevent them from working with you in the first place, or fix the financial relationship so that you can have health gross and net margins long into the future. After all, your client base should want you to make money and run a health business so that you are around to provide them service years into the future.
You should take all of the recommendations for recouping the cost of getting a customer below into consideration as you analyze your business this year.
Enjoy the read.
Josh
The Cost of Getting a Customer
By Paul Dippell, CEO, Service Leadership, Inc.
In several of our recent Managed Services Workshops, we’ve noticed that IT Solutions providers starting to bring to market Managed Services may not account for the cost of winning and launching a new customer. Since this important factor impacts both pricing and contracting – and ultimately profitability – it’s worth pursuing in more detail.
In a recent survey we did on behalf of a large client, we asked sixteen owners of companies offering Managed Services about their cost to win and launch a new Managed Services customer. Let’s analyze their answers and compare this with other datapoints and our experience.
When asked directly, the sixteen owners said it cost them an average of $875 to win a new Managed Services customer (excluding sales commissions), $1000 in labor to make the changes in their NOC to bring the customer in, and $3000 in labor to stabilize the new customer’s network so it could be most efficiently supported.
However, we also asked the owners about the amount of sales activity it took to close a new Managed Services customer. Their response was that each sales rep was targeted to make, on average, 10.7 face to face meetings per month with new prospects, deliver 5.7 proposals and close 38.7% of them (or 2.2 new accounts), for an average of $23,111 in annual value each.
You’re probably already coming to the same conclusion we did. A little arithmetic tells us each closed sale took, on average, 4.9 face to face meetings and 2.6 written proposals. Think the cost to win that customer was really only $875?
In the table below, we’ve estimated the number of telephone calls (“Dials”) and conversations (“Connects/Talks”) it would take to get 10.7 appointments in a month.
Prospecting Activity #/Month
Prospecting Activity - # per month
Dials - 150
Connects/Talks - 30
Appointments - 10.7
Proposals - 5.7
Wins - 2.2
Let’s assume the sales rep spent 60 hours calling and 20 hours talking to prospects by phone. Then let’s assume each appoint took 2½ hours to accomplish, and each proposal took five hours to write, deliver, revise and discuss until 2.2 deals closed. Lastly, let’s assume the sales rep did all this with no help from others in the company. The hours spent by the rep are shown in the table below.
Prospecting Activity Hours
Prospecting Activity - Hours
Dials - 60
Connects/Talks - 20
Appointments - 26.8
Proposals - 28.5
Wins - 135.3
So a rep might spend about 135 hours winning 2.2 deals. If anything, the achievement of closing 2.2 Managed Services deals a month is optimistic. If that rep is paid a $30k base and has a 20% benefits load, each hour costs about $17.30. Doing the math, that’s $1064 per closed deal in sales rep time or about 22% higher than the owners’ direct estimate.
Now let’s make the more realistic assumption that the sales rep has help from an $80,000 resource with half the sales calls, and with all the proposals. This brings the total to $1524 in sales-related labor per closed deal. Our guess is that this is still an underestimation; but let’s looks at what impact that has on an average Managed Services deal.
The owners told us their average Managed Services deal was (we’re rounding) $24,000 a year. In our latest BestPerformers™ benchmark, we know that the top 20th percentile of IT Solutions companies make 13% or better pre-tax net income. That means if the company is a BestPerformer™, it’s making about $3120 per year in net income on that new customer, or about $260 per month.
If the cost of winning a new customer is indeed $875, then 3.4 months of billing are needed to recover the cost of winning the customer. A bit more than 4 months are needed if the cost is $1064 and 5.9 months are needed if the cost is $1524. So the client needs to stay on for at least 4 to 6 months before the cost of winning is paid back.
Then we have the cost of labor within the NOC to launch the new customer. This is not the cost to stabilize the customer’s network, but just to add the customer to the NOC’s systems, procedures and reports, and educate the customer on how to work with you. The surveyed owners said this cost was $1000 in labor. In one of our Managed Services Workshops, the attendees together concluded the cost was about $1139. Add a probe and licenses to the customer’s premise, and we’re probably looking at $2500 in time and materials to launch the new customer.
Let’s tally up our costs of winning and launching this $24,000 a year customer:
Setup - Cost
Win the deal - $1,524
Launch the deal - $2,500
Total - $4,024
At BestPerformer™ levels of profitability, that’s as much as 15.5 months of billing until the costs of winning and launching are recovered. Adding to this, some owners tell us they even foot the cost of stabilizing the customer’s network (average labor fee $3000).
We should note here that such recovery periods are not unusual in outsourcing. Payroll processing companies that serve SMBs assume 14 to 16 months before sales and startup costs are recovered. Large IT outsourcing deals, such as won by EDS et al, are often at least five years and often ten, and the provider may not even be cash flow positive on the deal, much less recover sales and startup costs, for several years.
Nonetheless, this is a significant exposure for SMB Managed Services providers. What can be done to share the risk with the client? We recommend keeping your Managed Services contract documents as short and sweet as possible for SMB customers (after all, how many calls do you want to make to explain and possibly revise it?) but this is a case where some teeth are probably in order. Here are some options:
·Charge a non-refundable start-up fee of three month’s service. We prefer this approach.
·Put an “out-clause” penalty equal to, say, three month’s billing, effective for a cancellation within the first six months, and reduce it by one month for each six months of contract longevity. If the customer cancels after 18 months, there’s no penalty.
If these seem unreasonable, keep in mind the total value of the contract. One IT Solution provider engaged in a contract to provide a full range of services to a 95-user, 3 location customer, worth nearly $700,000 over five years. Included in the contract was $400,000 penalty out-clause if the customer cancelled early on. Not much later, the customer was acquired by a larger company with its own IT department. The solution provider successfully received the bulk of penalty fee. Compare that with a three month penalty of perhaps $35,000.
It also pays to keep in mind that the cost to win and launch a somewhat larger customer is not linearly more costly than a smaller customer. If the average monthly fee for Managed Services was even only 20% higher ($2400/month), the payback period would be perhaps 15% shorter – a significant reduction in risk.
This brings up our final point. Recently one of our principals was on a panel with five owners of SMB Managed Services companies, responding to another 300 IT Solutions company owners in the audience. The question came about pricing. Each of the five panel CEOs made clear that they initially under-priced their offerings by quite a bit. This indicates the typical $2000-$3000 per month price range for a 25 to 35 seat customer is probably too low. Our estimate is that the real value of your services to the same customer is probably between $4000 and $5000 per month. This means finding the ~25% of prospects who want the Managed Services value proposition, instead of trying to buy your way into accounts that really aren’t receptive (we heard this once described as “renting market share”).
Over time, more prospects will be receptive. Right now, competition with other Managed Services providers doesn’t seem to be the problem. Instead, it’s getting in front of enough prospects to find the 25% who are amenable to Managed Services. Which brings us back to that cold-calling sales rep…
About the Author:
Paul Dippell has 21 years experience as a successful Solution Provider executive, with a focus on Managed Services, infrastructure projects, application development; enterprise and SMB markets nationally.
Service Leadership, Inc. works with owners and executives of IT Solution Providers to maximize cash flow and shareholder value through best-in-class strategic and operational advice and practices. Service Leadership offers clients unique opportunities to critique, strengthen and accelerate their business planning, execution and results.
