Archive for July, 2012

Key Performance Indicators

July 2, 2012 by   •  Leave a comment

Karl Palachuk put on a great online series last week and I was happy to participate.  Here are my notes from a presentation I did.  Enjoy, and as always leave a comment or shoot me an email if you have any questions or feedback.

Top Ten Indicators that I’ve observed highly performing IT Providers adhere to over the years
10. DSO – Days Sales Outstanding – 30 days or less. More importantly, how closely does DSO match your payment terms? Here’s the calculation: (Accounts Receivable/Total Credit Sales) X Number of Days in period measured. Do this quarterly and pay attention to how this affects number 9. Cash flow is king; insist that your clients adhere to your payment terms
9. Accounts Receivable > 90 days is less than 10% of total A/R – Now, unless you’re like our good friend Karl, you likely have some sort of receivables. I can typically tell what your client satisfaction is based simply on this number. I can also, as a non accountant, get some pretty good indication about your accounting based on this condition of this report in QuickBooks. Happy clients pay and they pay on time. Sloppy book keepers allow clients with a 90 day balance still receive services. Sloppy accounting allows for negative numbers on this report.
8. Dime on a Dollar – If any of you know me, you know I beat the drum of building a sales force and doing it NOW! But wait, there’s more…you have to do it smartly. You have to budget for this endeavor. Here’s your budget number; 10% or gross revenue can be spent on your sales effort. I’ll allow you to make a small change, if you’re going to go very aggressive you can choose to use 10% of your TARGET revenue, just make sure you’re making progress so you don’t outspend your growth. That 10% should be broken down as – 4% Sales Salaries, 4% Sales Commissions and 2% Marketing/Advertising
7. Effective Hourly Rate – I’ll be honest, I’m not a very popular guy in our industry and this is why – your RMM providers and literally shoved the MSP model down your throat. I love it too, who wouldn’t like recurring revenue, I know I do. BUT, and this is a HUGE BUT!! YOU HAVE TO MAKE SURE YOUR MANAGED SERVICE MODEL IS OUTPERFORMING YOUR BREAK FIX MODEL. I swear to all things holy when I go into your business time and time again you’re getting your butts handed to you on your MSP contracts. Check for yourself then call and brag to me that you’re the exception…I’ll be very happy for you, promise. Here’s what to do. There are three versions of Effective Hourly Rate I want you to consider:
• Total Service Revenue/Total Number of Compensation Hours = Effective Hourly Rate on Total Hours Compensated.
• Total Service Revenue/Total Billable Hours = “I’m scared of the real number” Effective Hourly Rate on Billed Time.
• Total Recurring Revenue/Total Number of Hours Put Against Agreements – Agreement Gross Profitability.
If your Effective Hourly Rate is not greater than your hourly Rate then you have a problem. You’re selling your agreements too low, you’re putting too much time into your agreements, you’re not remediating problems before turning up to clients, or all of the above. My top MSP’s have effective hourly rates double that of their rack rates. The rest are struggling to get to 80% of their rack rate. You figure that one out!
6. Agreement Gross Profitability >60% – only one of the PSA’s out there takes this seriously. You can figure out which one. This report needs to be run monthly. Period, end of discussion. Your entire management team needs to be highly in tuned to this number. My top service managers have this report weekly and make course adjustments. You will not achieve this number if you never manage too it. The worst offenders are the MSP’s who ignore alerts, power cycle and run away from service calls and act surprised when the problems occur again and again. FIX THE PROBLEM!!
5. Employee Turnover – We all know that employee turnover costs of money. I don’t care. Employee turnover means you have a crappy culture and that people don’t like you. You think because you fired them that they are the problem. NOPE. You’re the problem, you have a crappy culture and it ruins employees quicker than you believe. Here’s the calculation. You can do this on an annual basis, or quarterly basis, you can even look longer term if you’re a really small company.
Monthly Turnover = Number of Separations in time period measured
Average Number of employees in time period measured

4. Service Department Gross Profitability > 50% – Take all of your service costs and divide by your service revenue. It’s just that simple. If you aren’t turning over at least 50% GROSS PROFIT then you’ll never have enough revenue left over to pay all those other things like sales people, rent, and YOURSELF. Control this cost by pricing your services correctly. I don’t care what you decide to pay an engineer as long as your rates support the payroll. Don’t tell me that you HAVE to pay a top engineer in your market but that you can’t charge $165/hour in your market! Most expensive employees and cheapest prospects…doesn’t add up!

3. EBITDA – Earnings Before Interest Taxes Depreciation and Amortization > 10% – Minimum people, MINIMUM. If you can’t make this indicator, then we have some work to do. Now if you’re beating that, awesome, this is a minimum, I want you to go higher! My most profitable client to date has hit 26% to 28% for 4 years running. Oh by the way take a guess at how much recurring revenue….ZERO. He will always gladly take those clients that you foolishly fired because they wouldn’t sign a managed services contract…he’s laughing all the way to the bank….unlike his peers he hasn’t spent $50K going through two version of an RMM that is still underutilized and spent 1000’s of hours trying to figure it all out. He put his head down and sold.

2. Net Promoter Score > 50% – Full disclosure, I own a company that performs NPS surveys for MSP’s. I love it. This score correlates to net profitability better than any indicator I’ve even experience. NPS is a wonderfully simple measurement of customer loyalty. Who cares about your survey asking so called satisfaction questions….”did Billy show up with his shirt tucked in?” “Was Susie polite when she called you about your past due invoice?” Yawwnnnnn….What I care about is will this client be with you for the next ten years. Well some really smart people studied this issue and came up with one simple question that YOU HAVE TO ASK YOUR CLIENTS. “Based on a scale of 0-10, how likely are you to recommend our services to your friends and colleagues?” There is some simple math that you to at that point. 9-10’s are promoters of your business. 8-7’s are neutral on your business and 6-0’s are detractors of your business. Subtract the percentage of detractors form the percentage of promoters and voila…you have your NPS. Make this a company wide initiative and get improvement and enthusiasm. The score will blow your mind and when you start tracking against EBITDA you’ll hopefully be pleasantly surprised.

AND NUMBER 1 Indicator…..

How many hours are you spending doing the things you love a week? Don’t even try to B.S. me by telling me you love your work and your business, if you truly do there is something wrong with you. Get a life. You can run this business successfully in under 40 hours a week…I promise, I see it every day. Become a manager….delegate…trust…train…if you’re working more than 40 hours a week, you are doing something wrong! Let’s figure out what it is and get it fixed.