Last time, we looked at the specific customers that you have on a quality and results basis, with the idea that you want to do MORE business with customers like your best customers, and LESS business with customers like your low-quality customers. A follow-on question is:
Why is that important? Say you have ONE large client that makes up a huge portion of your revenue and profits. What would happen if that client stopped doing business with you? How much leverage do you have in making sure that negotiated deals are “win-win” with that client? The flip-side of that argument is that you probably have many small clients that take up resources, but do not provide reliable business results for you. So what would be the impact on your business if you STOPPED doing business with those clients?
So in summary, today’s discussion is all about evaluating your “portfolio of customers”, much in the same way that you evaluate your investment portfolio. The goal is to maximize return on investment while minimizing risk. Some questions that you may want to consider in this exercise might include:
- Do I have any single customer that represents more than 15% of either my revenue or profits?
- Do I have a client that represents a huge REVENUE amount, but that due to pricing pressure, actually results in modest PROFITS?
- What would my results be if I took a more targeted approach to my client base, reducing my number of clients from hundreds down to just 25-30 clients? Life would be simpler, but how profitable would I be?
- NET RESULT: Am I “hostage” to a big account? Am I swayed by the siren song of revenue that doesn’t also include adequate profitability? Could I simplify my business and really “Do More with Less”?
So, how do you get started?
TOO BIG TO FAIL – REVENUE: Get a list of revenue for all of your accounts for the past year (easy to do with ConnectWise or your financial system), and look for any single account that is more than 15% of the total revenue.
TOO BIG TO FAIL – PROFITABILITY: Do the same thing with profitability, remembering to factor in 3rd party costs related to the revenue, as well as the cost of your engineer hours spent servicing that account. Include all time spent, billable or not, because you have to pay your engineers even when they are not billable. Also, make sure to include hours spent on flat-fee fully managed contracts so that you get the full picture of what true profitability looks like for this client.
WHAT IF I “THINNED THE HERD?”: Get a stack-ranked list of revenue and profitability of your existing clients. Count down the list from the top until you have reached 80% of your total revenue. Do it again for 80% of your total profitability. How many accounts do you need to keep to achieve 80% of your current results? For many MSPs, that’s a pretty small number of accounts. Now, as we’ve discussed, you don’t want to have one or two huge accounts dominating your business and holding you hostage. But on the other side of that discussion, you may not want to have to mess with 100 accounts that are giving you sub-par return on your investment.
So today may be a good day to see if you are being held hostage to a few large accounts. Or if you are “at risk” by not having a diversified portfolio of clients. Or perhaps, that you could simplify your life by servicing fewer clients and still get essentially the same results you are getting today. It’s always better to chart your own course, rather than just “keep doing what you are doing, hoping for different results”.
THE NEW HAVEN APPROACH
At New Haven, we tackle this exercise using our “Profile of All Clients” report. There are several components to the report, but here’s a quick look at the report in its entirety:
Zooming in on the revenue chart (see below), we see that “Company145” is our largest client by revenue, at 11.64% of total revenue. Since that’s under our 15% threshold, and we have a good mix among our other Top 10 clients (by revenue), it appears that we have a well-diversified portfolio of revenue.
Looking at the Contribution Margin (i.e. “profitability”) chart (see below), we see that “Isramco” is our most profitable account at 8.67% of profitability, again under our 15% threshold, so we have a well-diversified portfolio.
Note that comparing the “top 10” lists of revenue and profitability, client “Cabelas” is #3 in revenue, but NOT in the top 10 for profitability. So where does Cabelas show up in the list for profitability? By “hovering” your mouse over the pie chart, you can discover where they rank:
So we finally found “Cabelas” on the profitability chart, ranked at 23rd overall in profitability. Hmm, maybe there’s a very good reason for that. Or maybe we have a “pricing problem” with their contract. Or something else. That’s where your years of managing a successful MSP practice comes in, so get to work!
And what about the idea of “Thinning the Herd”? Looking at the top of the “Profile of All Clients” report, we can see that we have 81 clients, but just under 30 of them provide 80% of our revenue and profits, and about ten of them provide 50% of our revenue and profits. So we have about 50 clients that are providing only 20% of our revenue and profits. Are we sure that we want to KEEP all of those 50 clients, when our return on that investment is low?
It’s a complicated question, since you need to also look at your overall engineering resource utilization as well. If you are “beyond capacity” in engineering resource utilization, then “thinning the herd” may make great sense, as it will alleviate some of your service delivery pressure by eliminating low ROI service delivery. Looking at the “Hours per Client” portion of the report, we start to get a handle on where we are spending our engineering time (see below).
Comparing the hours spent per client to the revenue and profits for each client can be important as well. We see that “Company51” is eating up almost half of the overall engineering hours. Who is that? In this case, that’s actually OUR company, and those are “internal hours” spent by our engineering team. Holidays, sick time, and other overhead activities can make the number of hours rise and fall, but spending almost half of our overall engineering time on non-client issues does seem excessive. So the #1 finding from this is to dive in to find out why so many hours are being spent on internal-focused activities. There may be good reasons for that, but we owe it to ourselves and our stakeholders to delve into those issues and manage them professionally for best return on investment.
Hopefully this discussion will encourage you to take a look at the MIX of customers that you are doing business with, looking at the return on investment from each one. Also, keep in mind that sometimes “thinning the herd” just might be appropriate for your business, based on your portfolio of clients.
At New Haven Technologies, we provide access to information so that you can make data-driven, informed decisions about your MSP business. Our service is provided on a month-to-month basis, and starts with a free two-week trial on your network with your data. We also include customized reporting at no additional cost as part of the service. If you are interested in learning more, just “reply” to this e-mail, or you can sign up for your free two-week trial at https://www.newhaventech.com/Trial
Best Wishes for continued success in building your MSP practice!
Founder and Chief Consulting Officer
New Haven Technologies, LLC
Stop Guessing. Start Knowing.