In my last blog, I shared a set of five “killer” key metrics aimed at helping you maximize the profitability of project services. However, we’re seeing more and more partners move toward a managed services business model. Setting up for long-term success is critical to help minimize risk and ensure the practice is returning the right levels of margin to the business.
The number one indicator of success for managed services is gross margins. Strong managed services providers understand this, and as a result of disciplined management of the business, often realize gross margins in the range of 45-50%. To achieve this, there are three areas you should focus on: Revenue, Efficiency, and Resourcing.
  1. Revenue

    Average Revenue per Customer (ARC): For our purposes, I consider ARC to be the average amount spent per month among customers who subscribe to the managed services offering(s).

    In many cases, partners are offering a line card of services and in some cases a good, better, best option for each.

    My advice? Keep it simple. The more complicated your offering, the more time a rep has to spend educating the customer, leading to fewer transactions. It’s good to have differentiated offers, but enabling your sales team to position, transact, and upsell these is more important.

    Services Attach Rate: This is the percentage of active customers paying for managed services in addition to core product offering(s).

    The Services Attach Rate is probably the most important measurement of the ones I’ve included. Low attach rates limit growth and stifle profitability because primary revenue streams are focused on product and project services. You want to aim for 70% or above attach rate if this is a primary focal point for your business, and one key way to achieve that is through proper sales compensation. Instead of offering a flat commission rate on billed revenue, provide a different rate for each revenue stream, with the recurring and higher margin streams (managed services and packaged IP), providing the highest. This should inspire your sellers to attach these offerings. It’s also reasonable to include a minimum attach rate in your qualifying criteria for variable compensation.

  2. Efficiency

    Average Calls per Customer: The average number of calls per customer in a given month for managed services.

    It’s reasonable to expect lots of calls in the early stages of the customer relationship, but over the long term, call volume should subside. A perpetually high level of calls usually indicates one of these issues:

    1. The need to provide more preventative maintenance. Not keeping systems up to date can lead to a flood of calls from dissatisfied customers. Leverage tools like Microsoft Intune to stay ahead of the curve and proactively report the value you’re providing each month.
    2. The need for end user training. Many of the calls partners receive are related to features of products and issues that can easily be self-resolved by the end user. While it’s great to be needed, these can limit your capacity to take on new clients. I recommend setting up on-demand training for employee onboarding and a rich, searchable FAQ.

    Average Case Duration: This is the amount of time it takes to field the call, work, resolve, and document a case ticket.

    You provide your clients with training; ensuring your staff is up to speed on the latest and greatest is just as critical. Providing strong onboarding for your team and access to easy-to-use tools may seem obvious, but these can easily be overlooked. Having tools and training lessens the need for expensive, superhero resources and enables you to scale out more quickly. Track individuals on a regular basis (i.e. monthly) and include findings in performance reviews. I’d also suggest including this in a variable compensation incentive along with on-the-spot rewards for team members providing assistance to one another or contributing knowledge base articles that benefit the team.

  3. Resourcing

    Services Rep Utilization: This is calculated as the average hours annually spent per representative actively working cases divided by the number of available hours.

    In my blog on project services, I shared some thoughts on utilization per billable resource. The same concept applies here. Idle resources cost money. Resources should be, at minimum, engaged at least 80% of the time. If they’re not, look closely at the capacity you need to serve your customer need and the measure of Quota Run Rate I mentioned in my last post. Ensure you have 60 days of ramp time as your customer base increases to deal with recruiting, hiring, and training.

There are great resources out there to help you as you’re developing your managed services practice. You can get great consultation from firms such as Service Leadership and Cloudspeed, and at Microsoft, we’ve recently announced a set of partner-ready trainings to support you in your journey. Additionally, some partners decided to outsource these types of activities while they sell them to their customers. Firms such as Live Virtual Helpdesk have partnered with some of our distributors to deliver these, as have a number of our 2-Tier CSP providers.
Hopefully this helps you get off to a fast start. We’re here to support you. We’d love to hear your feedback, success stories, and creative ideas. You can share them by following me on Twitter @BrentCombest.
Thanks and we look forward to hearing from you.
BC
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