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In the world of Managed Service Providers (MSPs), navigating the financial health of your business with precision is not just an advantage—it’s a necessity. The adage “What gets measured gets done” captures the essence of why meticulously tracking key performance indicators (KPIs) is crucial. However, as we balance the measurable with the meaningful, remember that not everything that can be counted counts, and not everything that counts can be counted.
This is especially true in MSP operations, where straightforward metrics like sales numbers and the cost of goods sold (COGS) contrast sharply with less tangible measures like client satisfaction and IT service quality. The right set of KPIs can illuminate the path to profitability, guiding you through the complexities of financial decision-making.
We’re pleased to kick off our three-part series on “Top MSP KPIs You Should be Tracking” with this one on, what else—financial KPIs for MSPs.
Below, we’ll delve into each financial KPI, offering detailed calculations and insights to enhance your overall financial strategy. And be sure to check out parts two and three in the next few weeks, where we’ll give the rundown on Client-Focused KPIs and Sales & Marketing KPIs. Let’s dive in.
Table of Contents
- Monthly recurring revenue (MRR)
- Client contribution (CC)
- Staff utilization rate
- Total effective billable rate (EBR)
- Service line effective billable rate
- Cost of goods sold (COGS)
- Earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Contract profitability
What are Financial KPIs for MSPs?
These are critical metrics that measure the financial health and operational efficiency of your MSP business. These indicators provide both MSPs and IT professionals alike with insights into overall business profitability, sustainability, and growth potential. By tracking these KPIs, MSPs can make informed decisions to more strategically optimize operations, enhance customer satisfaction, and ensure long-term success. Financial KPIs are your compass in the complex landscape of MSP performance, helping you zero in on net operating income, operating expenses, and overall cash flow—and mastering these metrics can dramatically influence your bottom line.
1. Monthly Recurring Revenue (MRR)
Definition: MRR tracks the total predictable revenue generated from ongoing subscriptions and contracts each month—an obvious cornerstone metric for MSPs given the continuous demand for IT services from both new and recurring customers.
Calculation: MRR = Average Recurring Revenue per Account * Total Number of Accounts
Example: Let’s say you charge $1,000 per month for a managed cybersecurity services package that includes network management, firewall management, vulnerability scanning and more, and 10 of your clients subscribed. Your MRR would be:
MRR = $1,000 * 10 = $10,000 per month
Why It Matters: MRR isn’t just about tracking revenue; it’s about understanding the stability of your income streams. High MRR indicates a healthy, predictable cash flow, which is inviting for investors and essential for long-term planning and projections.
2. Client Contribution (CC)
Definition: Client Contribution measures the profitability of individual clients by subtracting the direct costs from the revenue they generate.
Calculation: CC = Revenue from Client − Costs Associated with Client
Example: You signed a new client that’s generating $5,000 in revenue but incurs $3,000 in direct costs (labor, software licenses, etc.). Thus, calculating their CC looks like this:
CC = $5,000 − $3,000 = $2,000
Why It Matters: CC helps identify which clients are most and least profitable. A low or negative CC suggests a need for renegotiation or process optimization, while a high CC indicates a client relationship to nurture and protect. However, remember that client profitability isn’t black and white. As ABC Solutions owner Rayanne Buchianico wisely pointed out, your most profitable customer doesn’t necessarily mean they’re your highest revenue customer.
Client A could be paying you $10,000 a month but you’re only making a 40% profit with them, while Client B might only pay you $5,000 a month—but you’re yielding a 65% return simply because they’re a “better” client.
Your most profitable customer doesn’t necessarily mean they’re your highest revenue customer.
3. Technician Utilization Rate
Definition: This rate shows the percentage of time that your technicians spend on billable work versus their total available time, highlighting productivity and efficiency.
Calculation: Technician Utilization Rate = (Billable Labor Hours / Total Labor Hours) * 100%
Example: If your techs collectively worked 1,600 hours and 1,200 were billable, the utilization rate is:
Staff Utilization Rate = (1,200 / 1,600) * 100% = 75%
Why It Matters: Understanding utilization helps manage technician workload and optimize resource allocation. Aka, two things that help alleviate and reduce burnout. This leads to my next point: Be cautious of the myth that 100% utilization is ideal—it’s just that, a myth. In addition to inevitably leading to burnout and turnover 100% utilization (or even aggressively striving for it), it also means there’s nothing left to allocate to mission-critical initiatives like ongoing tech training and development.
4. Total Effective Billable Rate (EBR)
Definition: EBR measures the average revenue per billable hour, providing insight into the actual financial return of billable work.
Calculation: EBR = Revenue / Total Billable Hours
Example: If your revenue is $50,000 and total billable hours are 1,000, then EBR is:
EBR = $50,000 / 1,000 = $50 per hour
Why It Matters: EBR helps identify pricing or productivity issues. A low EBR suggests underpricing or inefficiencies, while a high EBR indicates strong pricing power and operational efficiency. As an MSP, the concept of pricing and packaging your services never gets old because the target is always moving. Trends are always shifting and the economy is always evolving. To that end, regularly evaluating and optimizing your pricing and packaging is a non-negotiable when it comes to achieving profitability.
5. Service Line Effective Billable Rate (Service Line EBR)
Definition: This KPI breaks down the EBR for specific services, helping assess the profitability of each service line individually.
Calculation: Service Line EBR = Revenue from Offering / Total Labor Hours for Offering
Example: If a particular service generated $20,000 and took 400 hours of labor, the service line EBR is:
Service Line EBR = $20,000 / 400 = $50 per hour
Why It Matters: This financial KPI for MSPs helps guide decisions on which services to expand, reduce, or eliminate based on their profitability and strategic fit. Just as every customer is not created equal, the same can be said for your services. Some clients may load up on your offerings while others lean on you exclusively for monitoring email phishing scams. Whatever the case may be for your business, just be sure to lean on the calculations your financial KPIs spit out—numbers don’t lie.
6. Cost of Goods Sold (COGS)
Definition: COGS represents the direct costs associated with producing your services, including labor, materials, and overhead expenses (e.g., infrastructure, software, technician training, etc.) directly tied to service delivery.
Calculation: COGS = Labor Costs + Hardware Costs + Software License Costs
Example: If labor costs $10,000, hardware $5,000, and software licenses $2,000, then COGS is:
COGS = $10,000 + $5,000 + $2,000 = $17,000
Why It Matters: COGS is critical for understanding the direct profitability of services and for pricing decisions. (It does not include indirect overhead like marketing and sales expenses.) In short: The lower the COGS, the higher your Gross Margin, signaling there’s more room for investment and growth.
7. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
Definition: EBITDA is an indicator of overall operational profitability, showing earnings before the influence of financial and accounting deductions.
Calculation: EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization
Example: For a net income of $100,000, interest of $5,000, taxes of $15,000, depreciation of $10,000, and amortization of $5,000, EBITDA is:
EBITDA = $100,000 + $5,000 + $15,000 + $10,000 + $5,000 = $135,000
Why It Matters: EBITDA provides a clear view of operational effectiveness without the distortion of accounting and financial practices. It’s especially useful for comparing performance against competitors, providing insight into how potential buyers may value your company and, put most simply, measuring the overall financial performance of your MSP.
8. Contract Profitability
Definition: This metric assesses the profit or loss from each service contract, aiding in client relationship and contract management.
Calculation: Contract Profitability = Contract Revenue − Associated Costs
Example: If a contract brings in $25,000 and the associated costs are $20,000, the profitability is:
Contract Profitability = $25,000 − $20,000 = $5,000
Why It Matters: Identifying the profitability of individual contracts can reveal which clients are most valuable and which contracts might need renegotiation or operational adjustments. When assessing contract profitability, don’t just look at your highest revenue earner. Conduct a full analysis, including digging into your highest and lowest revenue earners, most and least profitable customers, and so on. Looking at contracts holistically enables you to track the financial health of each client engagement, which will ultimately guide your strategic decision-making.
Financial KPIs for MSPs: Choosing the Right Ones for Your Business
While the financial KPIs discussed are powerful, using them effectively requires the right context. Not all KPIs will be relevant to every MSP’s situation. The right mix should align with your strategic goals and operational focus. As computer scientist Alan Kay said, “Context is worth 80 IQ points.” Understanding the context in which your financial MSP KPIs operate can dramatically enhance their value and your decision-making process.
As a reminder, we’ll explore Client-Focused and Sales & Marketing KPIs in the next few weeks to round out our series and give you a holistic view of your MSP’s performance, so be sure to check back soon!
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