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Overutilized & Unprofitable Contracts 

A pivotal moment in our journey as an MSP was the discovery of a ‘Profit & Loss By Customer’ report hidden deep in Autotask. Of course, running this report for the first time did us no good, but it showed us what was possible. The problem was us. We didn’t have our resource costs set, our team was barely tracking their time on non-T&M contracts, and the contracts themselves were not aligned with the work actually being done. We had work to do, but we suddenly realized that there was a path forward. 

Overutilized contracts are the rotten apple that spoils the whole bunch. They eat away at the profits of your best customers and gobble up your resource time on frivolous tasks. They are what make you and your team feel ‘busy’ all the time with no end in sight. They keep you permanently stuck in a reactive state when you desperately want to be proactive for your customers. Every MSP has to overcome this and only those who do it gracefully will make it to the promised land.

To aid in this process, I reached out to a handful of leaders in the IT Channel to help culminate a vision and process for how MSPs should handle overutilized contracts in their business. Here’s what they had to say: 

The State of MSP & Cyber | 2024 IT Industry Report

Sponsored by Worklyn Partners & Zest 

PSA Data & Reports

Identifying overutilized contracts starts with making sure that you are looking in the right place. Hannah Paige, Managing Director of Worklyn Partners has run profitability analysis on thousands of MSP businesses. As she points out, “The easiest place to track contract utilization is in your PSA tool with a reporting add-on like BrightGauge for ConnectWise. While I realize not every MSP can budget BrightGauge or similar advanced reporting tools, some standard PSA reports can get close—it just takes the ability to use Excel and manipulate the data manually. Secure AI tools like Co-Pilot and ChatGPT can make this process even easier. It won’t be automatic, but if you treat it like reviewing your P&L at the end of the month, you can run the same analysis for profitability by customer.”

In a perfect world, a lot of this manual intervention wouldn’t be required. After all, there isn’t a single MSP that I’ve met that doesn’t want to know their profitability by contract. The challenge with legacy PSAs is that their endless customization makes out-of-box reporting almost impossible by default. This is why the market for add-on solutions exists and what creates a market for newer, more streamlined alternatives. One of these alternatives is spearheaded by Bobby Lind, CEO of Zest. As he explains, “Using the right tool, you can track every minute you spend toward each customer. At some MSPs, up to 30% of the time they spend providing service to their customers occurs outside of standard technical tickets.  All of this time adds up to cost, and you absolutely need to be able to compare that cost to your revenue on a per customer basis.” This shouldn’t be up for debate and I think it’s time the industry finds a way to make this easier for MSPs of all sizes. 

Accurate Time Entries 

While the ability to run a profitability report is imperative, it is only useful if you can trust the data behind the numbers. This starts with making sure that Engineers and Project Teams are accurately tracking their time. This is easier said than done, as there is so much friction in the ticket intake process, no matter what tool your team is using. Jeff Newton, Co-Founder of Cyft has been helping MSPs fight this battle everyday. As he explains, “[We] obsess over ticket times and miss the deeper story. While Techs document ‘router configured’ in 30 seconds, the missing 20 minutes of security advice, network planning, and client training vanish into thin air. This invisible work – multiplied across hundreds of tickets – creates a growing gap between your actual service delivery and the COGS that actually hit your agreements.” 

Newton goes on to say that “By capturing every conversation automatically, you’ll finally see the full scope of work your team delivers. That’s the difference between wondering why your margins are shrinking and knowing exactly which agreements need restructuring.” This automatic time capture that he describes is another valuable use case for AI. While PSAs have traditionally tried to improve user experience by widgetizing the time-tracking module and making it more accessible, I feel as though the real gains will happen when we do the opposite. Rather than conveniently putting it in the way, we should look to make it invisible. This is the only true way to hedge against human behavior and the costly friction in time entries that has derailed MSP profitability for over a decade. 

The State of MSP & Cyber | 2024 IT Industry Report

Sponsored by Worklyn Partners & Zest 

Quarterly Business Reviews

Once you have a process for contract utilization reporting that is built on data that you can trust, now you can start to monitor profitability by customer. While some customers will be quite obviously (and permanently) in the red, you may also notice others that fluctuate. This is why it is important to not overreact and you allow time and data to accumulate before approaching the customer. Most MSPs agree that the most appropriate time to discuss contract utilization with your customer is in their Quarterly Business Review (QBR). 

As Hannah Paige described, “We always save the profitability conversation for QBRs. So if you’ve been unprofitable for two full quarters—six months—we’ll start having that conversation. It depends on a few variables, like whether the contract is one year or three years, but typically at the one-year mark, we have the ability to increase pricing based on inflation plus a percentage, depending on the customer.”​ She brings up a great point, as running into profitability issues early on in a multi-year contract can be daunting. This is where contract escalation clauses can offer a pressure release valve, and establishing a steady QBR cadence can foster communication that leads to long term profitability improvements.

Honesty & Transparency 

When it comes to navigating QBR conversations, Alex Farling, Co-Founder of Empath is the authority. When asked how he approaches these conversations he states, “I’m a transparency guy. I show them the numbers and explain the business. But that’s not for most people. I find that good customers understand and come to the table. But you have to really know your sh*t to have that conversation and unfortunately [a lot of] MSPs don’t.” This lack of insight is largely due to the concerns we’ve already addressed with regards to poor reporting and time tracking. It’s hard to tell the truth when you don’t know fact from fiction.

Brian Gillette of Feel Good MSP echoed a similar sentiment. “The goal of transparency in negotiations is to align incentives and alleviate concern about ulterior motives. This needs to be balanced, though, with the reality that your customer is not in charge of your pricing model. Don’t bring them a problem that you are supposed to be in charge of solving and ask them to set up your pricing correctly. When my MSP bought a break-fix business, we went one-by-one to in person meetings where we were very transparent. ‘Mr. Customer, the way that we’ve been doing business with you is not sustainable. It’s resulted in Eric here working 20 hour days, many of those hours going un-billed. We realize that you’ve been the benefactor of this dynamic and we take 100% responsibility for it. While we continue to want the best for you, we have to level-set our relationship into a way that works for both of us.” 

The State of MSP & Cyber | 2024 IT Industry Report

Sponsored by Worklyn Partners & Zest 

Events, Issue Types & Root Causes

While offering a transparent look at the numbers is a great first step, it only gets you so far. There’s always more to the story and the only way to truly fix the problem is to get to the root cause. As Paige points out, “Is it overutilization, or is it just an event? We’ve had customers who spike in usage due to a specific issue, but once it’s resolved, the overutilization goes away. You need to take a holistic view—was this a bad contract from the start, or was this an isolated incident that isn’t likely to repeat?” Only time (and data) will tell. 

Farling also expressed a similar sentiment. “You have to know WHY it’s unprofitable and fix it. Are you just that far below market rates? Do they have a project that will fix high maintenance technology that they are just putting off? Are their people just needy and poor technology users? What’s the fix? It’s almost always raising rates AND [something else].” The bottom line is that you can’t just march into your QBR and demand that your customer pay more. You have to offer a path to resolution that aligns with everyone’s best interests (not just your own). 

Crafting A Compromise

What we are ultimately describing here is a compromise. This is what being a true vCIO is all about. It’s looking at a business problem and proposing a technology solution to fix it. It’s also why the terms customer success and vCIO often get thrown around interchangeably. Author Marnie Stockman knows this all too well, as she has penned several works on Leadership and Customer Success. She recommends that you “Wear your customer success hat to brainstorm creative solutions. Perhaps you can offer a scaled version of the service that aligns more closely with their needs and budget, or maybe there’s an alternative service model or additional training that could optimize their usage without increasing costs. Share stories of how other clients have successfully modified their contracts for mutual benefit. I love using the statement: Some of my most successful clients… (fill-in-the-blank with desired action and outcome).” 

When it comes down to it, you have to be negotiating from the same side of the table. Putting yourself at odds with the customer will only get you further from a resolution. As Hannah Paige reiterated, this is a business problem. “At the end of the day, the person you’re talking to is also running a business. If they want you to keep providing your service, you still have to be in business, which means you need to be making money. So it’s really a business-to-business conversation that should be had sooner rather than later. You don’t have to fire them immediately, but the first step is having that discussion to see if they understand the problem and if they can meet you where you are.”

The State of MSP & Cyber | 2024 IT Industry Report

Sponsored by Worklyn Partners & Zest 

When To Part Ways

One of the most difficult parts about being an MSP is navigating these situations with dead-end clients. In Seth Godin’s book ‘The Dip,’ he refers to these as Cul-de-Sacs. “The Cul-de-Sac ( French for ‘dead end’ ) is a situation where you work and work and work and nothing much changes.” He goes on to recommend that readers “realize that it exists and to embrace the fact that when you find one, you need to get off it, fast. That’s because a dead end is keeping you from doing something else. The opportunity cost of investing your life in something that’s not going to get better is just too high.” This is great advice for both life and dealing with unprofitable customer relationships that have reached a point of no return. 

If you find yourself in this situation, how you handle it matters. Remember, your goal is to provide the best outcome for your customer and your business and sometimes that means helping them find another provider. Matt Yesbeck of MSPX  is launching a project to help MSPs do just that. As he explains, “Pruning bad fit or unprofitable customers is essential for all MSPs at some point in order to ensure their other customers flourish. Let’s face it, firing a customer is never easy though. It’s awkward, it can get messy, and if handled poorly, it can even damage your local reputation. In my experience, cutting ties has always been an unpleasant, high-friction process. This is why we built MSPX. Instead of just walking away and leaving the customers scrambling, we now have a structured, professional way to transition them to another MSP that’s a better fit.” 

Conclusion

The bottom line is that if you want to mature, scale, and eventually exit your business, you need a process for dealing with overutilized contracts. It will be quite difficult in the short-term but the future of your business depends on it. As your client-base grows, these situations become even more difficult to spot as there is more operating income to hide behind. Treat every contract like your business depends on it and you will be just fine. 

SPONSORED BY ZEST