How To Manage Involuntary Churn – A Silent Threat To MSP Growth

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Blindsided By Breakups 

Having met with countless MSP Owners over the years, I’ve heard a ton of breakup stories. In many cases, these customer breakups were the catalyst for a sudden enthusiasm around marketing and growth. That’s because suddenly, these are no longer optional. What I have found most interesting about these stories is that many of these breakups were not because the MSPs were doing a poor job. In fact, this is precisely why these situations had such a profound  impact. Instead, they were blindsided by “involuntary churn,” which is essentially when the customer must terminate their agreement for reasons beyond their control. 

I can recall one scenario that may help to paint a more vivid picture of the snowball effect that can lead to this involuntary termination. An MSP had a contract with their local school district (and every learning facility therein). Given that it is a very large district with many schools, this contract alone made up a large portion of their revenue. An election took place that dramatically changed the district leadership.  This leadership led to budget cuts. The budget cuts then forced the district to publish a new Request For Proposal (RFP), which then required the MSP to re-apply for the contract that they already had. They lost the contract to a competitor who undercut their bid (and quite possibly had corporate ties to the new leadership).

Taking Retention For Granted 

One thing you will notice about the story above is that the MSP’s SLA adherence, customer satisfaction, and net-promoter score were in no way a factor. According to the MSP, district employees were actually very pleased with the service being provided. Ironically, the Board Members that were making these decisions were not actually daily users of the service and therefore the impact for them was purely financial. 

If there is a lesson in all of this, it’s that MSPs must not take retention for granted. This is especially true when dealing with certain verticals (such as education / government) and larger customers with more complex and bureaucratic leadership. At this very moment, there are silent forces working against you that with one tiny ounce of “bad luck” could tip the scale in the wrong direction. Those that never expected this to happen are often the ones who have a difficult time recovering  when it does. Despite your perfect customer feedback rating and 1% churn rate, it’s important to understand what scenarios often lead to involuntary churn and how likely those scenarios are to impact your customer (thus impacting you). 

Types of Involuntary Churn

Involuntary churn takes many different shapes depending on the industry you are in. For example, in the case of a SaaS business, an expired credit card could be all that’s needed to force a cancellation of services. Thankfully, the MSP business model is far more bulletproof than that, however there are still chinks in the armor. 

Here are a few of the most common types of involuntary churn that you may experience: 

Mergers & Acquisitions

It is quite common for outsourced IT contracts to land on the chopping block in the event of an acquisition. In fact, this scenario can work both ways. If your customer is acquiring another business, you may be a beneficiary of a new (or expanded) contract. However, if your customer is the one being acquired, it is very likely that your contract will be terminated. 

The trickiest part of these situations is that you can almost guarantee that you will be left in the dark until the final hour. This is because most M&A scenarios require a Non-Disclosure Agreement to be executed by any leadership that is involved in the negotiations. Unless your services are a crucial part of the merger, you likely will not be informed of the transaction until it becomes public. Depending on the timeline, you may also find that these relationships end abruptly and without warning. 

Leadership Changes

A more predictable, but equally as impactful scenario of involuntary termination may come upon leadership changes at the company. In the example I provided earlier in the article, this leadership change happened as a result of a vote, and therefore should have been easy to see coming. When it comes to SMBs and private companies however, it may take a little more observation to sense these tides of change and which way they may be pointing. 

One way to look at this is; the lower your point-of-contact is on the org chart, the higher risk you run of losing that contract due to a leadership change. For example, if you deal directly with the Owner or C-Level decision maker on a day-to-day basis, then you probably have a good chance of sticking around. However, if you primarily coordinate with IT or Administrative staff and have very little engagement with upper management, then your relationship ultimately hinges on the careers of these POCs. If your biggest champion quits or is let go from their position, then you may end up with a situation where their successor simply chooses to move in a different direction. 

Business Closures 

I recently read a statistic from the Bureau of Labor Statistics that stated roughly 20% of small businesses fail within their first year, 50% fail within five years, and 70% fail within ten years. For MSPs that are servicing the SMB market, this essentially means that there is some level of guaranteed involuntary churn baked into their business model. This is especially true when servicing startups, or companies that have been in business for fewer than 10 years. Ironically, the longer an SMB has been in business, the more stubborn they can be when it comes to technology use, which explains why this becomes a difficult formula to crack for MSPs. 

This also explains why some smaller MSPs that service SMBs can experience flat-lined growth, despite continuously adding new customers. If they were to lose 20% of their revenue each year to involuntary churn (which is not common, but statistically possible) they would actually need to grow 25% each year just to make it back. In this scenario, it is easy to see why growth becomes a means for survival as much as it is a pursuit of prosperity. 

Budget Cuts

While it may seem like smaller customers are more likely to be subject to budget-related churn, I have actually found that the opposite to be true. When the financial decision-making is done in a silo, separate from the IT and technology related decisions, it can sometimes lead to situations where there is a complete disconnect between what’s needed and what the company is willing to pay for. 

While size is a factor, so is the industry vertical. Any time that budgets are determined by a Board or Committee (such as a Non-Profit), you are likely going to run a risk of involuntary churn for these reasons. While this process probably produces the best outcome for the customer, it limits the amount of influence you the MSP might have over the decision. 

Regulatory Requirements

Any time there are major updates to widely observed regulatory frameworks, there appears to be a shuffling of the deck for MSPs that follows. This was true in the case of the HIPAA Omnibus Rule in 2013, which expanded liability to MSPs handling healthcare data. This change prompted healthcare providers to seek MSPs with specific HIPAA compliance expertise and liability protections. In many cases, those that were too generalized to keep up, found themselves at the losing end of these transactions. 

The good news is, there is often plenty of time to mitigate these situations long before the regulations take effect. If you are a general practitioner with no specialized abilities, it may be wise to do your homework before taking on clients in heavily regulated industries. While these are often great economic opportunities, they come at a cost, which is the time, attention, and discipline required to comply with these regulations at every step. 

Internal IT Expansion

Sometimes involuntary churn is directly tied to a change in need. I experienced this first-hand as an MSP, as it related to a Co-Managed opportunity. After the downsizing of their IT department, an enterprise in the logistics industry had hired us to cover most of their Level 1, as well as some project support. What we didn’t realize was that this downsizing was only temporary and that the company was actively hiring to fill open roles which would lead them to unwind our services after only six months. While we helped cover a crucial gap in support, what we failed to realize is that our relationship was not part of the “big picture” for them. 

While this may seem somewhat voluntary on the surface, this company had several satellite offices throughout the country and the location that we serviced was apparently not making all of the decisions. They were the only location using an MSP, which should have been a red flag for us from the beginning. The lesson from this experience was that any time we take on a Co-Managed IT contract, we need to better understand the company’s organizational structure as a whole and how our small cog fits into that machine. 

Getting Ahead Of The Issue 

Rather than letting involuntary churn simply happen to you, it’s important to get ahead of it. While you may not be able to change the outcome, you can at least brace yourself and your business to better deal with the impact. Here are a few ways that MSPs can help to prevent churn or offset the adverse effects of it: 

Becoming A Strategic Partner

If your customer is not making you or business part of their overall strategic decision-making, then you run a higher risk of churn. In some cases, it may take you initiating this involvement. One of the most common frameworks for this among MSPs is the quarterly business review. Regardless of how often these meetings occur, it’s important to sit your customer down, learn their goals, and understand what purpose you serve in the overall outcome. 

As Hannah Paige, Director of Worklyn Partners puts it, “To mitigate the effects of involuntary churn, MSPs should build strong client relationships, understand their customers’ strategic goals, and stay attuned to industry trends. By offering flexible service models that demonstrate adaptability and maintaining open communication through regular business reviews, MSPs can better anticipate and therefore manage disruptions such as mergers, leadership changes, and budget adjustments.” 

Asking The Right Questions 

One thing that you cannot expect of your customers is for them to willingly volunteer information that in no way benefits them to provide. No one likes being the bearer of bad news and so the only way to get to the truth is to constantly be asking the right questions. If you think that your relationship with your customer may be at risk, then there is a good chance that it is. Confront the issue head-on and find out for yourself. 

I recently caught up with Robert Gillette of MSP Dojo, who expressed his wisdom on this topic; “Wonderful rapport and relationships with people do not salvage bad business relationships. You have to be willing to ask questions even when the answers are incredibly tough to hear. Bringing hard truths out in the open (and discussing them without getting defensive) is the only way to strip the power from them. Hiding from the bad things does not make them go away, it just saves all the tough conversations for a sudden and messy breakup.”

Expanding Your Touchpoints

The best way to offset the risk of involuntary churn due to leadership changes is to treat everyone like the CEO. While it may be easy to express favoritism towards the decision makers who sign your contracts, they may not hold those positions forever. If you want your relationship to outlast their tenure at the company then it’s important to expand your touchpoints to other individuals when possible, no matter how high or low on the ladder they may be.

Rhondre Giscombe of MSP Revenue Secrets has a great analogy for this concept. As he explains, “Create relationships with the village, [not just] the elders. Your elders are your Buying Committee, the people directly involved in signing off and managing the relationship. Your village is the employees affected by their decision of who they decide to work with.It’s a lot harder for an elder to disregard the opinions of their village if everyone likes you. During turbulent times, they will vouch & fight because what you provide them goes beyond just a service but a relationship that’s all trust.”

Meeting Your Obligations

It is getting increasingly more difficult to be a “general practitioner” in today’s MSP landscape. This is primarily due to industry regulations which exist in every market, from major metros to rural communities. As the MSP, you are obligated to understand the regulatory environment that your customers must participate in and how their technology use impacts their adherence to these rules. 

As someone who helps lead the charge in this arena, Jesse Miller of PowerPSA Consulting expresses strong opinions on this topic. “When it comes to supporting regulated industries, MSPs definitely want to have a thought through approach, as it isn’t something you shoot from the hip on. Fully committing and building a program with internal resources is ideal. The benefits are that you are securing your long-term place in the evolution of the industry and creating that ‘mini-Accenture’ model that will pay dividends down the road with premium client types, and increase stickiness with existing clients. The downsides are that this is more work, and takes some time and money investment to stand up a practice. The bottom line is that regulation isn’t going away, so doing nothing really isn’t an option.”