The common adage of 'what gets measured gets managed' is repeated in businesses of all sizes and types – particularly in the service provider space. Service providers are in an ideal position to capture an almost endless number of data points on each customer as well as the overall business. However, many providers fail to manage what they are measuring or manage only by a basic set of core metrics. While metrics like revenue, sales forecasts and ticket counts are easily calculated and easy to understand, they often fail to provide sufficient value to guide the business to long-term success. In the first part of this series, we introduced nine metrics that service providers should consider for financial, account and service management. This report introduces several additional metrics for service providers to measure and manage the health and growth of their business.
The 451 Take
It is relatively easy to become a managed service provider, but it can be challenging to become a successful managed service provider with consistently growing recurring revenue that can stay profitable in a shifting industry. Constant measurement and analysis of the right set of metrics are crucial for service providers to understand how the business is performing and in what direction the business is heading. However, becoming a metric-driven service provider does not require assembling and reviewing hundreds of metrics. In fact, collecting too much data can end up being a distraction because there are too many variables to consider. Conversely, collecting and monitoring too few data points can fail to provide an accurate picture of the organization. It is important for service providers to monitor a set of metrics that align with the current and future goals of the organization, identify opportunities to improve performance, then appropriately manage the processes and drivers that affect those metrics in order to increase customer satisfaction, grow the bottom line and stimulate the long-term success of the business.
Labor loaded gross margin
Most service providers indicate they monitor labor loaded gross margin (LLGM); however, many fail to use this metric to better manage their profitability. This metric states the 'all in' gross margin profitability for each agreement after accounting for all the labor and direct costs incurred to service the agreement. LLGM is calculated by taking the total revenue from an agreement or contract then subtracting the total labor and total direct hard costs to support that agreement. The resulting number is the total true margin dollars for that agreement. Dividing this number by the total revenue for that agreement results in an LLGM percentage.
Ideally, this number should consistently be over 65%. A lower LLGM percentage often indicates that the service provider may be losing money on a particular agreement or contract. Successful service providers measure this metric month over month to ensure they are profitable on each agreement over the longer term and take proactive steps to address any problematic agreements. The metric may display a low LLGM percentage for a particular agreement for a particular month due to an abnormal service incident but otherwise should be north of 65%. Regularly low LLGM percentages will require additional investigation but often indicate there may issues with labor costs, pricing, or an ongoing unresolved issue with a customer that needs to be addressed.
Stale tickets
Most service providers believe if you take care of the client experience everything else will fall into place. While there is some truth to that belief, some service providers set themselves up for failure by allowing customers' requests to go stale. While it is important to monitor tickets by their overall age, it is arguably more important to monitor tickets that go untouched for periods of time. Ironically, most service providers monitor stale ticket metrics yet fail to proactively manage the tickets representing this measurement, frustrating customers and reducing client satisfaction.
The stale ticket metric measures tickets in terms of age and when they were last worked. Some variations also include the last communication to the client about the ticket status. Many providers monitor this metric in different tiers; for example, critical tickets that have not been worked on in four hours vs. low-priority tickets that have not been updated within three business days. These tiers and targets vary by provider depending on their business and delivery model.
Tickets can become 'stale' for many reasons, but are often the result of poor or broken processes that result in tickets with no engineer assigned or assigned to an engineer who is unavailable (e.g., on vacation). Unfortunately, tickets often go stale due to poorly managed tickets queues assigned to engineers that have more tickets than they can efficiently handle, possibly indicating an overburdened staff or a lack of ticket management skills. Regardless of the reason, keeping this metric at zero or as close to zero as possible should the goal for every service provider to ensure a high level of customer satisfaction.
Monthly recurring revenue metrics
Monthly recurring revenue (MRR) is the key component of the service provider business model and is often cited as the top metric that providers monitor each month. With each new agreement signed, the amount of predictable, ongoing revenue increases. However, merely measuring total MRR by itself can be misleading. As the business grows, it is important to track not only top-level MRR but also other data points that can provide key insights to into monthly recurring revenue.
Service providers of all types should closely monitor and manage the four individual metrics that have a significant effect on the total MRR month over month: new revenue, lost revenue, expansion/upgrades and reductions/downgrades. While customers may expand or contract business with their service provider for reasons outside the provider's control, these metrics can provide insights into trends that are otherwise often overlooked. For example, the expansion/upgrade metric can provide visibility into the effectiveness of growing business within the existing customer base through cross- or upselling, while the reductions/downgrades metric may signal that customers are no longer finding as much value in the services offered by the provider.
Another key MRR metric, MRR Growth Rate, provides a sound indicator of how quickly the business is (or is not) growing, measuring the month-over-month percentage increase in net MRR. To calculate the MRR Growth Rate, first calculate net MRR for the most recent month ended by adding existing MRR, new MRR and expansion/upgrade MRR together and then subtracting lost MRR and reduction/downgrade MRR for the month. Subtract the net MRR from the previous month from the net MRR for the most recent month ended, then divide by the net MRR for the most recent month ended. For example, if net MRR for January is $5,000 and net MRR for February is $6,500, then the MRR Growth Rate for February is 23% (($6,500-$5,000)/$6,500).
The MRR Growth Rate can provide the missing context to net MRR, measuring relative progress month-over-month. A consistent month-over-month MRR Growth Rate suggests the service provider is experiencing rapid, exponential growth because it requires an increasing amount of new revenue each month to maintain the same growth rate. Successful, growing server providers often report north of 15% year-over-year MRR Growth Rates. This metric tends to be favored by investors who often are seeking companies that are accelerating monthly revenues while decreasing monthly churn and reductions.
Metrics matter. However, there is no 'one size fits all' set of perfect metrics for every service provider to leverage month in and month out to manage the business. Successful service providers limit the number of behaviors and activities they measure. Recognizing that metrics are a tool, they focus on the most important metrics to guide their decision-making, pressing for positive change in the business and the bottom line.
The 451 Take
It is relatively easy to become a managed service provider, but it can be challenging to become a successful managed service provider with consistently growing recurring revenue that can stay profitable in a shifting industry. Constant measurement and analysis of the right set of metrics are crucial for service providers to understand how the business is performing and in what direction the business is heading. However, becoming a metric-driven service provider does not require assembling and reviewing hundreds of metrics. In fact, collecting too much data can end up being a distraction because there are too many variables to consider. Conversely, collecting and monitoring too few data points can fail to provide an accurate picture of the organization. It is important for service providers to monitor a set of metrics that align with the current and future goals of the organization, identify opportunities to improve performance, then appropriately manage the processes and drivers that affect those metrics in order to increase customer satisfaction, grow the bottom line and stimulate the long-term success of the business.
Labor loaded gross margin
Most service providers indicate they monitor labor loaded gross margin (LLGM); however, many fail to use this metric to better manage their profitability. This metric states the 'all in' gross margin profitability for each agreement after accounting for all the labor and direct costs incurred to service the agreement. LLGM is calculated by taking the total revenue from an agreement or contract then subtracting the total labor and total direct hard costs to support that agreement. The resulting number is the total true margin dollars for that agreement. Dividing this number by the total revenue for that agreement results in an LLGM percentage.
Ideally, this number should consistently be over 65%. A lower LLGM percentage often indicates that the service provider may be losing money on a particular agreement or contract. Successful service providers measure this metric month over month to ensure they are profitable on each agreement over the longer term and take proactive steps to address any problematic agreements. The metric may display a low LLGM percentage for a particular agreement for a particular month due to an abnormal service incident but otherwise should be north of 65%. Regularly low LLGM percentages will require additional investigation but often indicate there may issues with labor costs, pricing, or an ongoing unresolved issue with a customer that needs to be addressed.
Stale tickets
Most service providers believe if you take care of the client experience everything else will fall into place. While there is some truth to that belief, some service providers set themselves up for failure by allowing customers' requests to go stale. While it is important to monitor tickets by their overall age, it is arguably more important to monitor tickets that go untouched for periods of time. Ironically, most service providers monitor stale ticket metrics yet fail to proactively manage the tickets representing this measurement, frustrating customers and reducing client satisfaction.
The stale ticket metric measures tickets in terms of age and when they were last worked. Some variations also include the last communication to the client about the ticket status. Many providers monitor this metric in different tiers; for example, critical tickets that have not been worked on in four hours vs. low-priority tickets that have not been updated within three business days. These tiers and targets vary by provider depending on their business and delivery model.
Tickets can become 'stale' for many reasons, but are often the result of poor or broken processes that result in tickets with no engineer assigned or assigned to an engineer who is unavailable (e.g., on vacation). Unfortunately, tickets often go stale due to poorly managed tickets queues assigned to engineers that have more tickets than they can efficiently handle, possibly indicating an overburdened staff or a lack of ticket management skills. Regardless of the reason, keeping this metric at zero or as close to zero as possible should the goal for every service provider to ensure a high level of customer satisfaction.
Monthly recurring revenue metrics
Monthly recurring revenue (MRR) is the key component of the service provider business model and is often cited as the top metric that providers monitor each month. With each new agreement signed, the amount of predictable, ongoing revenue increases. However, merely measuring total MRR by itself can be misleading. As the business grows, it is important to track not only top-level MRR but also other data points that can provide key insights to into monthly recurring revenue.
Service providers of all types should closely monitor and manage the four individual metrics that have a significant effect on the total MRR month over month: new revenue, lost revenue, expansion/upgrades and reductions/downgrades. While customers may expand or contract business with their service provider for reasons outside the provider's control, these metrics can provide insights into trends that are otherwise often overlooked. For example, the expansion/upgrade metric can provide visibility into the effectiveness of growing business within the existing customer base through cross- or upselling, while the reductions/downgrades metric may signal that customers are no longer finding as much value in the services offered by the provider.
Another key MRR metric, MRR Growth Rate, provides a sound indicator of how quickly the business is (or is not) growing, measuring the month-over-month percentage increase in net MRR. To calculate the MRR Growth Rate, first calculate net MRR for the most recent month ended by adding existing MRR, new MRR and expansion/upgrade MRR together and then subtracting lost MRR and reduction/downgrade MRR for the month. Subtract the net MRR from the previous month from the net MRR for the most recent month ended, then divide by the net MRR for the most recent month ended. For example, if net MRR for January is $5,000 and net MRR for February is $6,500, then the MRR Growth Rate for February is 23% (($6,500-$5,000)/$6,500).
The MRR Growth Rate can provide the missing context to net MRR, measuring relative progress month-over-month. A consistent month-over-month MRR Growth Rate suggests the service provider is experiencing rapid, exponential growth because it requires an increasing amount of new revenue each month to maintain the same growth rate. Successful, growing server providers often report north of 15% year-over-year MRR Growth Rates. This metric tends to be favored by investors who often are seeking companies that are accelerating monthly revenues while decreasing monthly churn and reductions.
Metrics matter. However, there is no 'one size fits all' set of perfect metrics for every service provider to leverage month in and month out to manage the business. Successful service providers limit the number of behaviors and activities they measure. Recognizing that metrics are a tool, they focus on the most important metrics to guide their decision-making, pressing for positive change in the business and the bottom line.
Aaron Sherrill
Senior Analyst
Senior Analyst Aaron Sherrill covers the Managed Services sector, which includes disaster recovery and security services. Aaron joined 451 Research after serving as Vice President and Chief Technology Officer for two of the largest Managed Service Providers in the market.
Cameron O'Shaughnessy
Senior Research Associate, Information Security
A Senior Research Associate in 451 Research’s Multi-Tenant Datacenter (MTDC) Channel, Cam O’Shaughnessy covers top national and global datacenter markets.In this capacity, Cam tracks regional supply and demand, regulatory forecasts and shifts in the datacenter provider landscape.
Keith Dawson
Principal Analyst
Keith Dawson is a principal analyst in 451 Research's Customer Experience & Commerce practice, primarily covering marketing technology. Keith has been covering the intersection of communications and enterprise software for 25 years, mainly looking at how to influence and optimize the customer experience.