TLDR Preview: Many “MSPs” are still selling hourly services, which are tougher to bill, directly tied to labor hours, less profitable, and add little value to the business. Mature MSPs focus their business around managed services, which are easier to bill, not tied to labor hours, more profitable, and continually add value to the business. Anyone can make the shift, you just have to take a leap of faith.
Dirty Money Vs. Magic Money
Operationally immature MSPs tend to see all revenue as equally valuable to the business. “If it’s green, it’s good,” they say. Well, the reality is that there are certain kinds of revenue that keep you on the hamster wheel, and there are other kinds that get you off of it and set you up for a comfortable future.
What Is Dirty Money?
A lot of businesses that call themselves MSPs have not even embraced the basics of the MSP model, which boils down to charging a flat, recurring monthly fee for mostly proactive services. They either haven’t recognized the superiority of the managed services model, or more likely, they just don’t think they can sell it consistently. Most of their revenue is what we call Dirty Money.
Dirty Money has several characteristics. At its essence, it is a direct swap of labor for dollars. Thus, the only way to get more money is to spend more time. If the MSP works efficiently and spends less time on a matter, they actually make less money. Dirty Money isn’t recurring. It can’t be billed in advance.
Dirty Money is harder to invoice, because it requires painstaking time-sheet approvals and invoice cleanups, so that bills get challenged by clients less often. But no matter how good a job is done on that, some hourly invoices will go unpaid and/or have to be discounted. If a client’s average monthly bill is $2,000, they will always quietly pay when the bill is $1,000 in a particular month, and usually resist and complain when the bill is $3,000 in a particular month.
Dirty Money can only be billed once the work is completed, and bills only go out once a month. That means work performed on the first of the month gets invoiced somewhere around 45 days later, on average. Then the client can take a while to pay that invoice. Needless to say, waiting two and a half months to get paid for completed work will lead to cash-flow issues. How could it not?
It’s not a good plan. But yeah, we did it too.
Also, Dirty Money adds almost no value to a business. It’s an oversimplification, but generally speaking, buyers determine whether to buy an MSP based on the amount of contracted MRR they have, and they decide what to pay for it based on its profitability. MSP buyers won’t pay much for Dirty-Money revenue.
In short, Dirty Money…
- Requires lots of time from owners and key employees.
- Is not recurring. (No, it doesn’t matter if the billing is somewhat steady.)
- Is more painful to invoice due to time approvals and invoice cleanups.
- Is more stressful because more of the work is reactive.
- Adds little value to the business.
Magic Money
An MSP’s goal should be to get most of their revenue into what we call the Magic Money category. Magic Money has no direct correlation to the amount of time spent on work for a specific client. The MSP is billing for services, platforms, and business results, not time. They might still look at hours on the back end to determine the efficiency of an individual employee or the company as a whole, but as far as client billing is concerned, time disappears from the equation.
Because the MSP is invoicing services and not simply time, they don’t have to justify every 15 minutes they bill. This means the monthly invoice can be sent without approving time sheets or doing painstaking invoice reviews. The MSP can bill on the first of the month for the month ahead.
Because the MSP is charging clients the same amount consistently every month, they can even set clients up for automatic payment. They’ve just gone from getting paid two and a half months later for work done on the first of the month to getting paid the same day. In fact, they’ve also gotten paid for work that won’t get done until the last day of the month. They just shaved three months or more off how long it takes for them to get that cash money for their services!
This means that the more efficiently work is done, the more profitable the company is. Creating and following standard operating procedures (SOPs) and templates makes total sense. Leveraging automation and artificial intelligence becomes more important. The lower the monthly support time per user metric gets, the more profitable the MSP is. The amount of time it takes for an MSP to support a user on average has shrunk by over 50% in the last 15 years. This has been a boon for companies on a true MSP model – they have been to juice profits without raising their prices too much. The effect has been the opposite for those doing hourly billing. Less support time just means less revenue.
Magic Money also continually adds value to the business. If Dirty Money is the equivalent of renting a house—the money spent each month is gone and never to be seen again—then Magic Money is more the equivalent of buying a house, making the mortgage payment each month and building equity. And the value of the house is appreciating too.
In the earlier days of our companies, there were very few MSPs being acquired. The MSP model wasn’t mature, and we really didn’t know if we were actually building an asset that could be sold someday. We hoped that for every dollar we paid ourselves, we were putting a dollar in a piggy bank we could break open someday by selling the company. Over time, we both fully adopted the managed services model, and eventually that hope turned into reality.
If you are collecting MRR, you have a piggy bank too.
Magic Money…
- Requires little time from owners and key employees.
- Is recurring every month.
- Is easy to invoice. There is no time-sheet dependency.
- Is less stressful due to mostly planned, proactive services.
- Continually adds value to the business.
Intentionality is the Key
It’s really not that difficult to focus your business on Magic Money and leave most of Dirty Money behind. It’s not difficult, but for some it is hard. The battle is a mental one. A leap of faith is required. You must fully commit to the managed services model and believe you can sell it. You must also be willing to accept that clients who will not sign on to a managed services agreement just aren’t the clients for you. They’ll never be prize-winning pumpkins. They will prevent your MSP from ever reaching its’ full potential. Yank those weeds and grow something incredible.
Adapted from Chapter 5 of The Pumpkin Plan for Managed Service Providers by Dave Cava and Shawn P. Walsh. Read a chapter for free here: https://encorestrategic.io/#form