Data and analytics provide valuable insights into the past, current, and future state of your Managed Services business. Which Managed Services metrics are the most valuable, however, is a matter for debate. At TSIA, we have pinpointed the eight Managed Service provider metrics that will provide the most complete picture of the financial health of your Managed Services organization.

The Importance of Measuring the Right Managed Services KPIs

Data and analytics serve as barometers for all businesses. You are almost certainly using some metrics to assess company performance. There are, however, distinctions that set key MSP metrics apart from all other data concerning your company.

The key performance indicators are the metrics that align most closely with your organization’s specific goals. These goals should be rooted in your organization’s overall strategy. Therefore, the KPIs are essentially measuring your progress toward achieving your strategic goals. In that sense, the KPIs are vital for the long-term success of the company.

To think of it another way, key performance indicators are also essential for your company’s continual improvement. By constantly tracking your progress toward strategic goals, you will be better able to course correct quickly and effectively.

Without further ado, here are the managed services metrics that all providers should be measuring:

Growth Metrics

1 - Total Recurring Revenue Growth

It shouldn’t come as any surprise that revenue is one of the most important Managed Service provider metrics. There are, however, numerous ways to examine revenue contribution. Which one is best?

TSIA advocates for total recurring revenue growth, since it focuses on the core engine of your business – subscription-based recurring revenue and excludes one-time, transactional revenues that are often unpredictable. Total recurring revenue growth takes into account all recurring revenue from the previous year as well as newly contracted recurring Managed Services revenue.

2 - Top-Line (Net-New) Recurring Revenue Growth Rate

In contrast to the total recurring revenue growth, the top-line recurring revenue growth focuses exclusively on new recurring revenue that was signed in a given year. Top-line recurring revenue growth is valuable because it indicates the market’s current propensity to buy, the effectiveness of your sales team, and the perceived value of your offering.

A low growth rate or a major negative fluctuation in top-line recurring revenue growth year-over-year is a major red flag. Such a trend indicates a significant problem that you need to address, such as inadequate sales skills or inadequate offers in the market.

3 - Total Bookings Revenue Growth (Total Contract Value Growth)

This metric looks at the value of all contracts, including recognized revenue and revenue still to be recognized over the duration of all contracts with the managed service provider. In other words, the total contract value (TCV) of all signed agreements.

Bookings are arguably one of the biggest predictors of the future financial health of the managed service provider because of the lagging revenue model for managed services (or any subscription-based revenue stream).

For example, a three-year agreement that generates $10,000 per month in revenue has an actual total contract value of $360,000. Ten deals that generate $10,000 per month in revenue have an actual total contract value of $1.2 million.

4 - Base Revenue Growth

The Base Revenue Growth metric is a simple way to track your year-over-year percentage of revenue growth from your existing clients (a.k.a. base revenue expansion rate). This metric tells you how good your sales or customer success representatives are at “expand” revenue and shows your overall growth health for your managed services business.

Profitability Metrics

5 - Gross Margin

In the tech industry at large, gross margin has historically been the go-to metric to gauge profitability. In a product world, it’s easy to understand why. You basically have a cost of product (ideally, fully loaded cost) that is subtracted from revenue. Pretty simple.

In managed services, or honestly any other annuity revenue stream, there are a lot of factors that go into cost, and most of the managed service providers we’ve benchmarked do not calculate gross margin the same way. This is due to the lack of consistent approaches in the treatment of operating expenses, allocated costs, overhead, etc.

The TSIA Cloud 40 is a great way to illustrate why gross margin is not a good indicator of profitability. The average gross margin of 40 of the top cloud companies is 68%. Sounds great, right? The actual average net profit (net operating income) is -12%.

Despite what is mentioned above, the most common question from finance for the MS executive is: “What is the expected gross margin for these MS offers?” Hence, it is still a critical metric to track.

6 - Operating Income (a.k.a. Net Operating Income or Net Profit)

Operating income is the most accurate indicator of profitability for a managed service provider. The simplest explanation for net margin is all revenue minus all cost (direct cost, allocation, etc.). Gross margin is a good metric to use inside a company to compare to other product and service lines due to the fact that most companies calculate gross margin the same way (relatively speaking) across all products and services.

Operating income is essentially calculated the same way by all members. Therefore, it is a strong indicator of a company’s profitability compared to their peers and the industry overall.

Retention Metrics

7 - Recurring Revenue Retention Rate

Recurring revenue is the fuel that sustains any managed services business. As a result, it is imperative for a company to track and measure their growth or erosion in managed services recurring revenue. Profitable recurring revenue is what keeps the lights on by funding day-to-day operations as well as any future investments. This metric looks at the amount of recurring revenue from the previous year that is carried forward to the current year.

8 - Client Retention Rate

This metric looks at the number of customers a company retains over a given period of time. Two things renew in managed services: revenue and contracts. It’s important to understand both and the relationship between the two. A managed service provider wants to renew as much revenue as possible and continue to drive toward improved profit margins for that revenue.

There are some contracts that are just not profitable and may never be profitable. This can be caused by inadequate scope and design of the solution for a customer, or it can be caused by a problematic customer (or both). A skilled managed service provider will focus on growing profitable contracts. They may decide to shed their unprofitable contracts. Some MSPs will do this by not renewing a contract. Others have learned the art of selling less profitable contracts, often to a partner that has confidence that they can improve the profitability of those particular agreements.

A Final Word on Managed Services Metrics

The KPIs listed above have proven to be predictive gauges for Managed Services organizations. There may be additional metrics that suit your particular business as well. Whatever Managed Services KPIs you choose to follow, make sure to share them with your team. The goal is to have the whole Managed Services organization working toward improving these KPIs.