Asking businesses to prepare for uncertain times seems like redundant advice. Businesses have been dealing with an unsettled climate since at least early 2020, if not before.
But things are changing again, and while we may not officially be in a recession, there are many gloomy predictions from economists. Having weathered the worst of the pandemic, businesses need to find new reserves of resilience.
The pandemic accelerated digital transformation and smart MSPs were able to demonstrate their value. But an economic slowdown is different; many customers will look to cut costs and reduce fees. The goodwill gained with a customer portfolio will help, but it won’t fully protect MSPs. No business should become complacent.
MSPs may have a certain amount of natural resilience as their customers will always need IT services, but they cannot rely on that as a given.
Building resilience
There are two obvious ways that businesses can help build resilience against economic uncertainty – maximise revenue and control costs. Of course, businesses should be trying to do this at all times, not just during a downturn, but economic uncertainty makes this a pressing concern. MSPs should be looking at key areas and tools to do this.
First, they should automate and standardise. There are many reasons why MSPs can find themselves using multiple tools to do the same job—customer demands, merging with or taking over another MSP, or simply using similar tools to do very slightly different jobs.
MSPs can control costs by standardising their tools, rather than using multiple tools from multiple vendors. Better deals can be struck when more licences are bought in bulk, but there are other advantages too.
When technicians are highly proficient in a single tool rather than having a working knowledge of several, they can work far more efficiently. Working with fewer tools also makes it easier and more cost-effective to introduce automation, again increasing productivity.
Next, MSPs should look to maximise revenue from existing clients. Winning new clients may be seen as the best way to be recession-resilient, but MSPs should identify sales opportunities with existing customers where they can.
Far less effort and investment is needed to identify sales leads this way than looking for completely new leads. Plus, this can actually build stronger lifetime customer value. Offering customers strategic assistance communicates to them that an MSP is a strategic partner, not just a provider of basic services.
Going beyond the basics
Beyond these immediate steps, there are other, perhaps less obvious, ways that MSPs can prepare for economic uncertainty. First, you need to fully understand costs. Reducing and controlling costs is obviously important, but a deeper understanding will help.
A crucial KPI for any business is the “burn rate”, the monthly recurring contract revenue needed to cover all of your operating expenses and overhead costs over a certain period. The goal is to achieve a burn rate of at least one – this means the recurring revenue generated by the managed services line of business is sufficient to cover all operating expenses and overheads.
Once you’ve met this goal, then every pound earned after that automatically goes right to your bottom line. Unfortunately, when you are below your burn rate, it means that you are not generating enough recurring revenue to cover your expenses and you are relying on the non-recurring revenue to pay your bills just to break even.
Every MSP should know where they stand with respect to their burn rate. It’s a good indicator of the overall health of the business and how much needs to be done to get things moving in the right direction.
You also shouldn’t abandon marketing efforts. It’s tempting to see marketing as an unnecessary spend that can be cut, but a very careful approach is needed.
Rather than slashing the budget, evaluate marketing and sales to make sure they are properly aligned to support each other. More experimental methods of marketing may have to be put on hold in favour of something tried and tested.
Finally, make sure you understand debt.
Changes in interest rates have already happened and may continue, so MSPs need to know if any debt they have is at a fixed or variable rate. Changes will put pressure on cash flow and the balance sheet. Can this be renegotiated or paid down as a priority?
Don’t wait for a recession
A recession is technically defined as two quarters of negative growth and some economists are predicting that we won’t actually see a recession, just a short dip before a recovery. However, the best advice remains to be prepared.
Some parts of the market, whether geographical or vertical, are more vulnerable than others, though no one is immune. Understanding where an MSP stands and how these potential challenges will affect them is the first step.
Economic shifts have the potential to create new opportunities to expand and drive additional revenue opportunities, and MSPs are well-positioned to help streamline spending for customers as well as adding new cloud services and levelling up their security posture. Being prepared to do this is critical to preparing for a potentially turbulent future.
This opinion piece appeared in our July 2023 print issue. You can read the magazine in full here.