As with any small business, MSPs have to focus on day-to-day operations and service delivery— keeping clients happy—during their transition to subscription billing business models. Tracking financial metrics can easily get pushed to the bottom of the list…until there is a cash flow crisis.
To avoid those choppy waters, it’s critically important for MSP owners to stay ahead of the revenue changes that accompany the subscription billing model. There are five key challenges to consider and plan for that will enable you to make a smooth, and profitable, transition to the subscription billing based managed services world.
This article takes a very high level look at the revenue recognition challenges facing MSPs and he impact on MSP bookkeeping. In subsequent articles, we’ll dig deeper into each challenge and the specific metrics that will help you navigate the path to profitability.
1. Accurately track margins in A subscription Billing model
The costs associated with a subscription-based recurring revenue model will be calculated based on a number of components. For example, when you resell a SaaS product, there will be the licensing costs paid to the software vendor on behalf of customers plus the internal administrative personnel and monitoring costs that support the software. In addition, you may charge for your IP (Intellectual Property) as well as value-added services via your monthly fee. And be sure that corresponding costs are allocated across the same schedule.
2. Track profitability of individual service lines
The change to cloud-based business model doesn’t happen overnight. Some of your project-based business will continue as is and some will move toward subscription billing pricing over time. The types of managed services you offer will develop and morph to meet changing customer expectations, vendor offerings and your own observations of potential revenue opportunities. Tracking each of the service lines separately will help you identify areas of opportunity and those offerings you should leave to others.
3. Monitor the health of customer relationships
The concept of “Customer Lifetime Value” (CLV) takes a high profile in the Managed Service and SaaS worlds. Because revenue is earned and recognized over a long period of time, understanding the long-term potential value derived from a customer relationship is critical. The profitability horizon in Managed Service and SaaS operations is longer than for project work, requiring metrics that look further into the future.
4. Drive the growth of the business
Whether you have aggressive or more modest growth goals, tracking the forward motion of the business will keep you from losing ground. Factors like customer adds and service attachment will provide the performance measure to keep the business on track and ensure your growth is profitable.
5. ASSESS THE VALUE OF THE BUSINESS
One of the upsides of a cloud-based service practice comes through higher valuations from investors or buyers based on recurring revenue. With accurate measurement of the contribution and growth of recurring revenue, owners have a stronger financial position.
The momentum of cloud is unquestioned. To remain relevant, MSPs must adapt and provide services that align with customer expectations of subscription based software and service delivery. To remain profitable, MSPs must rethink how they monitor the financial health of the business.
The Driven Insights Advantage
At Driven Insights, we help MSPs get better visibility into the metrics that matter. Our bookkeepers and controllers are charged with much more than simply “doing the books”—they understand MSP bookkeeping take the time to understand your unique business challenges. We’ll help you navigate the transition to the cloud, providing the metrics and analysis you need in monthly reports and/or real-time dashboards.