Combating Margin Erosion

The economic climate keeps changing and Managed Service Providers (MSPs) are forever facing new challenges to keep their profit margins high. MSPs that originated in the past 10 years have never dealt with an economic downturn. Therefore, many providers are struggling to find new earning opportunities to avoid making cuts. It is time for MSPs to re-evaluate their strategies and determine how to remain profitable.

Combating Margin Erosion

Margin erosion can be defined as the loss of margin that occurs when the sale of an item has taken place, and that item has a profit margin lower than expected. While not every problem that can potentially erode margins is predictable, MSPs can work to address the ever-evolving business model to halt a gradual reduction in gross profits over time.

To combat margin erosion, some common best practices include:

• Creation of a strategic sales plan
• Thorough management of risks
• Optimization of the company
• Centralization of tasks
• Increased employee engagement

Causes Of Margin Erosion

Margin erosion can be caused by many different factors such as:

• Internal or external theft
• Human error
• A company's policy changes
• New legislation
• Shifts in the national and global economy

While not every risk that can lead to margin erosion is avoidable, MSPs can prepare for many of the different possibilities that contribute to this loss of margin.

4 Tips to Avoid Margin Erosion

Though margin erosion cannot be avoided entirely for every MSP, there are many steps they can take to mitigate the risks of many business projects commonly susceptible to margin erosion.

1) Establish Repeatable Processes for Providing Accurate Cost Estimating

Creating realistic estimates is an important first step when planning for a profitable business project. While cost estimating sounds simple in theory, the understanding of a project's limitations, and overall price is an extremely important aspect to account for.

2) Proactively Manage the Change Order Process

Unrealistic goals are one of the primary reasons business projects can lead to margin erosion. Change orders are commonly needed due to miscommunication or lack of communication between project team members, or the accepting of client scope changes without fully realizing the potential financial challenges.

3) Provide Visibility and Effective Coordination of Resources

The most valuable asset for an MSP in the services industry is their employees. Proper employee management is extremely valuable for an MSP looking to maintain profitability.

4) Arm Yourself with Information Necessary to Proactively Respond to Cases of Margin Erosion

MSPs will benefit when they have access to the tools to create an effective budget, realistically monitor spent time, adjust protocols and plans based on required changes, and be equipped with the information necessary to effectively respond to potential project margin erosion situations.

Drive Profitability

To drive profitability, MSPs need to adapt their business models, stay agile, and invest in new technology. It’s time to get creative and consider all the options that may help?increase profit margin.

Here are a few ideas to consider:

• Pay attention to KPIs. Pay attention to how well you are doing your job. Track things like how happy customers are and how quickly you solve their problems. Then look at if you are making money, and if your work is helping the company succeed.
• Re-examine your pricing.?You should look at how much you charge for your services and see if it is enough. An MSP should charge four and a half times the cost of things like taxes, insurance, and supplies.
• Market with a plan.?No matter what type of business you run, it's important to have a plan for your marketing so you don't waste money and erode your profits.
• Embrace the cloud.?With cloud computing, businesses can store their data and programs on the internet instead of their own computers. This makes it easier to access their information from anywhere and can help keep it more secure. MSPs can help businesses take advantage of the cloud and make sure their data is safe. MSPs managing clients who use AWS,?Microsoft Azure?and other services in the cloud can also drive profitability through automation. For example, by setting alerts in?Liongard?to notify you when security thresholds in these programs are not met or access rights fail to match your MSP’s policies, your staff increases efficiency and avoids costly errors.
• Think outside the box.?It's important to think of creative ways to show value. You can help customers save money by finding and showing them any unused or duplicate Office 365 licenses they have.
• Build and manage a standards library. MSPs can help protect themselves from bad things like ransomware by being prepared ahead of time. They can set up automatic alerts to help them stay on top of their security needs. This will help them save time and make more money.

Flex Your Profitability Muscle

When things are hard, don't give up. Instead, try your best, keep pushing yourself to do better, and start flexing that profitability muscle.

Those MSPs serving a cross-section of industries and those that have been able to pivot quickly have historically fared well. Strong customer relationships and a high level of customer service can help MSPs accelerate while their colleagues put on the brakes. Take a proactive approach to keep profit margins high in the current economic climate. MSPs that remain vigilant and adapt will not only survive but also thrive.

Interested in learning more?

Liongard helps MSPs increase efficiencies to free up time and allows for further profitability using:

• Automated Documentation - like a robot helper (but better) that helps you do tasks and remember information. It can help you do things faster and more accurately.
• Custom Actionable Alerts - helping people stay aware of important things that need to be done, like noticing when something is wrong or when there is an opportunity to make more money.
• Reporting and Analytics - helping you see data quickly and accurately so you can solve problems quickly and easily.