Paul Dippell is the co-founder and CEO of Service Leadership, Inc., a company that measures IT and managed service provider (MSP) performance across the industry and annually publishes the results as the Service Leadership Index®. In this interview, we ask about his work using operational maturity in benchmarking managed service providers.
What is operational maturity for an MSP?
At Service Leadership, we define five levels of operational maturity specifically for solution providers.
Operational Maturity Level 1 – Beginning
Low to negative financial performance and inconsistent service quality. They don’t know what they don’t know. Operations are largely trial and error.
Operational Maturity Level 2 – Emerging
Low to negative financial performance and inconsistent service quality but starting to understand the basics of profit levers. Few controls and little forward planning. Incentive compensation isn’t meaningful and/or is poorly aligned.
Operational Maturity Level 3 – Scaling
Median financial performance and service quality. Basic controls. Some forward budget planning, little attainment tracking. Incentive compensation is meaningful in scope but not tied to budget attainment.
Operational Maturity Level 4 – Optimizing
High financial and service quality performance. Robust controls. Detailed forward budgeting and attainment tracking. Incentive compensation is meaningful in scope and tied to budget attainment.
Operational Maturity Level 5 – Innovating
Highest financial performance and highest value and quality services. The characteristics are similar to OML 4 but they also now extend capabilities to lines of business adjacent to IT.
What’s the correlation between Operational Maturity Level and financial performance?
There’s a strong positive correlation.
The Service Leadership Index reports that solution providers at a higher OML consistently deliver EBITDA percentage (earnings before interest, taxes, depreciation, and amortization) about three times higher than those with a median OML. Meanwhile, the firms with the lowest levels of maturity regularly operate at zero profit or below—at least until they either improve towards the median, cease to exist, or sell.
According to our Service Leadership Index, solution providers at OML 1 or 2 were delivering EBITDA of 0.6% or lower in Q2 2016. This is after adjusting to ensure fair market owner compensation is being taken from the income statement and not the balance sheet.
MSPs at OML 3 are most often delivering at or near median financial performance, which in Q2 2016 was 9.6% adjusted EBITDA.
MSPs at OML 4 or 5 are most often delivering top financial performance, which in Q2 2016 was at or above 18.7% adjusted EBITDA. The top quartile has been at about this level for the last eight years.
By the way, it’s common to assume that larger solution providers must be higher in OML. After all, it takes more management skills to grow and manage a bigger company, right? The answer is, that OML has nothing to do with company size.
We know this because it’s entirely possible, and sadly not uncommon, to find large solution providers—up to billions in revenue—who don’t generate profit and who struggle to consistently deliver quality services. Conversely, it’s possible to find a $1 million solution provider who operates at OML 4 or 5 and gets very good results. And both can be found in between those sizes as well.
What does all that mean for MSPs?
Clearly, the management teams of the top performers are doing things more effectively than those of the median performers, who in turn are doing things more effectively than the bottom performers.
The things each management team is doing are the same across all these firms, but the lower profitability and lower growth firms are doing them in less efficient and effective ways.
By segmenting all the areas of management skill into highly granular, incrementally improving steps, we can tell a management team what their current level of operational maturity is, and more importantly, exactly what they must do in each area to operate more like the top performers and get closer to their desired results.
How do you know what those steps are?
OMLs are made up of traits—things that every MSP must do to have at least a basic, reliable business model. And they are the things you must do very well to have a top business model.
There are 30 to 39 OML traits, depending on your Predominant Business Model. Some sample assessment questions to uncover these traits include:
- How is time tracked?
- How is pricing determined?
- How are products, solutions and services delivered and how are accounts managed?
- How are people hired, on-boarded and terminated?
- How are new offerings developed, approved, rolled out, and driven to success?
- How are vendor relationships managed?
- How is financial management performed?
We ask these questions of low- and high-performing solution providers around the world, so we know how firms of differing financial performance answer them. We also know exactly what needs to change to move an MSP to the next OML.
How did you go about developing the five OMLs?
My co-founder and I come from solution provider backgrounds. We had built four large solution provider businesses in a row, including MSPs, and were looking for ways to drive higher financial results. Each of the four companies was a different size and targeted different markets, so what worked well for one didn’t necessarily achieve the same results in the other.
We discovered there’s no school for solution provider owners on how to run the business, how to add new solutions or services, or how to evolve from a current business model to a new one. To the extent that such guidance existed, it was generally very tactical—as in certification training and best practices for starting new solution practices—and missed the foundational aspects needed to make building a company as safe and profitable as possible.
We were looking for baseline practices that would help all of our companies perform at a high level even though they were different. We found those and they enabled us to drive our four companies to $130 million, $2 billion, $400 million, and $60 million in revenues respectively. Then we started Service Leadership to help others achieve similar success.
Before we developed the Service Leadership Index for solution providers, no other benchmarking method existed that was specific to the industry. Now MSPs can have the same quality and depth of benchmarking we had in our own companies, except they’re compared to the best-in-class across the whole industry.
We first built the OML approach to enable our own management teams to best perform. When you run a solution provider business with 9, 44, 14, or 18 locations across the country, as we have, you can’t afford to have a branch that doesn’t perform. You also can’t afford to have a location general manager say, “That solution or service or best practice doesn’t work here,” because you’ll soon have chaos.
So we developed the OML approach to understand each location’s management team skill and capability level, and to guide them step by step to higher performance. Now we apply it to independent solution providers.
The terms and concepts Service Leadership Index® (S-L Index™), Predominant Business Model© (PBM©), and Operational Maturity Level© (OML©) are proprietary to Service Leadership, Inc. All rights reserved.