For MSP business owners, figuring out how to improve your bottom line is like an ongoing game of tug of war. Do you raise your rates or do you make your service staff more productive?
Raising rates may seem like the easier option, but at the risk of upsetting existing clients and losing prospects to competitors with better rates, it may not be your best bet.
Instead, you should focus on improving service efficiency and productivity within your MSP.
It involves knowing where your techs are spending most of their time and understanding how even small changes can yield significant results and transform your business. And it starts with analyzing the data that’s already sitting in your PSA.
Getting started with employee utilization rates
Average utilization is the percentage of time an employee spends on client-facing tasks like responding to support tickets, onboarding clients, or working on client sites.
To calculate individual and group employee utilization rates, you’ll need detailed information about how your staff is spending their time, including:
- Allowable paid time off and sick days
- Time invested in training, education, and mentoring
- Time spent in internal meetings
- Number of hours spent doing internal work, like managing the PSA, RMM, network management tools, and your own internal infrastructure
- Salary (while this doesn’t factor into the average utilization rate, it’s important to know when converting the rate into profit)
And you need to know this for each of your staff members. Once you’ve got this information to plug into a spreadsheet, you can easily calculate your employees’ individual and group utilization. Let’s walk through an example.
Calculating your average employee utilization
Your average employee utilization rate is calculated by analyzing each employee in your MSP, identifying how much time they’re spending on tasks that aren’t client-related, and subtracting the percentage from 100%. The higher a utilization rate, the better it is for your MSP because you’re making more on service rates—you should strive for an average rate of 70% or higher.
In the below chart, we analyze one employee who works 40 hours a week over 52 weeks:
|Straight time hours||2,080|
|Non-client facing hours per year|
|Paid time off||80|
|Training and education||42|
|Tool and systems management||312|
|Other internal projects||4|
|Administration and management||0|
|Total non-client hours||529|
This employee’s average utilization rate is 75%, which is better than our aforementioned benchmark, but there’s still room for improvement. Where can you cut down their non-client hours?
Some of the non-utilized time—like two weeks for vacation and a week for training and education—are non-negotiable.
Diving deeper into the data, you can see this employee spends the bulk of their non-client hours—nearly two months per year—managing one or more of the tools their MSP uses. 80 out of those 312 hours supporting multiple BDR solutions, ensuring they’re maintained and current. If you were to automate this process and reduce the time they spent on tools and systems management by 80 hours, their effective utilization rate would increase by 3% to 78%.
Converting average utilization into profit
Once you’ve calculated each employee’s average utilization rate, you can then calculate the average group utilization rates among your different teams, like your help desk employees, field employees, and engineers:
|# FTEs||Average Wage||Average Salary||Average
|Standard Service Rates||Rate 1||Rate 2||Rate 3|
This will allow you to realize more opportunities to create efficiencies and boost productivity. Then, you can identify targeted performance improvements for each of your business functions.
How does this translate to your financials and headcount? Let’s break it down.
Assume you can find time savings equalling 3% for each of the 17 employees in your company. For a typical 40 hour work week, 3% equals 1.2 hours. Multiply that across your 17 employees and you’ve got 20 extra hours available to spend on client-facing tasks.
With an extra 20 hours per week available, what’s the potential additional MRR you can add to your bottom line?
First, let’s assume your employees won’t be working at 100% utilization within the extra hours—things will happen and they’ll occasionally have to focus on non-client tasks. Averaging out the three group utilization rates, we can predict workers will have an average utilization rate of about 73%.
If we use Rate 2—$155 per hour—for a mid-tier tech or engineer’s time, and combine it with an average utilization rate of 73% across all three groups, this is the additional MRR and ARR you can achieve:
20 hours per week × .73 utilization
= 14 hours per week
14 hours per week × $155
= $2,170 MRR
1,040 hours per year × .73 utilization
= 759 hours per year
759 hours per year * $155
= $117,645 ARR
And that’s without adding any headcount or raising your rates. So what are you waiting for? Make 2020 a great year by investing in your staff, yourself, and your business.
Questions about calculating your employee utilization rates? Reach out to Dennis O’Connell at [email protected] for more.