Successful IT & MSP Compensation: Service Provider Profitability Report

The weekly newsletter of the Business of Tech, giving you new insights into the world of IT service delivery.

Looking for stories from the podcast stories? Check out the pod itself on Apple Podcasts, Spotify, or daily in your inbox. Stories are available to everyone for five days,and Patreon supporters forever.

Was this forwarded to you? Join the list!

Service Provider Profitability Report

Of the many things I love about running The Business of Tech, sinking my teeth in fresh data might just top the list. Especially because every once in a while, an industry report comes along that leaves me scratching my head, but in a fun way. After all, you know a data set is compelling when you walk away needing to decipher more.

The Service Leadership Index® 2023 IT Solution Provider Compensation Report was one such piece – so much so that I knew I needed to talk to its creator. I was quite excited to welcome Peter Kujawa, VP of Service Leadership & TSP Evangelist, ConnectWise, onto a bonus episode of The Business of Tech to help me understand the nuances of this year’s findings.

If you didn’t get a chance to see my coverage, I’ll kick off this exploration of our convo with two of the report’s most compelling takeaways: Best In Class providers pay less for their staff, and apparently, 30% of providers are losing money.

Sound strange? I thought so too. Here’s how Kujawa interprets the findings.

Best In Class Providers Pay Less For Talent

Yes, you heard that right. According to the study, the top-performing tech service providers pay less than the median earning and less than the bottom quarter earning providers for talent.

Kujawa kicked off his explanation with a reminder that talent is very much the biggest cost of running a TSP; for every one of us out there, compensation’s about 80% of expenses. It’s critical to get those numbers right, so the report set out with two missions: one, to get accurate data that reflects worldwide where money is being spent, and two, to identify who’s the most and least profitable out there and the differences in how they’re paying their people.

The findings were clear: in 2022, the Best In Class paid the smallest wage increases relatively, and the bottom quartile was planning on paying the biggest increases.

Now before you go and slash your team’s wages, Kujawa’s data also made it clear that that’s not what’s going on here. Instead, he interpreted the data in two ways.

First, the difference in profit is not about across-the-board wage increases – it’s about the ratio of less experienced staff wages to more experienced staff wages. To explain this, he split the MSPs into the ‘We Like Profits’ category (the money makers) and the ‘We Work Hard For No Profits’ category (the money stragglers). In his own words:

“The We Like Profits MSP staffs their organization on a higher percentage of less experienced techs. The We Work Hard For No Profits MSP has the highest percentage of experienced techs, and the average is right in the middle. If you look at the average of those six techs’ pay at the bottom, you can see that the We Like Profits MSP is paying the least on the equivalent level one position the We Work Hard For No Profits is paying the most.”

The second explanation is what he calls the hostage scenario, which is when a valued member of your team receives a competitive offer from a different organization but offers to stay with you if they receive a salary match. Kujawa believes that the stronger the MSP, the more likely they are to safely let that employee leave – and save serious money in the process.

Again, in his words:

“The Best In Class guys have built their service operation, their factory around three principles. They’re really tight on their target customer profile, they know who they want to get and who they’ll walk away from, they have a very singular tech stack, and they’re selling a higher ratio of all in fully managed contracts. So those three things allow those providers to be in a better position.”

If you’ve worked for a range of MSPs throughout your career, this likely resonates. A thriving business knows how to train newer, lower-cost teammates without impacting the service clients receive, while a struggling business can’t survive without their senior staff – a snowball effect that only gets worse profit-wise when they’re forced to hand over higher wages.

The Methodology

When I first started talking about this report, a lot of you guys had questions about its methodology. I got feedback like, what does the data set look like that service leadership’s looking at? Are these smaller MSPs? Are they excluding the MSPs? Is this what’s happening at the big ones?

I ran all of these by Kujawa, and he explained that MSPs of every size and every location were included in the study, except for organizations with fewer than five employees due to a lack of information to pull from. When it came to that Best in Class label…

“One of the misconceptions I hear all the time is that to be one of the really profitable folks, to be in our definition Best In Class, the top quartile profitability, that you have to be a certain size, that you have to be big enough to have scale, to be able to have a sales engine that’s big enough,” he said.

He also received contrasting feedback – some people approached him assuming that only very small organizations ended up with the Best in Class title. But:

“In our Best In Class most profitable, we have big companies, we have little companies, we have rural companies, we have metro companies, we have international, we have US. And same thing with our bottom quartile, our folks that are losing money. We have some really large companies that are losing a bunch of money today, and we have a lot of really small ones, so it’s not correlated to size or location or any of that.”

Now, about those who are losing money…

The 1 in 3 MSPs Who Don’t Make Money

As leaders in our industry very well know, there are a few reliable ways to make money, and about a million ways to not. And although we don’t have the century of business practice an industry like car salesmen do, we are improving enough that this 30% figure is striking.

So, what’s going on here?

Kujawa has a few theories, but his leading one is that our industry is still dominated by technologists – technologists who may be fantastic at delivering customer satisfaction and operating technology, but aren’t as good, necessarily, at scaling up a sales operation and/or at making data-driven business decisions focused on profitability.

Another factor is that MSPs aren’t the type of company that can lose money one quarter and then rack in profits the next. By the nature of the business, once you start down an unprofitable path…

“You’re going to really start hemorrhaging customers because you don’t have the money to invest in your business or buy the new tools you need to and add the people that you need to be adding to scale up.”

To wrap things up, I asked Kujawa about how his law degree helps him glean these types of insights and run a TSP. As you’d expect, he sees the value come in handy for the exact style of analysis we’re talking about – looking at data, asking skeptical questions, and looking at things from multiple angles.

With or without a law degree, that is certainly something we technologists can work on.

The complete report is available here. There’s nothing better than connecting the dots between research and what’s happening on the ground, so I’d love to hear how these insights are playing out at your organization. As always, I’m available at [email protected].

More from MSP Radio

Missed Things?

How about our latest videos to catch you up?

The Daily Podcast available as videos

Protecting against Voice attacks with Vijay Balasubramaniyan of Pindrop

Focusing on the productivity layer in the insurance market with Caden Braly

The Pirates of Private Equity, and what they mean to plunder for MSPs with Brendan Ballou

Recruiting Veterans and MSPs with Billy House, MSP Hire

Want the Daily News?

All the stories from the daily Business of Tech Podcast are available in the daily digest, and stories are available to everyone for the first five days, and Patreon supporters forever. Catch the audio of the show anytime on Apple Podcasts, Spotify, YouTube, or wherever you find podcasts. Links at businessof.tech

Want to change how you receive these emails?
You can update your preferences or unsubscribe from this list.