How Successful Businesses Scale (MSP Version - Based on DATA) with Peter Kujawa
Have you ever felt like you're working harder and harder on your business, but not seeing the profits you expect? Or maybe you've hit that dreaded growth plateau and can't figure out how to break through to the next level? I've been there too, and it's why I love sitting down with experts like Peter Kujawa to get different perspectives on how to break through. Peter is VP and GM of Service Leadership - they collect and publish data on how to build high value businesses in the MSP space. Peter is also true industry subject matter expert who's run his own business before joining Service Leadership.
By the end of this interview, you'll learn:
1. The real metrics that drive MSP profitability (spoiler: it's not just about revenue)
2. How to use a KPI called the "service multiple of wages" to build enterprise value in your business
3. Insider strategies for scaling your MSP from $2M to $17M (from someone who's actually done it)
4. Why you need to start benchmarking NOW, even if you think you're too small
5. How the "who's" around you can skyrocket your growth
Grab a coffee, buckle up, hit play, and let's transform your business.
Full transcript below
Understanding Business Modes
Scott Levy:
The idea ConnectWise has of the different modes with startup, balance builder, empire builder, value builder. What I'm curious about is, I talked to so many folks where they're trying to figure out where to focus.
Does where they focus change based on which of those stages or modes they're in
Peter Kujawa:
Sure, it definitely can. Thanks for having me on, Scott, by the way. Within each mode, with the exception probably of startups are exactly that, they're startups. Your goal is to try to get your business off the ground and get some revenue in the door and have some paying customers and that kind of thing.
But once you get out of the startup mode and you get into balance builder, value builder, empire builder, whatever mode you select, there's no right or wrong mode. The mode is your mentality as an owner and what you're trying to really achieve as an owner. And Within each mode, though there's going to be a different level of performance.
So if I'm a balance builder and my goal is to build a business that's a lifestyle business and I want to really enjoy my life and have happy customers and all of those things. I want to run my business in a way that's going to optimize quality results and that's going to lead to my ability to not be in my business 80 hours a week.
I'm also going to want to make sure that my business is sufficiently profitable. That it's going to deliver the results I need to sustain my lifestyle, whatever that size is. And I think there's a misconception that a lifestyle business has to be a small business. I worked for an owner in a past life who owned a 300 employee, $60 million business. And if she was filling out a Modes questionnaire, I’m pretty confident she would be a balance builder and she got calls all the time from private equity and we want to see you invest so you can double the size of your business in the next three years. And her answer would be, why would I want to do that?
That doesn't sound very enjoyable. And so you can be a larger business or a small business, but within each mode, you want to optimize your profitability and you want to optimize your operational maturity level so that you're delivering the best possible results and whatever mode you're trying to be in or whatever mode you are in, that you're as good as you possibly can be in that. We've referred to that often as best in mode. We don't technically have that classified or defined yet, but basically if I want to be a value builder, be the best, most profitable value builder you can be, it'll help you be a value builder for longer and be more successful and all of that.
Scott Levy:
That's interesting. It reminds me - back in my consulting days, I actually had a client that was a billion dollar lifestyle business. The business had all kinds of opportunities to grow, but it didn't have a single owner. And they were good with it.
Peter Kujawa:
Yeah, they’re in the headspace of the owner. There's not a right or wrong. Again, you don't want to stay in startup mode. I think everybody would agree that's not a great place to be for long. But every business is in startup by definition for a period of time.
You can be a balance builder forever. You can be a value builder forever. Oftentimes, balance builder businesses get passed on generationally. You'll see they don't want to take on a lot of risk. They don't want to bet the farm. But they do need to be successful and profitable. They need to do the things that build quality leadership teams, legacy teams, the ability to transfer and build legacies. So you've got to do the right things in each mode.
Scott Levy: Yeah, that makes sense.
Optimizing Profitability
Scott Levy:
So you mentioned profitability and when we first spoke and we were talking KPIs you highlighted that you guys have found that one is incredibly important. Yet it seemed like it's not focused on a lot or maybe enough by some businesses, because you talked about some of the different things you can do - whether it's projects and things of that nature - that if you've got a Managed Service Provider business, you may not be thinking of as much, or you may be concerned that my gosh, this isn't recurring revenue? Can you talk a little bit about the more surprising things you've seen that maybe people aren't aware of that go into helping you be a best in class, best in mode business?
Peter Kujawa:
That's a great question. What has surprised me? There's not much that surprises me anymore. But probably the biggest surprise to me is how many owners are out there that are quarter in and quarter out content with barely breaking even or losing money. And when I say content, I don't mean that they show up and say, "Awesome. Woo-hoo. We broke even again." But I see it all the time in peer groups and with clients we work with. So what I mean by content is, at the end of the day, are they willing to do what they need to do to fix it? And the answer is oftentimes no.
We measure operational maturity level on a scale of one to five. What we find is our bottom quartile companies, most of which are losing money, tend to be an OML 2.8 or 2.9 or lower. Many of them will live there for years. It's miserable, and it doesn't have to be that way. But ultimately, as an owner, you've got to make a choice. That's no different than in your personal life. If you decide to get in shape, run a marathon, or do something, you're going to have to give up some habits and make changes in your lifestyle to achieve your goal.
I've been surprised at how many owners are tolerant of not fixing their situation. But I've also been pleasantly surprised by the opposite. I've worked with many business owners who will build their business. In our industry, there are a lot of technologists who own MSPs, entrepreneurial technologists. At the end of the day, they got into the business because they were good at tech. It's been really fun working with them and seeing them dig in and figure out what to fix in their business. Looking back six months or a year later and seeing the tremendous results they're getting is really enjoyable and amazing to see.
Oftentimes, we had a company in one of our peer groups who came to the meeting this quarter and met in May. They had made a remarkable jump in profitability. Amazing. When we talked to them about what happened, they said they got sick of it. In November, at our peer group meeting, they looked at their results compared to the rest of the group and to best in class, which is what we benchmark to top quartile profitability. They said, "Enough. We're working too hard. Every quarter we show up here and we're mediocre. We're going to fix it." They spent all of December fixing it, making a bunch of tough decisions on staffing, pricing, and customers. Their Q1 numbers were amazing. I'm pretty confident based on how they fixed it, Q2 is going to be great too.
So, there's not much anymore that surprises me. I've seen hundreds of different scenarios, but those would be two things that do both the good and the bad.
Key Performance Indicators (KPIs)
Scott Levy:
Are there a few, so I know profitability is one, and I know you've got an entire, like how to double click through all these different KPIs to make changes. Do you ever get questions like I know in the music world, like I would hear people like, do you have just a couple, like a handful of things to do? Do you have a favorite top, let's say top five or six KPIs that you can share, or, I'm using KPIs as a proxy for like, where do we focus? And how do we make it measurable?
Peter Kujawa:
Yeah, Peter, what's the one secret to fixing this thing? The answer is there's no one secret. There's a lot of littles that if you turn the screwdriver a quarter turn here, a quarter turn there, that over time will make a difference in your business. So from a KPI standpoint, a couple of things that I would highlight.
Number one is at service leadership. We focus first and foremost on gross margin. So when we're doing our comparisons, we're looking at the every quarter of the most profitable 25 percent of companies in each business model and work. Those are our best in class KPIs. And when I'm talking to providers, when I in person, oftentimes in peer group meetings or at IT Nation events, what a lot of providers who are not really dialed in on their metrics talk to me about is revenue that we've been adding a week, just added a bunch of customers and we've been growing revenue really well.
And our managed service revenue is up and I'll hear a lot of those kinds of things. Revenue is interesting, but not really. What really drives profitability is gross margin. First and foremost, every provider out there needs to know what their product gross margin is and what their service gross margin is at a high level. Current best in class service gross margin is 50%. Okay cool. Within that though, I'm going to want to know and that in service gross margins, the most important for an MSP, just given the nature of the business, majority of revenue being service. So I'm going to want to look at that and say, okay, so I know my service gross margin and where it's at, but what about the subcategories?
How am I doing on projects versus managed services? And how am I doing if I still do any break-fix billables? How are those what's the profitability? So really, by going more granular, it helps me to understand where I'm doing things right, and I want to keep doing them right. But also where I need to tweak things. So if I need to improve, where are my opportunities to improve? And the more granular I can get on that, the better the guidance and the better the change, the more effective the changes I can make in the business.
The second thing I would say is for every MSP out there, understand your service multiple of wages number. And what that KPI is, that's a service leadership KPI that we show right on the dashboard when you log into our system. And what the equation is for every dollar of service wages, I should be generating X dollars of service revenue. So current, we've historically taught target 2.5. So if I'm spending a million dollars on service wages, I should be generating 2.5 million of service revenue. Today, best in class is up more like 2.9, 2.89 to be exact. And they're continuing to get better with hyperautomation. That's going to continue to push up. We'll see that break three is pretty soon. We'll see three and a quarter, three and a half, and in a few years, bottom quartile folks tend to be sub-two. So they're generating less than 2 for every dollar of service wages.
So why is that so important? When I look at somebody's financials for the first time, the first thing I look at is their adjusted EBITDA. The second thing I look at is their service multiple wages. And the reason being is it's going to, it's not going to answer questions for me, but it's going to, it's going to point me in certain directions. I'm going to know if they're charging should I be looking at what they're charging for their services? Typically, if you have a low service, multiple wages, you're undercharging for your services. Second, it's going to point me in the direction of staffing. Are they overstaffed? Are they staffing too many level two and three techs relative to level one techs? Are they paying too much for their techs? So I'm going to have a better understanding of that.
Third thing is, are they efficient enough? Are they automating where they can automate, and that ties into them being overstaffed. So it's not going to necessarily tell me if I look at and say they're in, they're a service multiple of wages of 1.8. I'm not going to necessarily know right away that they're overstaffed or that they're charging too little. It's probably a combination of all of the above, but I'm at least going to know that they have an issue and I'm at least going to know where to start looking.
Scott Levy:
Yeah, it sounds like it. It gets you exactly to, oh, here's a thing I need to double click.
Peter Kujawa:
Yeah, it's also a really good metric for the service team managers to be held to. One of the rules of life and gravity and physics in this industry is service managers always want more bodies. How do you know you need more bodies? I don't think I've ever heard a case of a service manager going to an owner or CEO and saying, "Hey, I think my team's a little overstaffed. I think we need to shave one or two FTEs out of our team, and we'll be more productive." You never hear that, right? How do you know, and what do you use as an objective barometer of whether you're staffing right? All right. So I really like that KPI. I think it tells a lot quickly about an MSP.
Scott Levy:
That makes a lot of sense. And yeah, I've rarely heard we should cut our staff from any venue, a manager with a team.
Challenges and Success Stories
Scott Levy:
Do you find when you are surfacing these, there are forms of pushback? “Oh no, we don't want to pay attention to that. We're going to focus on this other area of the business.” Do you hear patterns come up at all?
Peter Kujawa:
Oh, sure. Commonly, it's on pricing. There's no way we could charge what you're saying we should charge in our market. The answer is there are people who are in every market that we benchmark. There are providers charging more, sometimes 50-60 percent more than other providers are charging. So pushback in terms of that. Go-to-market strategies, where we measure operational maturity level, you'll hear there's some religious discussions. You'll hear in higher OML companies charge for pre-sales assessments and lower operational maturity level companies do not. That's one that generates a lot of pushback.
There's a lot of companies that feel they shouldn't be doing that. It's an impediment to sales. And why would I put a barrier in the place of sales? There's a lot of reasons why it's the best business practice to do it, but sure, you hear pushback on everything possible. Probably the most frequent pushback that we hear is one that we tackled this year in our annual profitability report, which just came out last week. We have a slide in there that shows the breakdown by revenue size of best in class, median, and bottom quartile.
And the reason that we ran that data and put that slide together was we continue to hear that, and it's an excuse. It's a coping mechanism for folks that are bottom quartile typically. But sometimes median folks as well. That I'm X size, I can't be best in class because my size of X has too few salespeople or too many salespeople, or it doesn't have the scale or has too much back office or whatever it is. Everybody who's when we hear that, every size range thinks that other sizes have it better.
We also hear big city folks tend to think the rural folks have it better and vice versa. And so the data we showed by revenue tranche is sub 1,000,001 to 3,000,003 to 6,000,006 to 10,000,010 to 15,000,015 to 25, and 25 to 50 and greater than 50 million. In every size, at least 22 percent were best in class top quartile. At least 22 percent were bottom quartile. So there's a little bit of difference between the sizes, but generally speaking, no matter what size you are, you can be best in class or you can be bottom quartile. It's really up to you.
Scott Levy:
That resonates. It's a thing I've seen across industries. We would call it the special snowflake syndrome. “Oh, there's a practice that works, but it can't work here because …” Occasionally, that's true, but far less than people usually believe.
Peter Kujawa:
Look, I ran an MSP for 11 years prior to joining Service Leadership. And for nine of those years, we were members of a Service Leadership peer group. And almost 10 years, Paul Dippel, who was my predecessor, who founded and ran Service Leadership until he retired a couple of years ago, Paul and I used to frequently spar about some of these different concepts. And I look back and think, how stupid was I? The data is the data. You can fight the data all you want, but at the end of the day, you're only hurting yourself.
Our job, we're not going to go in and make those decisions at an MSP. The MSP has to make those decisions. They have to be the ones who decide to change how they do business. Our job is to tell them what the data says and tell them what the best way to do it is. But ultimately, it's their choice, right? And so you can choose to do things in whatever manner you choose to do it. It's one of the great things about owning a business. But if you want to be successful, there's better ways to do things and worse ways to do things.
Scott Levy:
I'm thinking of so many conversations I've had over the years, and ultimately, it comes down to: does the founder/CEO want to make the changes? Do they want to change how they do things to make those changes? And do they believe they can? That seems to get in the way of a lot of people.
Peter Kujawa:
And I've talked to CEOs who know the data. They know, for example, what they should be spending on their team, but they've chosen to do a more generous, let's say, profit-sharing arrangement, or they have a more generous retirement plan for their executive team, or they're doing other things. But they know full well that they're doing those things and they're making a conscious choice on what they're doing. I don't love that necessarily. I still want to see everybody perform at a top level. But at least if you know what you're deciding and you're making an informed decision about it, I'm much more comfortable with that.
So my advice to every owner out there is, at a minimum, you should be benchmarking. You should know exactly what your data tells you. Nobody's gonna come through your laptop and grab you by the neck and force you to make decisions you don't want to make. It's going to be up to you, but at least know what the data is telling you.
Scott Levy:
That aligns very much with our beliefs and what we work on with people. You mentioned you got into this after running an MSP.
Scaling and Growth Strategies
Scott Levy:
I'm curious, are there differences running an organization MSP from what you do now? Are there similarities? How did your day to day change as a leader? I feel like there is some insight there into what is really different about running an MSP.
Peter Kujawa:
So I'll put it this way. Is it different being president of an 85-employee business within a 300-employee company versus running a business unit within a 3,500-employee global company? The answer is yes. Yes, it's a significantly different business. And when you're running an MSP, first of all, it's a difficult business. All business is tough, but running an MSP is almost a minute-to-minute, if not hour-by-hour pivot that you're doing throughout the course of your day.
You go in, and all of us have this happen in our workdays, but you especially have it when you're running an MSP. You think you've got your day planned out and you have a good idea of what it's going to look like, and then a customer has a massive outage or you lose a couple of key employees and have to figure out how to backfill or whatever happens. If you're going to run an MSP, it's not for the faint of heart. You better be somebody who is pretty resilient, able to work through challenges as they come up in real time.
I think almost employees who are really successful at MSPs, especially leaders at MSPs, adrenaline junkie is not the right word, but maybe it is. You have to be somebody who really thrives to a great degree on the energy that comes with rapid change and challenges that change often. And so I loved it. I loved the team we had. I loved the customers that we worked with. I was a huge believer in the mission of what we did for our customer base.
And I found running an MSP to be an extremely rewarding exercise. You look back with nostalgia and rose-colored glasses a little bit, but it was a great run. We turned around a failing MSP with less than 20 employees, and we sold it a couple of years later to a larger copier dealer, a family-owned business, and we grew it at that time.
I think we had 32 employees when we sold it. When I left, we had 85 employees, and we had grown it from $2 million of revenue when I got there to about $17 million of revenue. It was a great 11-year run. We achieved things that I never would have thought we could have achieved. Probably most importantly, we built a really great team. The leadership team that's there today was largely around when I was there early on, and we grew together. We developed many employees into not only successful careers at our business but successful careers at many other businesses. Managed service providers are a tremendous launching pad for employees to come in, both technical and sales employees, and build up their skill set and go out and do great things in the world.
So that was a really great run. Here, my bigger challenge at Service Leadership is how do we do what we do at a worldwide scale? We're not doing consulting. We benchmark using the Service Leadership Index. We issue two annual reports a year: our comp report in March and our annual profitability report that just came out. We have SLEEK, which is our online operational maturity level assessment and coaching tool. Our mission under ConnectWise is not to do consulting or individual engagements but to reach the masses. So we get out to events, get on webinars and podcasts like this, and engage with the partner community as much as possible.
The reason is we want to lift as many boats as possible. The bigger challenge I have here is just figuring out how to do this at scale and how to really take the time with peer group communities, get in, do one-on-one. My colleagues, Rob Bufano and Aaron Boone, and I travel all over the country and, in some cases, all over the world to be in front of different peer group communities. We go to events all over. The purpose is to help providers get better at scale. As someone who ran an MSP, that's a pretty cool mission. It's great to be able to work with thousands of MSPs a year and see them improve, take on the concepts we're teaching, and run with the data we're providing.
Not only does this make their life and future better as an owner, but it also enhances the future and opportunities for their employees. So that's really cool, but it's radically different than running an MSP.
Scott Levy:
There are so many good bits in there. I do want to go back to that journey that you mentioned, because that's an interesting journey. You said that MSP, when you took it over, was at $2 million?
Peter Kujawa:
$2.2mm in the prior 12 months.
Scott Levy:
$2.2 to $17 million. That's a transformation, because the business at $10 million doesn't look like it did it too or very rarely. It's almost like a different business. What were some of the changes that you recall that helped make the difference and some of the challenges you found? I'd love to hear more about that journey.
Peter Kujawa:
Yeah, it's interesting. You're spot on. We typically see MSPs around the plus or minus $10 million mark really have to reinvent a lot of things that have gotten them to that point. If they don't, they're going to struggle to get to the next plateau, which we typically see around that $20 to $25 million range. In our data, what we saw was slightly lower best in class in the $6 to $10 million and $10 to $15 million revenue ranges. The reason is largely because of some of those reinventions and investments going on.
What you have to do as you grow is recognize the stage you're in, and what got you there, including in many cases, some of the people, is not going to be what gets you to the next level. So you're going to have to make some changes, and you're really going to have to make some changes as an owner or CEO. At that $2 million size, owners are selling, they're out there. They are the salesperson, the spokesperson. They're going out and doing QBRs. Often, in an MSP, because most MSP owners started out technical, they came from a technical background. They're probably doing some tickets. They're probably doing some project onboarding of new customers. So around that size, they're doing a little bit of everything in their business. But to grow, they've got to let go of some of those things.
As you get to that $10 million size, you probably have to bring in a controller or VP of finance, someone who's going to effectively run the numbers side of your business and help you execute on that. So you're getting accurate financial reporting, your billing is going out on time, and all the things that can really affect your cash flow. You may need to bring in someone to help with HR. For sure, around that size, you're going to need a sales manager. You're probably going to have at least a couple of salespeople by now. And that doesn't mean as an owner that you bring those people in and all of a sudden you can work 10 hours a week. You're going to work just as hard. You just need to work on the business more than you're working in the business.
As you grow the business, you're going to really focus in. You're not going to be on every sales call. You can't. You're not going to be in every QBR. You can't be working tickets. So you just need to start letting go of some things. When you get up to that $15, $16, $17 million range, your service manager can't be working tickets anymore, right? Let alone you can't be. So you start to get those delegation needs and those next-level leadership needs as you grow as an organization.
You don't want to become top-heavy or bloated in your leadership, but you do have to recognize that to achieve those kinds of growth numbers and be able to really absorb it, you have to have some organizational structure built in. Think of it as the foundation of your building. If I'm adding a second and third story onto my building, I need to make sure that the foundation is pretty solid. If I'm going to grow the building out and expand the square footage of that building as I'm growing, then I need to expand the foundation. And it's the same thing when it comes to growing your business.
Final Thoughts and Recommendations
Peter Kujawa:
The only thing I would mention is just for anyone who's not benchmarking today or is thinking about it: the best way you can really engage with this stuff is to join a peer group. Get ahold of Evolve. Evolve has peer groups, including service leadership peer groups under Evolve, which tend to be for slightly larger MSPs and VARs, but they'll find a group for you. Reach out to serviceleadership.com and to our team, go on our website and reach out to our team. We're happy to get on at any time and show you what these products look like.
My point is, don't be intimidated. Whether you sign up and benchmark on your own, we'll help you with that. But a peer group, I can't overstate how transformative the peer group experience was for us. Every quarter, being able to go in and not only compare notes on challenges that we might be having and talk through those but also be held accountable. I don't want to go back next quarter after I committed to a couple of things I was going to do and have to report back to the room that I didn't do them, or that I didn't follow through with some of the changes we were planning on making. These are the kinds of things that peer groups really can help you with.
If you're at 6-8 employees, you're big enough. You've got a legit business. You're big enough to start benchmarking and start really taking on some best practices. Don't make the mistake a lot of providers make, which is thinking, "I've got to be $5 million first or $10 million first before I really get serious about this thing." Life doesn't have to be as hard as it is running an MSP. If you're doing things right earlier on, it'll make your life a lot easier later.
Scott Levy:
I see that a lot. I see it because it's avoidance of change. "Okay, we're going to change when we're this big. We're going to change how we do things or what we join, etc., once down the road," because I can tell myself it'll be easier than actually thinking the changes are what enable you to get down the road. Making these types of changes, doing these types of things earlier, accelerates your path, just like you're saying.
Peter Kujawa:
Yeah. Today’s the day. Don’t wait to get going.