This quarter we’re going to discuss the outcome: Manage the Company.
In Q2 we wrote about “Building a Foundation for Best in Class Services,” and we introduced the 5 Business Outcomes that our clients are looking for:
- Deliver Support Services – Foundation
- Deliver Support Services – Next Level
- Manage the Company
- Lead the Company
- Grow the Company
In Q3 we wrote about “Take Your Support Services to the Next Level.”
As a quick refresher, each of those Outcomes has several Business Challenges and each of those Challenges has a collection of Solutions.
In this illustration, you can see that the Outcome of Manage the Company has several Challenges, and two of them are Conduct Business on a Handshake and Understanding Gross Margin.
Each of those Challenges has many potential Solutions. For the Conduct Business on a Handshake Challenge, there are several Solutions, such as Master Service Agreement, Proposals, Scope of Work and Managed Service Attachments. The Understanding Gross Margin Challenge contains Profit Centers, Benchmarking, as well as CoGS and Expense Alignment.
These are just a small subset of Challenges and Solutions for illustration purposes. Once we have our Support Services in order, it’s time to focus on Manage the Company.
Conducting Business on a Handshake
Most young MSP businesses don’t want to either deal with lawyers or pay for legal services, so they go one of two routes:
1. Skip the contact and rely on the handshake/verbal agreements.
2. SWIPE (Steal With Integrity and Pride from Everywhere) a contract from a friend and edit it for your own purposes.
Both solutions will put your business at significant risk. Payment terms, limitation of liability, and nonsolicitation have become real issues for many owners. I firmly believe that if you end up in court, you both have already lost. The idea behind good contracts is to negotiate a mutual understanding before starting work and avoid conflict in the first place.
Understanding Our Gross Margin
Rolling back to 2004, even though I had been in the service manager role for a few years, I was very naive about gross margin. I understood the formulas, but I didn’t know what went into them or how I could manipulate/manage them to a desired outcome.
Gross Margin Dollars = All Service Revenue – (All Service Hard Costs + All Service Labor)
Gross Margin Percent = (Gross Margin Dollars / All Service Revenue) * 100
It took a few years of studying the numbers with our owner each quarter and asking a ton of questions. What are the service profit centers? Generally, they are Technical Services (break fix), Professional Services (projects) and Managed Services (fixed fee all you can eat). Each dollar in (Revenue) and each dollar out (Cost of Goods Sold or Expenses) must be allocated into the proper “bucket.” More importantly, how do we configure our systems and processes to feed the accounting system to create accurate numbers?
Once you get the numbers accurate, start asking:
- How do we compare to industry average and best in class?
- Which profit center is growing or shrinking? Why?
- What can we do this quarter to improve margins?
Manage People
Your people are your most important asset. I tried to find who first said this. I like how Jim Collins attributed it best as the “old adage,” although he modified it with one really important word: “The RIGHT people are your most important asset.”
Managing by the Culture
When there are only one or two leaders in the company, culture is easy to manage, because of the constant daily interaction with the top leaders. As the leadership team expands and the front-line team becomes separated from the senior leadership, culture will take its own shape quickly, and you probably won’t like it. The key components of culture are developing your Vision (where you are going), Mission (how you are going to get there), and Core Values (the principles we live by).
Your team should create them, and you must talk about them often.
Evaluate the Right People in Role
Jim Collins, in Good To Great, describes the right people on the bus and right seat on the bus. In Traction, Geno Wickman defines the people analyzer where individuals are compared against company core values, confirming this person should be ON the bus, as well as Get it, Want it, have the Capacity (GWC), which would confirm right seat on the bus.
The Rule of 7 says that the optimum number of direct reports for a manager is 7. That means every 7 new hires, you need to look for a managerial skill set in addition to the technical skill of the position. You also need to get the right resources to help your team grow and mature into new roles.
Accountability and Adherence to our Standards
The 2nd Growth Stage is largely about creating standards, which create good data, which creates accurate KPI information. See https://www.sealevelops.com/before-firing-a-rogue-engineer-check-your-business-maturity-stage/.
Improving operational efficiency means a change in processes and, since nobody likes change, you can expect to, at least initially, lower employee satisfaction. To help with this, we created the 5 Phases of Operational Excellence.
- Understand the Best Practice
- Document Your Way
- Train Your Team
- Implement Your Process
- Inspect What You Expect
If you work the 5 Phases, in order, you will not lower employee satisfaction as much. We are constantly pushing to “slow down” operational initiatives to focus on the 5 Phases, which ultimately speeds up adoption. Phase 5 is key. We always say it is the most important, takes twice as long as the first 4 phases combined, yet is the least implemented in the community.
A few other key Manage the Company initiatives are Consistent Invoicing and Payment, Efficient Order Flow, Managing to the P&L, Budgeting, and Cashflow Management.
Therefore, we believe that company leaders must pull themselves away from the tyranny of the urgency to work “ON” the business at least 10% of their time – that’s a mere 4 hours per week.
As always, your Sea-Level/Pax8 Academy team is ready to help!
To your success,
Rex Frank
VP of Academy, Pax8