managed revenue services recurring total growth rate
Top 8 Managed Services KPIs You Should Be Measuring | TSIAData and analytics provide valuable insights into the past, current, andfuture state of your Managed Services business. Which Managed Services metricsare the most valuable, however, is a matter for debate. At TSIA, we havepinpointed the eight Managed Service provider metrics that will provide themost complete picture of the financial health of your Managed Servicesorganization.## The Importance of Measuring the Right Managed Services KPIsData and analytics serve as barometers for all businesses. You are almostcertainly using some metrics to assess company performance. There are,however, distinctions that set key MSP metrics apart from all other dataconcerning your company.The key performance indicators are the metrics that align most closely withyour organization’s specific goals. These goals should be rooted in yourorganization’s overall strategy. Therefore, the KPIs are essentially measuringyour progress toward achieving your strategic goals. In that sense, the KPIsare vital for the long-term success of the company.To think of it another way, key performance indicators are also essential foryour company’s continual improvement. By constantly tracking your progresstoward strategic goals, you will be better able to course correct quickly andeffectively.Without further ado, here are the managed services metrics that all providersshould be measuring:## Growth Metrics### 1 – Total Recurring Revenue Growth RateIt shouldn’t come as any surprise that revenue is one of the most importantManaged Service provider metrics. There are, however, numerous ways to examinerevenue contribution. Which one is best?TSIA advocates for total recurring revenue growth, since it focuses on thecore engine of your business – subscription-based recurring revenue andexcludes one-time, transactional revenues that are often unpredictable. Totalrecurring revenue growth takes into account all recurring revenue from theprevious year as well as newly contracted recurring Managed Services revenue.To calculate your total recurring revenue growth rate, take the current year’srecurring Managed Services revenue and subtract the previous year’s totalrecurring Managed Services revenue. Divide the difference by the previousyear’s total recurring Managed Services revenue and convert into a percentage.### 2 – Top-Line (Net-New) Recurring Revenue Growth RateIn contrast to the total recurring revenue growth, the top-line recurringrevenue growth focuses exclusively on new recurring revenue that was signed ina given year. Top-line recurring revenue growth is valuable because itindicates the market’s current propensity to buy, the effectiveness of yoursales team, and the perceived value of your offering.A low growth rate or a major negative fluctuation in top-line recurringrevenue growth year-over-year is a major red flag. Such a trend indicates asignificant problem that you need to address, such as inadequate sales skillsor inadequate offers in the market.To calculate top-line recurring revenue growth, take the most current fullyear new recurring revenue and subtract the previous year’s new recurringrevenue. Divide the difference by the previous year’s net-new recurringrevenue and convert into a percentage.### 3 – TCV Bookings Growth RateWhile the two previous Managed Services KPIs looked at revenue on an annualbasis, some Managed Services contracts are signed for multi-year terms. Tocapture these longer-term commitments, your total contract value (TCV)bookings rate is a useful metric.The TCV bookings rate takes into account the full span of the contract. Thus,if a customer signs a two-year contract for a subscription that costs $10,000per month, the TCV would be $240,000. By monitoring the TCV bookings rate, youget a better sense of the market demand for your Managed Services.To calculate, take the total value of existing contracts and subtract thetotal value of the previous year’s contracts. Divide the difference by theprevious year’s total contract value. Convert into a percentage.### 4 – Base Revenue Growth RateThe base revenue growth rate is a valued metric because it focuses exclusivelyon your existing core group of Managed Services customers. The base customersrepresent your most loyal customers.At least, the base customers should be your most loyal customers. If the baserevenue growth rate is slowing or declining, you probably have a problem –your most loyal customers may not be valuing your services the way they oncedid.To calculate the base revenue growth rate, take the revenue from existingcustomers for the most current full year (excluding revenue from newcustomers). Subtract the previous year’s base revenue. Divide the differenceby the previous year’s base revenue and convert into a percentage.## Profitability Metrics### 5 – Gross MarginGross margin is often used as the metric to gauge profitability in the techindustry, but it may not be the best metric to evaluate the profitability of aManaged Services organization. Gross margin is a simple calculation ofsubtracting direct costs from revenue, but there are many factors that go intothe cost of Managed Services (operating expenses, allocated costs, overhead,etc.). As a result, there is not consensus on how Managed Servicesorganizations should calculate gross margin (i.e., there are varyinginterpretations of what are considered “direct” versus “indirect” costs acrossorganizations).So then why is gross margin included on this list of Managed Services KPIs?Since gross margin is recognized as a meaningful metric in the tech industry,Managed Services leaders will almost certainly be asked about it. You willneed to be able to answer questions about the gross margin of ManagedServices.As mentioned, TSIA has not seen clear agreement on how Managed Servicesorganizations should calculate gross margin. Nevertheless, we recommendkeeping it simple: services revenue minus direct delivery expenses and directtechnology expenses. Direct delivery expenses include direct FTE (full-timeequivalent – employees and contractors) delivery expenses, such as employeebase salary, incentives, and benefits. Direct technology expenses includeservice delivery infrastructure (tools/platforms), and also any embeddedproducts or technologies (for OpEx deals), etc. To calculate, subtract alldirect costs from the total Managed Service revenue. Divide that number by thetotal Managed Services revenue and convert into a percentage.### 6 – Net Operating IncomeWhen it comes to assessing the profitability of a Managed Servicesorganization, net operating income is a more accurate gauge than gross marginbecause this “bottom line” metric accounts for all direct and indirectexpenses. Net operating income takes into account the reality that ManagedServices are heavily supported by indirect operating expenses, like Sales,General and Administrative (G&A), Research and Development (R&D), andDepreciation and Amortizations expenses.To calculate your net operating income, subtract all direct and indirectexpenses from your total Managed Services revenue. Divide that number by thetotal Managed Services revenue and convert into a percentage.## Retention Metrics### 7 – Managed Service Recurring Revenue Retention RateTo underscore the importance of focusing on recurring revenue as a key MSPmetric, we also recommend including recurring revenue retention rate as a toprevenue metric to monitor. The Managed Service recurring revenue retentionrate is simply the amount of recurring revenue from the previous year that youwere able to carry forward into the current year.To calculate the Managed Services recurring revenue retention rate, take thetotal Managed Services recurring revenue for the current year (minus any newrecurring Managed Services revenue from the current year). Subtract the totalrecurring Managed Services revenue from the previous year. Divide this numberby the previous year’s total recurring Managed Services revenue and convertinto a percentage.### 8 – Managed Service Contract Renewal RateWe all know that it is generally cheaper and more efficient to retain currentcustomers than it is to land a new contract. Therefore, every Managed Servicesorganization needs to also pay attention to its contract renewal rate.To calculate your renewal rate, divide the number of current year ManagedServices contract renewals by the total number of contracts that were up forrenewal.You can learn more about how contract renewal rates impact your bottom line byusing TSIA’s Renewal Rate ROI Calculator. The calculator is based on TSIAbenchmarking that will help you forecast your renewal revenue.## A Final Word on Managed Services MetricsThe KPIs listed above have proven to be predictive gauges for Managed Servicesorganizations. There may be additional metrics that suit your particularbusiness as well. Whatever Managed Services KPIs you choose to follow, makesure to share them with your team. The goal is to have the whole ManagedServices organization working toward improving these KPIs.Contact TSIA if you need to discuss how to select or measure your ManagedServices KPIs. Also, TSIA members can always find more information aboutManaged Services metrics, including current metrics for many of the KPIsabove, in our annual State of Managed Services research report.