Growing Your Business When The Economy Is Stuck In Neutral
The U . S . economy had unprecedented growth from 2009 – 2019 . It was the longest economic expansion without a recession in U . S . history . It was also the economic swan song of the baby boomers .
The greatest productivity and earnings of your career will generally be the last 10 years you work before retirement . The baby boomers had started retiring before COVID-19 , but we saw the bulk of them head off to retirement between 2018 – 2021 , and the successive generations ’ replacement birth rates have not been sufficient to fill the workforce . I have bad news … there is not a 20-year crop of humans coming to save us . Let ’ s hope AI and automation can ramp up quickly to ease labor market issues .
Based on the data we monitor in our Simple Numbers ® model , the overall market is stuck and cannot grow because we do not have labor to produce to demand . When demand exceeds supply , we get price increases ( i . e ., inflation ), and we expect that to continue until we see excess labor in skilled categories . Even though your revenue might be higher , has your “ output ” gone up , or are you just charging more ?
While the economy might be stuck , your MSP can still grow because you are in one of my favorite categories : “ necessary businesses ”! When the economy is disrupted , the first spending turned off is discretionary expenses you can delay or even do without . IT services have become the most important utility businesses spend on . While your customers may push back and try to lower costs , they will always need to keep a core level of services .
Before you decide to grow your business , you need to assess your ability to be “ profitable with what you got .” Our models show the overall market is behind in pricing adjustments by an average of 5 % to pre-COVID-19 . I want you to grow your business , but you are usually in denial if you think growing will make your unprofitable business suddenly profitable .
Getting Profitable With What You Have
The great thing about MSP business models is you can measure your LER ( Labor Efficiency Ratio ) very easily , and the magic target is $ 2 of gross margin for every dollar of labor you spend ( direct and management ). You can be heavy on direct labor and light on management or vice versa . That is your call . But at the end of the day , a dollar of labor spent needs to produce $ 2 of gross margin ( MRR plus projects ). If you are below that target , it could be any one of the following problems :
You have not raised prices enough to cover labor increases . You have expensive labor that cannot produce enough to justify salary ( management and direct ).
26 | MSPSuccessMagazine . com • VOLUME 4 ISSUE 2