The New MSP 501 2020 Methodology Explained
… recognition is deserved by those businesses that recognize the incredible opportunity of managed services and decided to pivot toward it. We’ll be watching the NextGen 101 closely to see which players become powerhouses on the 501s of the future.
Percentage of recurring revenue will also factor into our overall judgement criteria, coming in as 15% of an applicant’s total score. Again, we’re looking at the factors that the larger financial markets will scrutinize to determine if you have what it takes to grow over the long haul. We all know these Wall Streeters are drooling for recurring revenue. It has to factor into our new methodology.
The key metric healthy managed service providers are measured on is recurring revenue, but today that comes in many different flavors. Office 365, hardware leasing, and telecom management are all recurring revenue streams, but they fall outside the realm of true managed services monthly contractual revenue.
We realized we had to differentiate contractual, true managed services from other streams of recurring revenue such as managed telco or HaaS. These streams will still count, but we’ll be placing a lesser weight on them in 2020. In total, weighted previous year’s annual revenue will count for 50% of an applicant’s final score as opposed to 100%.
2. What Does It Mean to be a ‘Top’ MSP?
Today, partners are expected to have 10-year business plans, succession plans, on-point valuation and the perfect revenue mix. MSPs are being forced into an operational maturity they’ve never had to deal with before. It isn’t enough to be a great tech with great customer relationships and a great book of clients. If you’re going to compete in 2020 and beyond, you’ve got to be savvy when it comes to business, too.
If we wanted the list to truly be a reflection of the top MSPs in the world rather than just those with the largest annual revenue, we needed to incorporate some key metrics used to gauge the health of a business.
For starters, we all know that it isn’t really the revenue you bring in that makes you a healthy business; it’s the profit, customers, and employees you keep. Basing the MSP 501 rankings solely on annual revenue, even when you incorporate the weighting methodology, is a logical fallacy. A company making $10 million in revenue but only $500,000 in profit shouldn’t place over a smaller, but more profitable company, just by default; therefore, in 2020 we will be asking applicants to provide not only annual revenue but annual profit as well.
But maybe you’re in an investment phase where you’re pouring resources into scaling efforts. Profit margin, therefore, will count for a good chunk of the criteria at 25%, but it isn’t high enough to knock out those companies making heavy investments in growth strategies, especially when you consider the other criteria we’re looking at.
Operational efficiency is a critical metric that anyone looking to acquire you, invest in you, or partner with you will be looking at closely to see if you have what it takes to scale.
Operational efficiency means doing more and supporting new and existing clients with the same resources, and in a services company, those resources largely come in …