When it comes to measuring MSP performance, most business owners focus on basic key performance indicators like revenue and profit margins. But according to Dean Trempelas, Head of MSP Success at Empath and VP of Operations at Helpt, this approach is leaving money on the table.
“Your finances could probably be better,” Dean explains, “and surprisingly, the solution comes from Physics 101.”
The Physics of MSP Profitability
Think back to your university physics class. Remember learning about scalars versus vectors? A scalar is a quantity that only has magnitude (size), like speed. A vector has both magnitude and direction, like velocity. While this might seem like an unlikely place to find business insights, it’s actually the perfect analogy for understanding MSP efficiency metrics.
“Most MSPs approach key performance indicators like scalars,” Dean notes. “They track ‘how much’ but not ‘where’ things are headed. If you want deeper insight, you need to think in vectors like an engineer – metrics with magnitude and direction.”
Traditional MSP Scalar Metrics:
- Cost of Goods Sold (COGS)
- Monthly recurring revenue
- Gross Profitability
- Average Revenue per User (ARPU)
- EBITDA
While tracking these basic metrics is important, they’re just the beginning. As outlined in our guide to MSP Financial OKRs, modern MSPs need to think beyond simple key performance indicators to drive transformational change in their businesses.
Vector-Based Financial Analysis
When you apply vector thinking to MSP metrics, you start combining data points in ways that reveal deeper insights. The relationship between monthly recurring revenue and customer satisfaction, for example, tells a more complete story than either metric alone.
“The effective hourly rate treats all hours equally,” Dean explains. “But efficiency takes into account the value of different hours – Level 3 techs vs. Level 1 techs, after-hours work, etc. It provides a more holistic view of customer satisfaction and value delivery.”
The Efficiency Formula: Efficiency Ratio = (Invoiced labor) / (Value of labor performed under agreement)
Understanding Your Efficiency Numbers:
- Below 0.8: You’re doing too much work for too little pay
- 0.8-1.5: The sweet spot for sustainable client relationships
- Above 1.5: You’re not doing enough work for the client (potential flight risk)
Case Studies: Vector Metrics in Action
Let’s examine three MSPs at different efficiency levels to understand the practical implications of vector metrics:
Struggling Sam’s Tech Support (0.6 Efficiency Ratio)
- Monthly Agreement Value: $10,000
- Actual Labor Delivered: $16,667 (111 hours at $150/hr)
- Efficiency Ratio: 0.6 ($10,000/$16,667)
Sam’s situation is common among growing MSPs: they’re working harder, not smarter. At 111 hours of service delivery against a $10,000 agreement, they’re effectively giving away nearly $7,000 worth of labor every month. This usually happens when agreements aren’t properly scoped or when the MSP falls into the trap of saying “yes” to every client request without evaluating the impact on efficiency. The good news? There’s significant room for improvement through better service delivery processes and agreement restructuring.
Perfect Partners MSP (1.3 Efficiency Ratio)
- Monthly Agreement Value: $15,000
- Actual Labor Delivered: $11,538 (77 hours at $150/hr)
- Efficiency Ratio: 1.3 ($15,000/$11,538)
Perfect Partners demonstrates what well-optimized service delivery looks like. They’re delivering appropriate value to clients while maintaining healthy margins for their business. Their success comes from careful agreement scoping, strategic use of automation, and proper alignment of technician skills with client needs. At 77 hours of service delivery, they’re hitting the sweet spot where clients receive sufficient attention while the MSP maintains profitability. This leaves room for occasional surge support without breaking their service model.
Too Good Tech (1.9 Efficiency Ratio)
- Monthly Agreement Value: $20,000
- Actual Labor Delivered: $10,526 (70 hours at $150/hr)
- Efficiency Ratio: 1.9 ($20,000/$10,526)
While Too Good Tech’s numbers might look attractive at first glance, they’re in a dangerous position. Their high efficiency ratio suggests they’re either significantly overcharging clients or, more likely, under-delivering on service. At just 70 hours of service delivery against a $20,000 agreement, they risk client dissatisfaction and eventual churn. This often happens when MSPs focus too heavily on profitability metrics without considering the client experience vector. Clients who feel underserved will eventually start shopping for alternatives, regardless of how efficient the MSP’s operations appear on paper.
Visualizing Vector Metrics
Understanding vector metrics is one thing; presenting them effectively is another challenge entirely. Different visualization methods serve different purposes and audiences. Line charts excel at showing trends over time and work particularly well for tracking efficiency ratios, but they can become cluttered with too many data points. Heat maps provide excellent client-by-client efficiency comparisons and make it easy to spot outliers, though they can overwhelm viewers if you’re tracking too many clients simultaneously. Scatter plots help identify relationships between metrics like efficiency and client satisfaction, but they often require additional context for non-technical audiences.
The key is choosing the right visualization for your specific audience and purpose. For technical teams, detailed scatter plots might provide valuable insights. For client presentations, simpler line charts showing clear trends often work better. When reviewing your entire client base, heat maps can quickly highlight areas needing attention.
Client Communication Strategy
Vector metrics provide powerful insights into customer satisfaction trends and help predict customer lifetime value. When communicating with clients, focus on showing how your optimized service delivery enhances their experience while maintaining cost-effectiveness.
Reporting Improvements
Transitioning to vector-based metrics requires thoughtful communication with your clients. Start by documenting your current agreement performance to establish a baseline for comparison. This isn’t just about gathering numbers – it’s about creating a clear picture of where your service delivery stands today. Review the last six months of service delivery data, identifying patterns in ticket volume, resolution times, and resource allocation. This baseline will become invaluable when demonstrating improvements driven by vector metrics.
Once you have your baseline, analyze where vector metrics reveal opportunities for improvement. Look for areas where efficiency ratios suggest misalignment between service delivery and agreement value. These insights become powerful conversation starters with clients, showing them not just what you’re doing, but how effectively you’re doing it. Rather than overwhelming clients with raw data, create visual representations that clearly show the relationship between service delivery and value received.
QBR Enhancements
Quarterly Business Reviews take on new life when enhanced with vector metrics. Instead of presenting a simple review of tickets closed and projects completed, you can now tell a more compelling story about service delivery efficiency. Begin your QBRs with a performance overview that shows efficiency trends over time. This demonstrates not just what you’ve done, but how well you’ve optimized your service delivery for the client’s benefit. Use clear visualizations to show how your efficiency improvements translate directly to better service for the client.
The strategic planning portion of your QBR becomes more dynamic when informed by vector metrics. Instead of generic technology roadmaps, you can identify specific optimization opportunities based on efficiency data. For example, if your metrics show high ticket volume in certain categories, you can propose proactive solutions that address root causes rather than symptoms. This approach transforms the QBR from a backward-looking review into a forward-thinking strategic planning session.
Value demonstration becomes more concrete when backed by vector metrics. Rather than simply stating that you’re delivering value, you can show precisely how your service efficiency translates to client benefits. Compare actual service delivery against agreement scope, highlighting areas where you’ve exceeded expectations or identified opportunities for improvement. Use real data to demonstrate cost avoidance through efficiency gains, showing clients the tangible benefits of your optimized service delivery.
Your quarterly business reviews should highlight the strong correlation between service efficiency and customer satisfaction. Use data visualizations to demonstrate how your focused sales and marketing efforts align with client needs while maintaining high service standards.
Agreement Adjustments
Note: The following section contains suggestions for agreement structure and should be reviewed by your legal counsel before implementation. This information is for consideration only and does not constitute legal advice.
Vector metrics often reveal the need for agreement adjustments to better align service delivery with client value. Start by examining your scope alignment carefully. Your agreements should clearly define service delivery expectations, including specific response and resolution targets. Rather than using generic language about “industry standard” response times, specify exactly what clients can expect based on your efficiency data. Include clear definitions of service levels and how they’re measured using vector metrics.
Value-based pricing becomes more feasible when supported by vector metrics. Consider implementing tiered service levels based on efficiency targets – this allows clients to choose the level of service that best matches their needs while ensuring profitability at each tier. Define clear escalation procedures and after-hours support parameters based on actual service delivery data rather than industry assumptions. This approach helps clients understand exactly what they’re paying for and why.
Performance metrics in your agreements should reflect your vector-based approach to service delivery. Include specific reporting requirements that demonstrate the value clients receive from your optimized service delivery. Define success metrics that align with both client goals and your efficiency targets. Most importantly, build in regular review and adjustment periods that allow you to fine-tune agreements based on actual performance data. This ensures your agreements remain aligned with both client needs and your service delivery capabilities as they evolve over time.
Internal Communication Strategy
Implementing vector metrics requires more than just client buy-in – it demands alignment across your entire organization. Your team needs to understand not just what you’re measuring, but why these measurements matter and how they impact daily operations. Start by organizing a comprehensive training session for all staff members who interact with clients or influence service delivery. This initial session should focus on the fundamental concepts of vector metrics and their practical applications in your MSP.
Service delivery teams often express concern about being measured in new ways, so it’s crucial to emphasize how vector metrics provide a more complete and fair picture of their work. Show your technicians how these metrics account for the complexity of their work, not just the quantity. For instance, demonstrate how the efficiency ratio recognizes the different values of Level 1 versus Level 3 work, and how after-hours support is properly weighted in the calculations. This understanding helps transform potential resistance into advocacy for the new measurement system.
Account managers play a particularly crucial role in the successful implementation of vector metrics. These team members need deeper training on interpreting and presenting vector metrics to clients. Regular internal reviews of client efficiency ratios with account managers help them identify both opportunities and potential issues before they impact client relationships. Equip them with clear talking points and real examples that demonstrate the value of this approach. Their confidence in discussing vector metrics directly influences client acceptance and understanding.
Your sales team needs to understand how vector metrics influence proposal development and pricing strategies. Work with them to develop clear ways of explaining your value proposition in terms of efficiency and optimization rather than just hours or response times. This might require adjusting sales presentations and proposals to incorporate vector metrics in a way that differentiates your MSP from competitors still using traditional measurements.
Implementation Best Practices
Start small and scale gradually. Begin by implementing vector metrics with a subset of your client base where you have the most complete data. This allows you to refine your processes and build confidence before rolling out across your entire organization. Consider starting with your most stable and profitable clients, as they’re often more receptive to sophisticated performance measurements.
Invest time in configuring your PSA tool to capture the right data points. While you don’t need to overhaul your entire system, ensure you’re tracking the components needed to calculate efficiency ratios accurately. This might include adjusting time entry categories, implementing new automation rules, or creating custom reports. The goal is to make data collection as automated and consistent as possible.
Regular review and refinement of your vector metrics program is essential. Schedule monthly internal reviews to assess how well the metrics are working and identify any necessary adjustments. Pay particular attention to feedback from your service delivery teams and account managers, as they’re often the first to spot opportunities for improvement.
Conclusion
Vector metrics represent a significant evolution in how MSPs measure and optimize their performance. As Dean Trempelas puts it, “Stop looking at your profitability like the speedometer on a car. Treat it more like your GPS treats your commute time – distance, speed, traffic, and best route forward all combined.”
By implementing vector metrics thoughtfully and communicating their value effectively to both clients and staff, MSPs can transform their service delivery model from a simple input-output equation into a sophisticated, value-driven operation. The result is better alignment between service delivery and client value, improved profitability, and stronger client relationships.
About Dean Trempelas
Known for his straight-talking approach and deep MSP expertise, Dean Trempelas serves as Head of MSP Success at Empath and VP of Operations at Helpt. A self-described “Professional annoyer of MSP CEOs” and “Profitability Percentage PITA Person,” Dean combines technical expertise with a unique ability to help MSPs optimize their operations. When he’s not winning “Vendor Aggravator of the Year” awards (6x gold medalist), he’s helping MSPs boost their revenue and improve their service delivery through data-driven insights.
Learn more about Helpt, an outsourced helpdesk service for MSPs with American helpdesk agents, at www.gethelpt.com.
Learn more about Empath, a training platform to help employees at MSPs level up their skills in everything from cybersecurity to Microsoft 365 to management and leadership, at www.empathmsp.com.
