How to Avoid MSP Margin Erosion

Aside from customer service or dealing with complex technical problems, one of the growing concerns an MSP faces is margin erosion. Through margin erosion, an MSP is forced to work harder to maintain the same level of gross profits over time. This issue plagues many MSPs to the point it becomes one of the primary factors that shuts down a business.

It’s the MSP businesses that learn to strategize for expected margin erosion that will grow their profits and see sustaining growth for long-term success.

Combating The Source of Margin Erosion

To learn how to avoid and combat margin erosion, an MSP needs to understand how it occurs. Preparing and securing your business for growth means adopting various best practices to ensure your business remains viable.

These practices include:

• Creating a strategic sales plan
• Understanding business risks and managing them
• Optimizing the company performance overall
• Centralizing tasks
• Increasing employee engagement
• Pricing review

Knowing What Margin Erosion Is and The Causes

Margin erosion is a unique kind of loss compared to a typical business loss. It occurs when the sale of an item provides a lower profit margin than what it used to be, or what is expected. It is a gradual loss of a business’s profits over a period, even while it’s working at peak capacity.

Based on the previously mentioned best-practices, the causes of erosion are the result of several different factors. It’s why the solutions to combat it vary so widely. Some examples of these factors are:

• Internal or external theft
• Human error
• Company policy changes
• New government legislature
• Shifts in the national and global economy

Based on these examples, many causes of margin erosion are out of an MSP’s control. It would be impossible to avoid certain things – such as government passing legislation that would impact MSPs. That said, there are some ways for MSPs to avoid erosion from different possibilities.

Having Repeatable Processes for Accurate Cost Estimation

One way to avoid margin erosion is setting realistic estimates. When an MSP generally knows how much a project or service will make them, it’ll be easier to plan around it. As simple as estimating costs and profit sounds, there is a lot of thought that goes into it. To understand the costs, an MSP needs to understand project limitations for example.

Being Proactive with Managing Change Order Processes

Margin erosion can also stem from unrealistic goals about a project. Change orders are one way to address unrealistic contracts as it would reduce the profitability risks. Change orders are used in situations where:

• a lack of communication or miscommunication is created between team members
• an MSP has assumed the client’s changing scope of deliverables without realizing any potential financial implications.

Make Resources Visible and Effective

For a project to be successful, an MSP must have good teamwork and productivity. This means making employees as effective as possible and accommodating them. For those wanting to maintain profitability, look after employees to optimize their performance.

Know How to Proactively Respond to Cases of Margin Erosion

Project managers and MSPs will benefit massively when they have access to tools that can create effective budgets, monitor work time, adjust protocols and plans based on changes, and have the information necessary to respond to any potential margin erosion scenario.

Overall, to fix margin erosion, there needs to be a combination of people, process, and tools in place that allow people to work together to solve the problem. Every business needs to have solutions and support available so they can make the best decision for a profitable business model.