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In today’s post, Paul Azad, the founder of ServiceTree talks about when something isn’t really what you think it is, in this case when it’s $30, not 30 at all, but really $43.

 

The Average Hourly Rate.

So, I’m not talking about magic here, I’m not talking about cheating, or gambling, or anything like that. But when it’s $30, really not $30? Well, the $30 I’m talking about is the average hourly rate for a technician. In today’s market, the $30 I’m talking about is in the US; in the UK, from memory, I think it was around the 25-30 pound mark, so it’s not too far from it, the currency doesn’t really change too much. In Australia, it’s about the same $30. That’s what we are generally paying per hour for our technical resources. Post COVID that might change, COVID, that had been slowly increasing, unfortunately, but $30 an hour loaded is what we’re generally paying for our average technical resource. 

I definitely know that in some markets, like in the New York area, it’s not 30, it’s actually quite a lot higher, in that $40-$45 mark, but let’s just start with 30, because at least that way I can cover what I want to talk about, And if you’re loaded labor is $20 an hour, then just times everything I’m saying by two thirds. And likewise, if your average load, burden, labor rates, are 45, then add 50% to everything I’m saying. 

$30 an hour is great. And it details an hour, where we’re paying them $30 an hour, and our team is 100% utilized. So if I’ve got somebody working 40 hours in a week, and I’m paying them $30 an hour, that’s costing me $1,200. If they’re actually working 40 hours, then I am actually paying them $30 an hour to do 40 hours worth of work. If you look at what the MSPs’ average utilization is, and when I say their utilization, what I mean is really what they think it is. And there’s very, very, very few MSPs I’ve spoken to that measure the utilization anywhere near accurately to validate this. For most MSPs, the utilization rates they’re talking about are loaded with a bloated because they’re being rounded up either deliberately because the MSP is asking the text to round up to the next 15-minute block, or not deliberately because the technicians are rounding their numbers up so that it looks like they’re busier than they really are. 

I speak to many MSPs every week, In the year that’s hundreds of MSPs, and I always ask this question. The reason is that it’s one of those things that I like to understand because an MSP that doesn’t know the utilization is an MSP that’s running blind, there’s just no way to describe it. In any other industry, I’ll use food because it’s one that I’ve been involved in for many years. Doesn’t matter if you’re a cafe or restaurant, a sandwich shop, or a fast food chain, the two biggest costs in your business are labor and the cost of food. So, to make a sandwich, how much did it cost for the lettuce, the bread, the cheese, and all those bits and pieces that makeup? Any business that is business-minded would know those two figures. Just critical, it’s like as an employee of a business, you know how much you get paid per hour per year. It’s just the way it is. 

 

The Number One Cost in Every MSP is Labor.

The interesting thing is that a lot of businesses in the MSP space don’t. And if you don’t know your utilization, you really don’t know where your money’s going. The number one cost in every MSP is labor, and if it isn’t, and it’s your tools, then I would really be concerned even more than the MSPs that don’t know their utilization. If labor, and really because I will say is our number one cost, it really should be the number one cost that we look at too. Seeing where it’s going, how can we improve on it? How do we maximize it? 

 

What is 70% Utilization? What does that mean?

The utilization in the MSP space is generally 70%. And I’d say generally, and I’m saying that very vaguely, because as I said, most MSPs don’t calculate it, don’t know it, and those that do really, unfortunately, don’t look at it properly. They don’t look at the nitty gritty, they don’t look that day, and they are at a very superficial level when they calculate it. But let’s just go 70%. What that means is, if I’m buying 40 hours of labor, which I generally am, and I’m paying them $30 an hour loaded, I’ve paid $1,200 for that resource for that week, which also means I’ve paid him $60,000 a year, give or take because of holidays and sick leave. So when I paid $1200 a week, and they’ve only done 70% utilization, what that means is they’ve only worked 70% or 40 hours, which means they’ve only worked 28 hours. A utilization of 70% means I’ve only utilized 70%. 

Now, it doesn’t mean that the 30% is them doing nothing, that’s they’re playing on their phone or chatting on social media. I mean, it definitely could be, but I don’t believe overall that’s the case, and maybe if it is, it’s not the 30% of that, out of the 100% that they’re doing that. Generally what it means is that the rest, that 30% is the inefficiencies of the MSP. It’s them either not having a handle on doing things efficiently, it’s them doing paperwork, it’s them doing stuff that they shouldn’t really need to be doing. Is them doing time entries at the end of the day, putting in how much time they spend on every ticket. It’s all those kinds of things. 

 

The Importance of Looking at the Hourly Rate.

Given that, yes, those resources as you’re working towards something, they’re actually not working towards what you hired them to do. When we hired technicians, we hired them to do technical work. Realistically, if we could get them to do 40 hours of technical work in zero time of anything else without, and I say that without sounding like I want them to be a machine. But at a high level, that would be ideal. But 30% of them doing nothing, you’ve 12 hours awake, they’re doing stuff that’s not actually utilized towards what you’re wanting them to do and what you hired him for. 12 hours a week at $30 an hour is $360. That’s $360 you’ve just wasted. Really what you’ve paid, you’ve paid $1,200 for them to only do 28 hours of work in the week and when you do the numbers, it’s about $43 an hour. That’s really scary. 

When my accountant, my CFO taught me that years back, I was like – no, no, it doesn’t make sense. But they’re in the office for 40 hours. He says – Yeah, but what are they doing? They’re busy, yes, they’re busy. But what are they doing? – I’m saying –  Staff, I’m shooting their documentation. He says – Okay. Now, you need them to do timesheets, can’t you make that any quicker? – No, because of this, and this and this and why – Anyway, we were running around in circles. Reducing the amount of time it took them to do time entry, and reduce the amount of time it took them to find the next ticket. There were two of them, I think, the five main reasons we ended up building a tool for ourselves, which then ended up becoming what we now offer as ServiceTree. 

But before all that, I did look at an hourly rate, but I was like – No, they’re doing 40 hours, they’re busy. – Once I stopped believing what I was trying to believe in and looked at it from – Well if they’re only doing 70% – (and I’ll use that 70%) – If they’re only using 28 hours of tech work, so it’s only 28 hours of contact time. Then the other 12 hours a week, we should be able to try to reduce to zero or get other things that are more cost-effective to do that for us. 

 

Faking the Numbers.

The other part is that 70%, is it a real 70%? Or was it blue and is it exaggerated? And in all honesty, like every other MSP that I speak to today, my techs were definitely faking the numbers. I didn’t have a way of knowing that at the time. And the funny thing was the ones that had the lowest utilization were the ones who actually were not lying, the ones that weren’t fudging their figures. For me, what was devastating was that the ones that were sort of near 70-80% utilization were the ones that were faking it the most, they were in the 40s 50s 60s, and they were faking it. So instead of opening 12 minutes, opening, 25 minutes and opening 20 minutes, or or 40 minutes in there. And when we started utilization, they couldn’t do that. What I found is the ones that were in the 40-50%, didn’t change, they were the ones that actually were being very specific. But the ones that were in their 70s, 80s, 90s, they got picked down quite a bit. 

 

Wasting Time.

What that actually helped me realize, though, the reason why they were faking it was because they were doing so much other non-essential stuff that I actually didn’t even realize. The thing was that I actually thought that the guys that had the lowest utilization, were wasting time. What actually came to learn was most of my team, were wasting time doing stuff that number one, I didn’t value, number two, I didn’t need done, and number three, nobody wanted to either, they were hiding it because they thought that they shouldn’t have done it, and then I expected it to happen.

For example, I expected them to create a PowerShell script in an hour, it might have taken three or four hours, but they will put in one hour, or maybe they’re putting in one and a half hours for that task. Then, for every other ticket for that day, they would fudge up to sort of cover their time. And what really got me was they weren’t lying to be deceitful to me, they were actually lying, because they thought that’s what they needed to do. So what we ended up doing was realizing that instead of getting my guys to spend three or four hours writing a PowerShell script, partly because they didn’t have the skill set to the level that I needed, or partly because they were enjoying doing it, so, therefore, it was taken longer; they weren’t being measured, and they could hide their time. What I found was, it was more useful for them to do ticket work because that’s what we hired them to do. And I would then just outsource those other functions to other people that were quicker at that. 

What ended up happening is where I thought – Oh, that script only cost me $30-$35 an hour – where really it took them like four hours and it cost me $120. And I didn’t see the value. I’d rather pay somebody $40 an hour than take an hour and a half. And number one be cheaper; number two, I’d have more capacity at my service desk to work through the tickets.

What really came out of all that was that when I was paying my team hourly to do work, at the end of the day, they work 40 hours, they get paid for 40 hours, If the hourly contract, yearly salary wages, that’s really irrelevant right now. What I was able to realize was anything that took time and therefore cost money that wasn’t in the direct wheelhouse of why I hired them, I actually took off their plate. Some of the team felt that was sort of a punishment, and we had to be very clear in communicating that actually wasn’t them doing badly. It was actually, in this case, me not realizing what I didn’t know. And it was very evident that the message that we had to give to them was – Listen, there’s nothing that you’ve done wrong, if anything, is what we have done wrong, We assumed you knew this, and we assumed you were doing that. And at the time that’s taking you to do it. It’s great. But right now we have enough work to do for you to do your normal service desk work, that you don’t need to be focusing on scripts. – And a few other staff we would give some time here and there to do scripts and so forth. We would encourage them to work on those scripts, but knowing that their time was better managed, and we would be able to work towards a mutually successful goal. But it was good. 

 

When it’s $30, $43?

But it does come back to that really starting point when it’s $30, $43? Well, it’s when it’s utilization of 70%. If your loading rate is really $30 an hour, your burn rate is $30 an hour, and utilization is 70%, if it’s not working out based on the simple mathematics, which I mentioned before, then look at everything that they doing and see, are you happy with them spending $43 an hour? Write a script, it took them four hours. Is it really worth $200? Or close to $200 to write that script? And you know what? Fortunately, unfortunately, what you realize is a lot of times it’s not. Keep an eye on it, look at your hourly rate. As any business we need to be looking at our costs, the cost of goods sold. A CFO would generally call our costs, the cost of goods sold. In this case, labor is only part of that element, because a lot of what we do, the costs of what we do at a service desk are generally going to be labor. So we need to ensure that is reasonable, and that we’re spending it wisely. So that way, we can be profitable, and we can be in a position to be successful, when things are not going as well as they are, aka now with COVID. But also when things are going well. We’ve got cash reserves to inject to spend money on our business to help in be doing what we’re doing better.