MSP Finance: Activity-Based Costing
BY IT GLUE | April 05, 2021
The fun thing about managerial accounting is that there are no rules. There are concepts, but this is financial information for internal use, so you get to decide what you want to know, why you want to know it and how you’ll use that information in your decision-making. One valuable technique is activity-based costing. Another variant of this concept is client-based costing.
The Basics
Activity-based costing seeks to determine the true cost of doing something. If you’re looking at this at a client level, which is a good idea for an MSP, you’re determining the cost of servicing that client. The obvious benefit is that you can align what you charge a client a lot more closely with what it costs to service a client.
Let’s say you have two clients and you charge each of them the same $150/seat, and they each have 20 seats. That means each client is worth $3,000 a month in revenue. Company A is low-maintenance. They use your full stack and hardly ever send in tickets. Your service desk spends 10 hours per month dealing with them and each hour of your service desk costs $75 all in, which means they cost you $750 each month. This is a great client.
Company B is a complete dumpster fire. They have all sorts of old equipment, refuse to adopt half your stack, and because they are all useless with technology, they call in for tickets all the time. Your service desk spends 50 hours per month dealing with them, costing you $3,750 a month.
Company A | Company B | |
Revenue | 3,000 | 3,000 |
Cost | 750 | 3,750 |
Income | 2,250 | -750 |
Obviously, I’ve made up these numbers just to prove a point, but I think we all accept that some clients cost more to service than others. If you can apply hard numbers to that, you can make a case to them to a) adopt your stack, b) pay more or c) both. It also makes it easier for you to feel good about letting go of a client if you have good numbers and those numbers show that a client is routinely losing you money (or even just coming in below your cost of capital).
Probably the most difficult thing about this concept is getting the data. Pay attention to whether or not the tools in your stack are delivering the data that you need to have accurate costing information, and then make the best decisions on pricing.
Want to learn more about MSP finance? Sign-up for our upcoming finance-focused webinar featuring Peter Melby, CEO of Greystone Technology, a globally recognized MSP, as he reveals how MSPs can reinvest and make money at the same time.
