What is the optimal size for an MSP?

At their heart, MSPs are consulting firms. Consulting firms are generally small businesses. As are the firms that many in our industry cite as their equivalent in professionalism such as accounting and legal.

Law Firms: Stats from brandongaille.com

  • 3 out of 4 lawyers are working in a law firm that has 2-5 lawyers working for it.
  • 13% of lawyers state that they work in a legal firm that employs 6-10 lawyers.
  • Just 11% of lawyers work for firms that employ more than 10 lawyers.
  • 2% of lawyers work in firms that employ more than 50 lawyers at the same time.

Accounting Firms: Stats from QBO chat

  • The average revenue per employee for all firms is over $100K.
  • Firms with 0-4 employees actually had higher average revenue per employee numbers and the average decreased the larger the organization.
  • The average payroll per employee for all firms is $48K.
  • Over 70% of the firms in the entire data set (112K+) have 0-4 employees.

We know that MSPs follow a similar pattern. If you’ve ever attended a conference and talked to your peers, then you know this to be the case, but we can look at some actual data too. MSP 501 by Channel Futures shows these stats in their annual report. Apply for your copy 2020 MSP 501 Full Report (channelfutures.com)

If we do a little math, then we find that the top tier firms employ about 15 people on average. My own MSP is in this group, having ranked at #40 and we had 7 employees at the time so I do wonder if there aren’t a few very large firms in the mix.

If we look at firms serving the SMB market and we do a bit of math, we find that these firms are really small, having an average of 1.2 employees. You ought to note too that the revenue per employee isn’t much different from big to small firm. And that the SMB firm beats the full market by a couple thousand per employee. The 501 averages 196,663 per employee and the SMB averages 198,336. Frankly, if you’re an SMB firm you ought not to fear throwing your hat into the MSP 501. You’ll probably knock a larger firm out of the ranking.

Is then the optimal size somewhere between 1 and 15 employees? It would seem so. It’s an interesting phenomenon that consulting firms do not experience economies of scale as they grow.

As someone who does consulting with MSP looking to improve their business or sell a business, I’ve seen quite a few financials. I’ve noticed that small firms outperform larger ones, always. The larger the firm, the more management top heavy they become, the lower the revenue expectations per employee, and the more significant the overhead in tools, office and supplies.

Do you just have more employees or are you actually making more money?

When I formed my own MSP, 21 years ago, I looked to the legal firms to provide an example of how a consultancy should operate. I also had little desire to own a large firm. My desire was to own an outstanding firm. As the company grew, I did give some thought to size, and I came up with 7 as the ideal size firm. After this point the economies of scale begin to play against you.

I do think that it is possible to scale larger and retain the efficiencies of a small firm but only if employees are assigned to independent small pods of 5-7 technical staff and technical management. In my own firm we will soon have 9, and you know what? Our revenue per employee is down. This is a temporary situation until we can grow to 12, but it will be that long before the revenue per employee is back up again. Meanwhile, we’ll be making less money but at least we know what the problem is and what the solution is and most importantly we have a plan to get the business to this next level. This is the key to smart business growth.

Choose wisely and have a plan when you decide upon the size of firm you will grow.

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