643 Peter Kujawa on Boosting MSP Profitability: Insights from IT Nation Secure

[Uncle Marv]
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Visit them at www.getthread.com. ♪♪ Hello, friends. Uncle Marv here. I'm here back again live at IT Nation Secure here in Orlando, Florida for the 2024 version, and I'm here on what is looking like Radio Row a little bit more and more.

I've got another podcaster set up down here. We've got some media people down the row, and we are outside the Solutions Pavilion where vendors are getting set up. And seeing some MSPs come in, I've had a quick look at do a shout-out to Heather, shout-out to Matt, Kat, some other people there.

I'll let you guess who those people are. But right now, we are sitting down with another member of the ConnectWise family. Peter Kujawa of Service Leadership is here.

Peter, how are you? I'm great, Marv.

[Peter Kujawa]
How are you doing?

[Uncle Marv]
I am good. So, we had a little bit of a pre-chat here because we just met for the first time. Nice to meet you.

And interested to hear what leadership is.

[Peter Kujawa]
Service Leadership. Service Leadership is a business that was acquired by ConnectWise in early 2021 and started, though, 20 years ago. And it was started by Paul Dippel and some others.

And the goal of the business initially, and still largely what we do, is to provide objective financial and operational benchmarking performance data to MSPs and other TSPs all over the world. So, every quarter for 19 years now, every quarter, companies all over the world put their financial and operational data into our system. And every quarter, we determine who's the best in class and what the performance characteristics of those companies are.

And then we tell the companies who put their data in how they compared to the best in class. And so, for us, the best in class is a really simple definition. It's the top 25% most profitable MSPs or VARs or whichever business model it is that we're comparing you to.

And so, we base it on profitability because it all comes out in the wash, ultimately, on profitability. And then we're able to use that data to really have a great sense of what revenue growth looks like and what's working with MSPs and what's driving success. And that's what we really do, is teach companies what's driving success today and how they can get there.

[Uncle Marv]
So, I will say I caught a little bit of the conversation you were having with somebody right before we started recording. They came up and started asking you about numbers and talking about the margins and all that stuff. So, it sounded like it gets pretty deep.

[Peter Kujawa]
It's extremely detailed, yeah. Somebody who benchmarks with us, everybody, so we benchmark, we'll take a step back. We benchmark 10 different, what we refer to as predominant business models or PBMs. The two largest sample sets are MSPs and VARs. The definition of a VAR to us is anybody who has 60% or more of their revenue coming from product, both recurring and non-recurring product, and 40% or less is services. If 40% or more is services, then we look at, is it infrastructure services? Is it application services?

And we have different business models for those. So, when somebody benchmarks with us, they're going to really get compared apples to apples to somebody who's doing a very similar business and understand what's driving success in their specific business model. But, yeah, everybody, the question that you heard the discussion on related to, we have what's called the Normalized Solution Provider Chart of Accounts, the NSPCOA.

Everybody who benchmarks with us worldwide maps out their chart of accounts to the NSPCOA. So, there's a common way that all of our benchmarking clients are putting in their revenue. There's a common way they're putting in their cost of goods sold, where they're putting their labor cost is the same.

That way you get a really effective comparison to how you're doing.

[Uncle Marv]
That sounds actually daunting, to be honest with you. I'm on a smaller side of the MSP scale. I know the person that you were talking to is on the larger side, at least compared to me.

And when I've talked with other companies about not just chart of accounts, but margins and how they're calculating everything inside of their chart of accounts and stuff, you're right, we're all over the place. And it used to be the top revenue numbers, what everybody looked at. I think people are now starting to realize, hey, profitability is something we need to be looking at, margins, net margin, all of that stuff.

I've kind of done that in my own business. I have a pretty healthy margin. I've been told by my accountant that I make too much money some years.

I need to allocate some more expenses or something. But having this standardization across companies so that we can all measure ourselves, how did that actually get to be to where you guys could say this is what works and works consistently?

[Peter Kujawa]
Yeah, so there's a bunch in there that we can unpack. First of all, most of the MSPs that we work with or other PBMs that we work with, typically about seven or eight employees is when they start to get a level of financial sophistication, usually right around a million of revenue if they're an MSP, maybe a million five. They start to get a level of financial sophistication that all of a sudden you wake up one day and this is a real business, that it has the potential to provide really good returns annually.

It has the potential, if you continue to build it, to be worth something substantial when you go to sell it at some point. And so around that time is when we typically see companies start to benchmark. And around that time is when they really start to have the ability to process the instruction and what the data is telling them.

And so the average MSP today is about 7.2 million of revenue, but our industry still has a lot of MSPs that are smaller than that. We're starting to have some that are substantially larger than that as well. But we lay out our system, it's all web-based, and you put your data in.

And when you get your data, when the reporting comes back, it's impossible to not see where you're doing well and where you're not doing well. There's over 80 different KPIs. The main dashboard is going to show you the top KPIs and it's going to show you, in all cases, how you're doing relative to best in class.

So, for example, what's my managed service gross margin last quarter and how did it compare to the best in class? And it's stoplight color-coded. It's red, yellow, green.

You know right away if you're green, you're doing well, and keep doing it and double down on it. If it's red, you've got a major issue. If it's yellow, you've got to tweak it a little bit and you'll be pretty good.

So our providers know that every quarter they can look and see what are the areas of their business that they should be prioritizing as a focus area. Oftentimes that's different than what they anecdotally or personally believed was what they should focus on. It's not uncommon we'll see a provider that starts a benchmark and they think, well, we've got a really huge issue in our product gross margin.

And then they get their report back and find that, no, in fact, their product gross margin is doing really well relative to the best in class. They have an issue in service delivery or in project delivery or in some other area of the business. Or maybe it's in sales cost or maybe they're spending too much in customer acquisition.

G&A might be too high. So all of those things are laid out so that it's really easy to process and understand what the data is telling you.

[Uncle Marv]
All right. Now, from a standpoint of an MSP that maybe is not there yet, is this something that you can be a part of when you're not quite yet a million and at least start to build that foundation of this is how I need to be setting up my chart of accounts. This is where my margins need to be.

Here's what my percentages need to be. Is that something that can be done early on, or do you really need to get to that point where?

[Peter Kujawa]
Oh, no. If you have an owner who's so inclined to really dive in, they can certainly do it. You can do it if you're at one employee, if you're inclined to do it.

The 7-8 employee is about where we typically see most MSPs hit a maturity curve. But an owner who has just a few employees, they'd have a few options. They could certainly start to benchmark.

There's no size restriction. You can start benchmarking when you have a dollar of revenue or $100 million of revenue. There's no issue on either one.

So you can start to do that. The other thing you can do is start to really follow service leadership on social media. We do a lot of webinars.

We provide a lot of content. You can sign up for when we do webinars, when we do newsletters, those kind of things, and just really start to learn the methodology, learn the terminology. We teach operational maturity level.

OML is a term that service leadership trademarked about 10 years ago. So you can start to learn what high OML behaviors are in your MSP. And then the advantage is you're building it right.

Instead of having to go back, as a lot of MSP owners have to do once they get $2 million, $3 million of revenue, and now they've got to go back and change a bunch of things in their business because they're doing them wrong, you can start off right out of the gates, doing things right, and it's going to be a lot easier to run for you.

[Uncle Marv]
That's exactly why I asked that question, because a lot of people, they'll ask the questions, but it's a matter of whether they'll do the work in the beginning. So if there's a way that that can be done ahead of time and grow into that maturity, that would be great. One of the things I noted that you guys put out, and I don't know if it was for the first time last year, but you put out a compensation report.

Now, is that only reserved to the people in service leadership, or can anybody get that?

[Peter Kujawa]
No, the compensation report was something service leadership used to do every other year until 2016. And when I was running the MSP, I was running before coming to service leadership. It was something that I really liked getting, but it's a huge amount of work to do every year.

And two years ago, we started getting so much request for the data.

[Uncle Marv]
That's the joys of being live on the pre-day here. So the beeping you hear is the...

[Peter Kujawa]
This is real-world background. We started getting so much request for compensation data because of wage inflation. We were getting a lot of questions on, what should I be paying for an increase this year?

What are you seeing in the market? What are level one’s going for these days? And, you know, just on and on and on.

And the answer was, we don't know. We didn't have any up-to-date data on it. Our most recent data was from 2015 data that was published in 2016.

So we decided a couple years ago to bring it back. And the process is from beginning of October to the end of November, any provider from all over the world can enter their data in. Good.

Any provider can enter their data into our system. They don't have to be a service leadership customer. And they'll get a free copy of the report when the report comes out.

And that's in March every year. And anybody who doesn't enter their data can still buy a copy of the report. So I think the report retails for $2,000 U.S., but it's available. We have some discounts on it. But 100% of the data in it comes from other MSPs and VARs. It's industry-specific data.

We provide data on 60 different positions in the industry, on averages, averages by experience level. We even captured data on remote work model last year. We captured data on some different benefit costs.

We captured data on PTO policy by position. So the report itself is about 400-some pages of data. And it gives any MSP of any size really, really good data on what they should be paying their people and how they should be doing it.

And that's a huge issue for MSPs. It's about 80% to 85% of your cost as an MSP is your people. So you've got to make sure you're doing it right, not only so that you're not overpaying, but you want to make sure you're paying enough so that you can recruit and retain and get the best people you need.

[Uncle Marv]
Absolutely. Now, you had mentioned a little bit about the fact of what you were doing before coming over to service leadership. So, of course, I've got to ask about that because there's actually two bits of your history that seem interesting.

But let's start with the MSP factor first. You had, did you, I can't remember, did you acquire the MSP or did you just join an MSP?

[Peter Kujawa]
No, I actually, I did not acquire it. I was hired in 2010 by an owner of an MSP based in La Crosse, Wisconsin, where I continue to live. And we were, my wife and I were living in the eastern side of the state of Wisconsin and I was CEO of a financial technology firm that was unrelated to the MSP space.

And I had been running that for seven years and it was a great business. We had massively grown the business and it was really profitable. I had done some other turnarounds over the years in the cell phone industry.

And in 2010, we really wanted to move back to La Crosse. My wife and I had met on the west side of the state in La Crosse and we'd been gone for 15 years. And the owner of this MSP was in his early 70s and was independently wealthy, but he was getting less independently wealthy every month he owned the MSP.

[Uncle Marv]
That sounds like a lot of us.

[Peter Kujawa]
Doing $2 million of revenue at the time, $2.2 million of revenue and losing $1.5 million. And so he was looking for a new president to come in, take over, and to fix it and make it profitable. And he wanted to ultimately exit the business over the next few years.

And he was at an age where he wanted to get his business's loose ends tied up and this was one of them. So I thought, great, it'll get us back to La Crosse and how hard can the MSP business be? We pretty quickly learned it's a really hard business.

And we had to figure things out the hard way. 2010 back then, as you remember, this was a new concept. Was it even using the word MSP back then?

We were, but I like to joke, when you think back, those of us who've been in the industry that long, back then the first 10 to 15 minutes of every sales call was explaining the concept of managed services to the business owner. They'd be like, what, you mean, I'm not going to have an IT guy down the hall? I don't get this.

You're going to be the IT guy down the hall? No, you're going to call us and we're going to do things remote. And so all of us in the industry were just figuring things out back then.

We didn't know how to do pricing and packaging. We didn't know how to measure success. It was the Wild West.

[Uncle Marv]
I remember when I started, I didn't actually start, well, I guess I did start billing by the buckets, the bucket of hours. It wasn't necessarily hourly, I would just say, we think it takes about this long to support you, so here's the cost for the month. Kind of like an all-in type of deal.

But yeah, it was tough to explain.

[Peter Kujawa]
Yeah, and today, part of the reason our annual profitability report comes out today and 2023 was the fourth great year in a row for the industry. We've turned the corner from those days in a big way. The last four years are the best four years we've ever seen on record for profitability in the space and the model has just really matured and the customer acceptance has turned the page.

And so we're in a really, really different time today compared to back to 2010, for sure.

[Uncle Marv]
I'm going to try to put a pin in that and come back to it, but I want to get your viewpoint after those first couple of years running the MSP. It sounds like you did hit a turnaround to the point where you were asked to do service leadership. What was it that, you know, where you were able to turn the ship, I say, for that business, where you were losing 1.5 and, you know, you got a handle on stuff and made it work. Was there one single thing or a series of things?

[Peter Kujawa]
Yeah, so part of it, a big part of it, was service leadership and that's part of why I'm here today is I'm a religious-level believer in the data and the power of the data to transform your business. But we went in, when I took over, we had some really good people on our leadership team and some good employees in the organization, but we had to make some pretty rapid changes to the business. One of the guys I used to work for years ago had a saying, and this was during the Great Recession, the early days of the Great Recession.

I remember him pulling, we were trying to really look at our business prior to my past life at the FinTech company and make some decisions because of the market crash and trying to really position ourselves, and he said, Peter, a hangman's noose sharpens the mind and leads to rapid decisions. And I've always remembered that, that quote, and that was really the case for us. We had to do some really tough decisions fast.

We had to get rid of some people. We had to change pricing. We had to do a bunch of things fast, and we did.

But after about eight or nine months or so, we were doing better, but we were still losing money. So we were on track to lose a half a million, not a million five, which is certainly, it's a million less that you're losing, but you're still losing money. And in 2011, after about eight or ten months, I was fairly convinced that it was impossible to really make money in managed services, that the industry existed for techie guys to own a company and have a few of their buddies that they worked with and be able to play with the newest technology and maybe pay themselves a salary, and that was about the best-case scenario.

And then we discovered peer groups, and we discovered service leadership benchmarking. We joined a peer group, a service leadership peer group, and we were members of that the entire rest of my time there, and that company's still in a service leadership peer group today. And we started to benchmark, and as soon as we got our first benchmarking book back, it was instantly transformative.

I'll give you an example. My salespeople had convinced me that the best-case scenario on product gross margin was about 13%, and I thought, this is appalling. I don't know how you can, we're selling a million dollars of hardware back in those days, but we're only at 13%.

It's almost not even worth the effort, but I was talked into it that we're online, we're competing against Dell, and customers can shop you and go to other websites and shop you, that this is the best-case scenario. So after a while, I had accepted that. We got our first book back, and at that time, best-in-class was 23%.

So I went back to the team and said, wait a second, guys. Well, how is it that these guys are all able to get 23% and we're only able to get 13? We're going to now start pricing our hardware at 23%.

And we did. And by a month later, we were over 23%. The following quarter, we were over it.

We never went under best-in-class after that. And we only had a couple of customers that really pushed back. Well, for us, if you're selling a million of hardware and you're able to add 10% to your margin, that's $100,000, right, without doing an additional deal or anything.

So that kind of input in our service gross margin, across our lines, and just really understanding the relationship between what we were getting for new revenue and what our true cost to deliver the services was, that was transformative. So we did an acquisition around that time. A year later, we were acquired.

By then, we were starting to make a little bit of money. We went on to do two more acquisitions. When I left, that was a $17 million business.

And I'm fully convinced that had we not discovered service leadership, that that business would have closed by the end of that year. And none of those employees would have had the opportunities that they had. And we wouldn't have been able to put food on the table and kids through college and pay mortgages and all the things that we were able to do over the years.

So when the opportunity came up in 2021 to lead service leadership and be able to take that out to the community and be as passionate with the rest of the community, helping other partners, as it was transformative to us, that was what got me to jump at it.

[Uncle Marv]
Peter, we're going to have to bump into each other a little bit more here. But I will say that story just should show to everybody out there, if you just listen to what else is out there, find out what the best in class are doing. They're doing it, and it works.

And stop listening to all the naysayers out there who says, oh, you can't do this, and our customers won't pay. You know what? They won't pay if you don't ask.

So that's one thing I'd like to say. I want to go back and kind of reiterate, or not reiterate, but revisit a conversation we were starting to have right before the recording because I do another podcast, and I just finished an interview with somebody who had left a profession that you too were at the beginning of your career. You were a lawyer first, and I always like to find out, there's a lot of lawyers that leave the legal industry, and this particular person left for health reasons and mindset issues, and she's now leading a health and wellness coaching and all of that.

You ended up in the tech space. So I first want to ask, in terms of, I guess we should ask, one, why did you become a lawyer, and then why did you leave?

[Peter Kujawa]
Yeah, those are both really good questions. I was out of undergrad for six years, so I graduated from Marquette University in 1992, and in 1998 decided to go back to law school. And why is a long story.

The short version is I was leveraged to the hilt coming out of undergrad. I paid my way through and had no option other than to go out and make some money and start paying some bills off and decided to go back to law school. And Marquette at the time had a part-time program where you could go at night, and so we moved to Milwaukee.

I ran U.S. Cellular’ s major account team in Milwaukee, the sales team, Monday through Friday during the day, and I went to law school Monday through Thursday from 5.30 to 9 at night, which meant that basically Saturday and Sunday I was reading all day, preparing for the next week of classes. And so made it through, graduated in 2002, and it was fine. I worked at a couple of law firms for a brief period of time, but it was right after September 11th.

The law firms weren't adding at the level that they had been, and so while I was waiting for the right opportunity to come along, and I kind of had decided I liked leading a business better than I liked being at a law firm anyway, I ended up working in legal content for Thompson West, who provides the books and online search databases and everything, and did that and loved it, and then about a year into that stint, there was an owner of a business in Fond du Lac, Wisconsin, who owned a couple of companies that were heavily regulated and he needed, he was looking for a CEO of one of those companies, and it was more of a startup, and so he brought me in, and so I went back to running a company and never looked back. I did that for seven years and then came over to the managed service provider in 2010.

[Uncle Marv]
All right. I always like to hear the journey that people take.

[Peter Kujawa]
By the way, I'm still a licensed attorney. I've got my Wisconsin bar card in my wallet right now. Yeah, I still keep up my license.

I actually went back, so the company that acquired us was a large office technology company based in Wisconsin, and I was corporate counsel of that company for the last three or four years, in addition to running the MSP. And so it's a great toolkit. What most people don't realize is 50% of licensed attorneys are not actively practicing law after 10 years.

They're doing something else. They're running companies. They're entrepreneurs.

They're doing other things. Because it's such a great toolkit, it opens up so many things for you in the business world, especially that a lot of attorneys end up it's a great place to start off and get going, but a lot of attorneys after a while, it's also a grind.

[Uncle Marv]
I was going to say that rigor role is just very hard, but that type of mindset, I would imagine, is very beneficial translating to other businesses.

[Peter Kujawa]
Yes, it transfers extremely well. So no regrets. I've been asked a lot.

I look back on that time, and it was a crazy time for me. I was married. We had my first child.

My son was born during my second year of law school, and so you're working full time. You're going to school at night. You have young kids.

I mean, it was a blur. It was a crazy time, but I don't have any regrets. It was great for me from a career standpoint.

I really enjoyed it. I enjoyed being a corporate counsel, and who knows? We'll see.

Down the road, may do that again. We'll see.

[Uncle Marv]
Maybe ConnectWise will need your leadership in the legal side at some point.

[Peter Kujawa]
It does help even now, yes.

[Uncle Marv]
All right. Well, Peter, it was great to meet you and to learn more about service leadership. I can't imagine why I had not heard of it before.

Again, disclosure, I've only used one product in the ConnectWise world, so I guess I'll have to dip some more toes in.

[Peter Kujawa]
Well, one of the things that's great with our product is anybody can use it. We benchmark providers. The majority of our customers, ConnectWise has priced it in a way that's really, really advantageous for anybody who's a ConnectWise client.

They can get access to our benchmarking, which is called Service Leadership Index. They can get access to SLEEQ, S-L-I-Q, which is a tool that teaches you how to run your business better. And they've baked that into some licensing bundles and things to make it really appealing.

But even if you're not, you can still purchase our products and get them. So service-leadership.com is our website. Otherwise, go to our LinkedIn page and you can find us there.

[Uncle Marv]
All right, well, there you have it, folks. Very nice discussion with Peter Kujawa and service leadership. Definitely something to help you get your game on par if you want to be a solution provider and understand the numbers the right way.

So, Peter, thanks a lot, and I'll let you get going here. We've got a great, what, two days of sessions and stuff here. Amazing content.

[Peter Kujawa]
Really, really excited about the content that's going to be provided this week. So looking forward to it a lot.

[Uncle Marv]
Thanks for having me on, Marvin. Nice to meet you again, and I will definitely see you down the road. All right, folks, we'll be back with more interviews here from Radio Row and IT Nation Secure.

Later.