Another great metric that is similar to Service Gross Margin is Service Team W2 (salary) Ratio. The formula for this is:
Service Team W2 Ratio = Services Revenue / W2 Expense Of Services Team
Services Revenue is the total services dollars delivered by your team and W2 Expense Of Services Team is the total compensation of that Services Team. (note: The term "W2" comes from the federal tax form issued by employers which states how much an employee was paid in a year)
2.0x ratio translates to 50% Gross Margin and 2.5x ratio translates to 60% gross margin. Our goal was always to break 2.0x with some of the most efficient firms pushing 2.5x - 3.0x. At Compuquip, we typically hovered between 1.7x - 2.0x most of the time which makes sense given that our historical services gross margin was less than 50%.
One point to note is that typically this metric did not factor in the additional direct cost of your service team. That wouldn’t change the numbers drastically but I always liked to see fully loaded costs to truly understand my margin. However, given how easy it is to calculate we often found ourselves using this metric in our monthly review meetings.
Metrics like this and Services Gross Margin are great indicators on how efficient your team is performing. As I’ve said before, the important thing is to start measuring the metrics that matter to you and then take action to improve the metric performance and ultimately improve your business.
This blog is part of our Internal Metrics That Matter For MSPs blog series that you can download here: Download White Paper