The Elephant in the Room Podcast Recap: Your Projects Are Not a Loss Leader! Don’t Let Projects Sink Your P&L

Moovila joined Empath’s podcast to explain why projects are not a loss leader. Here is a recap. 

Louis Bagdonas of Moovila joined hosts Kyle Christensen and Alex Farling on Empath’s podcast The Elephant in the Room: Projects Are Not a Loss Leader! for an informative – and spicy! – discussion of why MSPs lose money on projects and why it doesn’t have to be that way.  

Christensen highlighted a shocking data point that was presented in a previous episode by ConnectWise VP Peter Kujawa: For many MSPs, projects are not profitable. In fact, they are often the reason MSPs underperform on net profits. “We're doing the same number of projects, but we keep losing money on them,” he said. 

The MSP business is risky. Margins are tright. Resources are hard to find. But by treating projects like a loss leader, he said, “we're getting worse at making money by carrying somebody else's risk.”  

Projects can be profitable. Louis Bagdonas, senior program manager for MSPs at Moovila, joined the podcast to share strategies for handling projects so they turn a profit and help your MSP grow. With a background in project management in manufacturing, he now helps MSPs run projects using Moovila’s autonomous project monitoring and management program Perfect Project for MSPs.  

It starts with a plan 

“I saw Peter Kujawa give a talk recently where he said that MSPs don’t budget, not at all,” said Bagdonas. “Mind blown! How can you work without something to plan against? You need a target profit margin, and you to break it down on a project-by-project basis.” 

For many mature businesses, budgeting seems obvious. But many MSPs fell into running an MSP, stumbled into managing projects, and budgeting came along as an afterthought.  

“I was ten years into running an MSP before I started building a plan that was mature enough to be respectable,” admits Farling.  

To be fair, failing to plan isn’t that unusual outside of MSPs, either. It is a measure of business maturity.  

“Early on, in the manufacturing space,” said Bagdonas, “we would estimate that we could do something for, say, $5 million. Nobody checked what things cost or how many hours it would take. You’d get 50% through the project and realize your capital was gone. At that point, either you have to leave the project unfinished or invest another $5 million.” 

In some ways projects are a microcosm of your MSP, said Christensen. “Some of the problems we have as MSPs are the same problems we have in projects,” he said. “Running your business is a giant project without a defined end date.” 

What is a project? 

Managing projects starts with defining the difference, for your MSP, between a ticket and a project. When is a package of work too much to be managed by a ticket? When does it require that you use project management tools and practices? 

“Define what classifies work as a project for your MSP, and don't be afraid to change it,” said Bagdonas. “Many MSPs define projects by time: Is it over a certain number of hours? Or in terms of the customer contract: Does it falls outside of the scope of your service agreement? A definition will let you see easily when something is outside that scope.” 

This definition needs to be somewhat fluid, though. Because projects are, often, a way for your MSP to reach outside the normal and build new business. 

“Often projects unfold because we are deploying a new tool for one customer,” explained Farling. “We are learning as we go. If we were experienced, we could do the job in 10 hours. But the first time, it takes 17.”  

This scenario area is often why MSPs lose money on projects. You want that work or customer and don’t believe the customer should pay you to learn. So, you do the job at a loss. 

“Absolutely,” said Bagdonas. “You don’t want to miss out on that business. But you could bill it as time and materials and communicate that to the client. What we see a lot of people doing is discounting big setup projects because they want the recurring revenue. But how many months does it take for you to recoup your losses on that initial project? You then have set the expectation with the customer that project work is cheap. When you sell them the next project at your actual rates, it's not an easy conversation.” 

How projects impact customer relationships 

“The psychology of your relationship with customers is interesting,” said Christensen. “When do you create the expectation that projects cost money? If they have an expectation that they don't, are you going to ruin that relationship by telling them that something you didn't charge for a few years ago now costs money?” 

According to Farling, this comes down to the agreements you and your customers signed.  

“You have to know what's in your agreements and stand by them,” he said. “The first time you do something that wasn’t in that agreement, for free, you set a precedent. It will always be an uphill battle to get paid. It's up to your team to know what's included. If project work is not, put your foot down early and often.” 

One way to handle this, according to Christensen, is to issue an invoice for that work, even if you aren’t charging for it.  

“I had to track the giveaways to see where we were leaking revenue,” he said. “Every time a customer got an exception, they got a line-item invoice for zero dollars to show them that this is normally something we charge for and to clarify that this is a one-time exception.”  

When it comes to offering discounts and giveaways, there are many ways to get it wrong. “I see people giving a price reduction by discounting the quantity of hours,” said Bagdonas. “No! It takes the same amount of time.” Changing the scope of the project to reduce the bill wreaks havoc with your project management and resource planning.  

Is that project bespoke or R&D? 

When you do a project, you won’t profit from because you are learning as you go, don’t think of it as a loss leader, think of it as product development. 

“What you're doing is R&D,” said Christensen. “You're developing a product to sell, and you have the opportunity to do the research while someone is paying you.” 

But remember that goal. If a customer asks for a project that’s outside your proficiency and there is no future opportunity to sell it to others, it isn’t research. It’s bespoke. 

“The customer is saying, ‘I know you're a pizza shop, but can you make us a burger?’ When you agree to that, they have to pay,” said Christensen. “You don't have economy of scale. You are not getting materials at volume cost.” 

The first project is onboarding 

One tragedy of ignoring project management is that it probably means you are flubbing the first interaction with every client. 

“We're so desperate to get that customer,” said Farling. “That we give away the onboarding and teach the customer we don't value projects.” 

“Onboarding is your first true operational engagement with a customer,” agreed Bagdonas. “You are showing them how you act, communicate, and work. Your first engagement is a project.” 

If you aren’t good at managing them, you will give a poor first impression: “Thanks for signing on the dotted line,” said Farling. “We'll talk to you in 30 days. Good luck! That is a crappy way to introduce them to what it feels like to be your customer.” 

Who is your PM? 

Projects need a project manager. Depending on the size of your MSP, you may not have a dedicated PM for the task. But someone needs to do it and to build a skill set for that work. 

“A lot of people have their service coordinator or an owner doing project management,” explained Bagdonas. “Whoever does it, though, somebody is doing it. Somebody needs to be dedicated to it, and to have a portion of their time allocated to managing projects and keeping them consistent.” 

“At the average MSP, nobody owns this,” said Farling. “This is just another hat somebody wears, which makes it even harder.” 

This is why projects are loathed, ignored, and dropped to the bottom of the to-do list at many MSPs. 

“If you're asking, say, your service coordinator to communicate with the customer and manage projects, they end up hating projects and are not trained in how to do them well,” said Bagdonas. 

Building profits into your compensation 

The trick to turning your project mess into a profitable side of your business is a matter of making them efficient, getting granular about hourly rates, and working with a plan and a budget. 

“Everybody should have the same clear goal within the organization,” said Bagdonas. “Here’s the budget, professional services gets a dedicated target, everyone knows the targets they need to hit and what the margin is. Then track it month over month or quarter over quarter.

Don’t wait until the end of the year. That’s too late. If you give money to your team for hitting goals, they will be incentivized. Your business grows when everybody's on the same team trying to grow the business. If you're losing money on projects, though, it will pull the business down.” 

Watch The Elephant in the Room: Your Projects Are Not a Loss Leader! Don’t Let Projects Sink Your P&L podcast – complete with swearing and spilled tea – here.