Revenue leakage at MSPs

Revenue leakage at MSPs is revenue a managed service provider misses because billing does not keep pace with what is actually managed, purchased and done. The biggest leaks are devices and users not included in the contract, licences that keep running with the vendor but are not billed to the customer, out-of-scope work handled as contract work, and contracts and licence prices that are not adjusted when the cost price rises. Because almost all of an MSP's revenue is recurring, every leak that is not closed comes back every month.

This article describes the leaks one by one, with the check that makes each visible and the agreement that prevents it. How to compare an MSP's systems continuously is covered in Revenue Intelligence for MSPs.

What causes revenue leakage at an MSP?

Almost every leak at an MSP has the same cause. When a customer takes less, the customer tells you, because they want to pay less. When a customer takes more, nobody tells you. A new employee gets a laptop, a mailbox and a licence. Your engineer sets it all up, because that is their job. Whether the contract and the invoice are updated depends on whether someone remembers.

That makes an MSP's billing structurally lopsided: decreases are processed quickly, increases slowly or not at all. Every leak below is a variation on that theme.

The ten leaks

1. Devices above the contract

The leak. The contract states a number of devices. The RMM sees more. The customer has grown, and every new laptop duly received an agent.

The check. Per customer per month: active devices in the RMM versus devices billed. Define active, for example seen in the last thirty days, and stick to that definition.

The agreement that prevents it. State in the contract that the monthly invoice is based on the count in your management tooling on a fixed reference date. Then growth is not a negotiation but a count.

2. Users above the contract

The leak. The same as with devices, but per user. With contracts priced per user, every new mailbox or account counts.

The check. Per customer: active users in the environment versus users billed. Watch out for shared mailboxes, service accounts and former employees who are still active: they distort the count.

The agreement. The same as for devices, with a clear definition of what a user is.

3. Licences bought, not billed

The leak. A licence is added in the vendor or distributor portal, often at the customer's request via a ticket. The engineer adds the licence and closes the ticket. Billing never hears about it.

The check. Per customer per licence type: quantity with the vendor versus quantity billed. This is the most direct and most profitable check an MSP can run. The details are in SaaS billing leakage at MSPs.

The agreement. Internally: no licence change without the ticket producing an invoice line or a contract change. The ticket may only be closed once billing has been updated.

4. Licences at the wrong tier

The leak. The customer moves from a basic plan to a more extensive one, or adds an add-on. Purchasing cost rises, billing stays at the old level.

The check. Compare not only quantities but also licence types: which plan is registered with the vendor, which plan is billed? This is a variant of revenue leakage from wrong subscriptions.

The agreement. The same as for leak 3: every change in the portal is a change in billing.

5. Rising vendor prices

The leak. A software vendor raises its prices. Your cost price rises. The selling price to the customer is fixed in your system and is not adjusted. Your margin on that licence shrinks or disappears.

The check. Per licence type: current cost price versus current selling price. Where the margin drops below your standard, a price increase has not been passed on.

The agreement. Include in your contracts that vendor price changes are passed on, with a notice period. Then applying them is an administrative step, not a renegotiation.

6. Contracts without indexation

The leak. The price per device or per user was set when the contract was signed and never adjusted. Your engineers get more expensive, your tooling gets more expensive, the price stays the same.

The check. A list of all managed services contracts with the date of the last price adjustment. The mechanism is the same as with any form of missed price indexation.

The agreement. An indexation clause in every contract, and one fixed date each year on which you apply it to all customers.

7. Out-of-scope work as contract work

The leak. A customer asks for something outside the contract: setting up a new workstation for a branch, supporting an application that is not under management, an office move. The engineer does it within the contract, because they do not know where the boundary lies or because they do not want to disappoint the customer.

The check. A sample of tickets per customer, assessed by someone who knows the contracts. What percentage fell outside the scope? Extrapolate to a year.

The agreement. Make the scope concrete in your PSA: a list of what is included, visible when a ticket is opened. And give engineers a simple way to flag a ticket as possibly out of scope, so someone else makes the decision.

8. Hour bundles that quietly run out

The leak. A customer buys a bundle of, say, forty hours. Hours are drawn down. The bundle is used up, but the system keeps drawing down, or nothing more is recorded and the work carries on for free.

The check. Per bundle: hours bought, hours used, balance. Every bundle with a negative balance is an invoice that should have gone out.

The agreement. An alert at 80 percent usage, to the customer and the account manager, with a proposal for a new bundle.

9. Vendor commitment longer than the customer's

The leak. With some licence types you commit to the vendor for a year or longer, while you let the customer cancel monthly. If the customer cancels, you pay for the rest of the term.

The check. Per licence: term with the vendor versus notice period for the customer. Where the former is longer, you are carrying a risk.

The agreement. Align the customer's notice period with your commitment to the vendor, or price the difference in flexibility.

10. Hardware and one-off deliveries

The leak. A replacement laptop, a switch, a docking station. It is ordered, delivered, set up. The purchase invoice is booked. No sales invoice follows, because the delivery went through a ticket rather than an order.

The check. Put all hardware purchase invoices for a quarter next to the sales invoices. Look for purchases without a counterpart.

The agreement. Hardware is only ordered through an order that automatically creates an invoice line.

Worked example

Worked example: take an MSP with 80 customers, 3,000 managed devices at an average of EUR 45 per device per month, and EUR 900,000 a year in resold licences.

On revenue of around EUR 2.5 million, that is 3.6 percent. The first three lines are recurring: once corrected, they pay off every month. This example does not yet include out-of-scope work or missed indexation, and at many MSPs those two together are larger than the rest.

The figures are assumptions, not averages. What they show: the percentages per leak are small, and that is exactly why they go unnoticed.

From leak to opportunity

Some of these findings are not leaks but sales opportunities. A customer who structurally raises more tickets than their contract covers may need a broader contract. A customer growing in devices is probably growing in other needs too. A customer still on a basic plan while their environment has become more complex is a candidate for a conversation. How to recognise such signals is covered in how do you find missed upsell.

Checklist for the first month

1. Map each customer's IDs across PSA, RMM, vendor portals and billing.
2. Compare active devices and users with the quantities billed.
3. Per licence type, compare the quantity and tier purchased with the quantity and tier billed.
4. Per licence type, put the cost price next to the selling price.
5. List contracts with the date of their last indexation.
6. Review a sample of tickets for scope.
7. Check every hour bundle for its balance.
8. Put hardware purchases next to hardware sales.

Frequently asked questions

Which leak is usually the largest at MSPs?

At many MSPs, the gap between managed and billed devices and users, followed by out-of-scope work. Licence leakage is smaller per customer, but occurs at almost every customer.

Is it reasonable to bill a customer retrospectively for extra devices?

That depends on your contract. If the contract says you bill on the basis of a count, it is a correction. If it states a fixed number, it is a conversation. For the future, it is better to set up the contract so that growth is processed automatically.

How do I stop engineers doing out-of-scope work within the contract?

Make the scope visible at the moment a ticket is opened, and give engineers a simple way to report doubt. The decision on whether something is billed belongs not with the engineer but with the account manager or service manager.

Does every vendor price increase have to be passed on?

Not necessarily, but it should be a conscious choice. If you decide not to pass on an increase, you know how much margin you are giving up. If it is forgotten, you do not.

How quickly does a first check pay off?

The licence comparison for your largest vendor often produces a list of concrete differences within a few days. You can process those in the next billing run.