Stages of Collection Maturity for MSPs

Like any process, getting clients to pay for the services that MSPs deliver is a continual journey. Collections is not a one-and-done venture but an area the management and financial accounting teams must periodically review and upgrade as clients, operations, back-office tools, and portfolios evolve. The strength of their cash flow and business health depends on the success of continuous improvement in processes and policies.

No organization can defy basic business principles. A well-defined and streamlined collections process is essential to the financial health of every company. Growing Monthly Recurring Revenue (MRR) means nothing without the proper systems and checks and balances—ensuring that extra income is effectively converted from invoices to cash in the bank for an MSP. Higher Accounts Receivables (A/R) should never be the ultimate objective.

Every sales growth plan should include a review of the collections process to ensure all that hard work doesn’t go without reward. MSP businesses that continually augment best practices in this area are more likely to boost profits and reduce A/R—maximizing both their cash flow and margins. Implementing effective A/R plans isn’t rocket science. Still, it does require insight into the types of transactions (i.e., recurring, one-time, both), client payment preferences and habits and other collections-related factors.

Most MSPs collect this information over time and tweak their operations to maximize cash flow. There are a few areas where providers should focus their attention to advance their business on the collections maturity model.

  • People: The goal is to turn employees into assets who don’t limit the company’s ability to scale
  • Methods: How effective is each step in a procedure from a time and cost perspective?
  • Information: Does the collections team have the right contacts and account data to speed up the payment process?
  • Relationship: Can employees readily retrieve and update information from clients, sales, and account personnel? What is the best way to interact with customers to collect outstanding A/R balances?
  • Automation: How much of the collections process can be driven by technology? From PSAs and accounting packages to secure payment portals with autopay options, the reduction in manual tasks (and payroll costs) can be significant, while speeding collections.  

Collection maturity is a journey for every business, but especially important to MSPs with recurring payments and little experience leaning on clients to get paid for the services they deliver. Those optimization plans typically evolve through various stages, including:

  1. The Fundamentals. Few SMBs start with a system that includes formal operating procedures with proper documentation for each process step. Since MSP relationships are primarily transactional, with cost being a critical factor, most providers begin with less-than-optimal A/R plans and policies. Metrics are often minimal, as are reporting and tracking capabilities. MSPs typically experience higher A/R numbers and write-offs due to poor follow-up and a lack of expertise in collections.
  1. Add Structure. Investing in organizational improvements is critical for every business. For the collections team, that means adding tools, honing processes and boosting reporting capabilities. MSPs must move from a reactive to a proactive strategy for managing their A/R, adopting industry-leading best practices and policies and providing clear documentation for employees and clients. Spelling out collections terms in master agreements and managed services contracts and including similar language in invoices is a good start. Identifying and tracking Key Performance Metrics (KPIs) are also critical at this stage. Many MSPs struggle with shifting their A/R processes and policies and adopting those most favorable to clients to a system that is at least mutually beneficial.
  1. Push Payments Best Practices
    While MSPs at this stage have likely made significant investments to capture and strengthen their account information, managing the A/R side of the equation often comes last. At this stage, providers should regularly assess and enhance their collections procedures and implement tighter controls over outstanding payments. Data analysis helps identify revenue leakage and savvy A/R teams develop strategies to quickly address gaps with solutions they could roll out to other accounts. An automated and well-integrated invoicing and payment system can solve many of those issues and prevent errors on the client and MSP side of the equation.  
  1. A/R Realization. Achieving Zen in the collections process is no easy feat—most companies will never hit that level of excellence. Evolved MSPs develop true partnerships with their clients and implement policies, procedures and tools that solidify those relationships. Collections is no exception. Most satisfied clients understand the need to pay promptly for the services they receive and will readily adapt to changes—especially those that are mutually beneficial. MSPs that provide top-notch support should never feel guilty about altering their collections agreements and requiring the use of secure payment portals and autopay for recurring services agreements. True A/R realization is when outstanding payments are the exception, not the rule, and providers eliminate that one point of “uncertainty” in their business.       

Implementing a Proactive Process

New clients are the easy part. When sales and account management teams do their job, those business leaders should fully understand the collections policies and procedures, and the issues should be minimal.

The problem for many MSPs is the conversion of existing clients. IT professionals tend to have more anxiety about discussing new collections terms and requirements than asking these companies to double their cybersecurity spending. Selling technology comes more naturally than selling themselves. If clients are true partners, they’ll understand the need for their IT provider to get paid fairly and when expected.     

Sure, some clients may require an incentive to sign a contract with new A/R collections requirements, but it’s often as simple as reducing next year’s rate increase from 10% to 5%. Another option for MSPs is to throw in a new low-cost but highly valued service for free (or at a reduced rate). For example, providers may offer a free annual cybersecurity assessment or provide a discount on employee awareness training for six months. The key is knowing the motivators for each business client and matching their want with the MSP’s capabilities. The incentives can be relatively small, considering how much the provider—especially their A/R team—gets in return.  

People, processes and automation are all essential parts of the collections evolution. Giving A/R teams the ability to communicate and collaborate with clients easily and providing both sides with a single interface to manage the process and related issues helps move MSPs quickly from step 1 to step 4.

With the proper focus and the right tools, there’s no reason why every managed services company cannot achieve its A/R nirvana.   

Schedule a demo to see how ConnectBooster can help your MSP automate its cash flow and reach optimal collections maturity.

Published November 22, 2022

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