Recurring revenue is the part of a company’s income it can reasonably expect to receive again next month or next year without having to sell it again: the client has agreed to keep paying under an existing arrangement. For a software company the definition is simple and standardised (standardized, in the US spelling), because the arrangement is a subscription. For a consultancy, agency or managed service provider (MSP) it is not, because the arrangement can be anything from a signed three-year support contract to a client who has bought a project every quarter for five years and never signed anything. That is why a services firm asked for its recurring revenue usually has four honest answers, and the spread between them is the size of the story it is telling itself.
Why a services firm has four numbers, not one
Every rule of thumb about recurring revenue quotes a percentage, and none of them defines the numerator. When an adviser told us in our first year to aim for the great majority of our revenue on long recurring contracts, we understood the target at once and spent eight years discovering how many things it could mean. Contracted, or forecast? Sold under the managed service label, or locked in? Each is a legitimate reading, and each describes a different company.
The four rungs
| Rung | What it counts | Who uses it | Where it misleads |
|---|---|---|---|
| 1. Contracted annuity | Fees under a signed contract with a minimum term still to run, which the client cannot cancel without penalty, counted for the committed term only | Buyers, lenders and diligence teams | Understates a healthy base of long-standing month-to-month clients |
| 2. Product line | Everything sold under the retainer, managed service or support label, including rolling monthly arrangements and variable usage | Sales and marketing; the pitch deck | Counts a retainer on thirty days’ notice as if it were an annuity |
| 3. Planning model | What the budget assumes will recur, including renewals expected and expansion forecast | The board pack forecast | It is a forecast wearing the clothes of an actual |
| 4. Management-accounts actual | Whatever was booked to the recurring revenue code in the period, as the chart of accounts happens to define it | Finance, at month end | Moves when the definitions move; the widest reading and the easiest to flatter |
The rungs run from narrowest to widest. The first is the one a buyer means; the fourth is the one most founders quote, because it is on the dashboard. There is also a fifth, forbidden reading: a percentage that rose between two years because a category was widened, so the share went up without a single client committing to anything more. If your recurring share moved and you cannot name the contracts that moved it, check the taxonomy before you celebrate.
What it looks like in a consultancy, an agency and an MSP
A consultancy’s recurring revenue is usually a retainer: a fractional chief technology officer for two days a month, an advisory seat, a support arrangement after a project. Most roll monthly with a notice period, so they sit on rung two. An agency’s is the monthly retainer for a defined scope, often on a twelve-month agreement with a break clause; the term takes it onto rung one, and the break clause pulls part of it back off. An MSP’s is the closest to a true annuity: a per-user, per-device or per-application fee on a multi-year contract with service levels attached. That is the shape diligence likes, and the hardest to build from a standing start, because someone has to run the service before the first fee arrives.
At DevOpsGroup, a services company helping other businesses build and run software, our recurring line was managed cloud services, mostly attached to migration projects. It was real, and it stayed a minority of the company all the way to the sale, because the project side grew faster. I knew the number every month; knowing it was never the hard part.
Recurring or reoccurring?
The two words get swapped and they should not be. Recurring revenue comes from an arrangement that continues by default: the client has to act to stop it. Reoccurring, or repeat, revenue comes from a client who buys again by choice: a quarterly project, the audit they book every spring. Repeat revenue is valuable and belongs in your forecast, but it is not recurring, and a buyer will reclassify it in an afternoon. The test is simple: if nobody at your firm picks up the phone and the invoice still goes out, it is recurring.
ARR, and why it misleads a services firm
Annual recurring revenue (ARR) is the monthly recurring fee multiplied by twelve, or the annual value of subscriptions in force at a point in time. It was built for software, where a subscription renews unless cancelled, the price holds, and serving one more customer costs close to nothing. Applied to a services firm it does three unhelpful things. It annualises arrangements that can end on thirty days’ notice, so a rolling retainer becomes an annuity on paper. It ignores that the fee has a person attached, whose cost rises with every pay review while the price is fixed. And it says nothing about margin, which is the whole difference between a good services firm and a poor one. Contracted ARR and committed ARR narrow the definition back towards rung one; if you must quote an ARR, quote one of those, and say which.
MRR, and the same problem at monthly scale
Monthly recurring revenue (MRR) normalises everything to a month, which is useful for spotting churn and expansion in a subscription business. In a services firm the month itself varies: a retainer with an hours cap and an overage rate produces a different invoice every month, and a managed service billed per device moves with the client’s estate. MRR counts the fee and not the capacity you kept on the payroll to earn it, so a firm can grow MRR while its recurring margin falls. Neither measure is wrong; they answer a software question, and the services question is different.
The one diligence counts
When a buyer or a lender asks for recurring revenue they mean rung one: contracted, committed, with a term still to run, at the margin the contract actually earns. Everything else they discount or strip out, and the gap between what you told yourself and what they count arrives late in the process, when it is most expensive to learn. When a business is sold, the questions about the recurring line are rung-one questions: which contracts, what term, what margin. Count it four ways now, in your own time, and you will know the spread before anyone else does.
Going further
The playbook How to count recurring revenue in a services business, four ways sets out the tests for each rung, and the recurring revenue counter runs all four readings on your own ledger. Both are in development. If you are building the base rather than counting it, start with the course How to build recurring revenue, also in development; a productised service is often the first step, though productised is not the same as recurring.