Managed Services Pricing

February 7, 2013 — Leave a comment

I’m fortunate enough to own the Managed Services product portfolio at one of the worlds biggest MSPs – that’s not a brag by any stretch of the imagination, but it does mean that I have a bit of an insight into the Managed Services industry, pricing and delivery of those products – http://www.mspmentor.net/mspmentor-100-global-edition-2012-companies-20-to-1/

With that comes a lot of pain, believe me, but also an incredibly amount of challenge on a day to day to basis. One of the key challenges is how to price a managed services agreement so that it’s both profitable to the company and seen to be good value in the marketplace.

That’s about as hard as it sounds and leads to some very interesting conversations with finance people, executives, industry peers and customers around price and value. These conversations are, by necessity, hard for a few reasons.

Firstly, not everyone sees value in Managed Services – their opinion is that if something is broken, we’ll have it fixed, but ensuring it doesn’t get broken doesn’t have a value attached in their mind. While I’ve tried very hard to educate some of these people around lost time and opportunity but in the end you can’t change someone’s opinions and those people will never perceive value no matter what you do – UNTIL they’re offline for 4 days with a server issue, then there is a value perceived but unfortunately that’s usually followed by a “Well, it’s happened once in 3 years, I won’t need to worry about it again statistically for 3 years!” – I do wish computers were linear like this, but unfortunately that’s not the case!!

It’s not just customers who don’t necessarily see value in it, a lot of risk averse C-Level execs of IT companies see it as a risk which they’d rather not undertake as, especially in a ‘all you can eat’ model it is an unquantifiable risk.

I’m a bit pragmatic around the risk and partially agree with the risk averse around ‘all you can eat’ agreements, it’s very difficult to price risk (just ask any of the major re-insurance firms that struggled through Hurricane Katrina) and if you do it’s always a high price so you end up pricing yourself out of the market, or not being able to demonstrate value.

Which brings me to my next point, price – how do you price an agreement so that you maintain a respectable bottom line in a business and wether the ebbs and flows of agreements being less and more profitable.

There is an interesting survey done each year by Kaseya on Managed Services pricing available at: http://www.kaseya.com/lps/en/lp/2012/MSPGlobalPricingSurvey_Q4.aspx

It has a raft of intriguing information on how our peers in industry price their agreements and is well worth a read.

Anittel price their agreements on a per device basis, with added value services included depending on the plan chosen. We don’t put the line item pricing out there because we don’t see a reason to do so, but publish a calculator for our sales team to punch things like PCs, thin clients, servers etc into and a price is delivered at the end of this. This works really well for up to about 75 clients, but above that the pricing becomes difficult to compete with ‘tender based’ business – we deal with clients above that size based on the calculator but look to add in services, or discount other services to make the proposition more attractive.

That’s all good and well with regards to price and value, but then how do you know that your MSP business is profitable based on that pricing and value – if you sign up a whole lot of customers on agreements that aren’t profitable for a long period you’re going to struggle financially.

As a business we measure a predominant metric which is around Managed IT Average Hourly Rate which is a report ran monthly and at it’s basis is a calculation like this:

($ValuePaidByClient – software costs such as RMM/Backup) / Hours Worked on Agreement

For Anittel – an effective hourly rate of >$100 hour on average across a location is good, anything lower than that is bad. Some agreements will go up and down in a given month, but one needs to establish a trend rather than a point in time measurement and an average of a location or business is the best metric.

I’m pretty sure it was Drucker that said “What you can’t measure you can’t manage” or something like that – Once you have this data on how profitable or not your MIT agreements are, what do you do with it to actually MANAGE an outcome.

What we’ve found is that if customers have a persistently low MIT average hourly rate, they have one of these problems:

1. You’ve discounted your agreements too much or priced them incorrectly to start with

2. They’re on a legacy, incorrectly priced agreement

3. The customers has an underlying infrastructure problem which is causing a lot of support and either hasn’t been clearly explained to a customer what the fix is or the customer is choosing not to do anything about it because there is a cost associated with fixing it

4. You have a skills issue with your employees (ie they aren’t fixing things as quickly as they should be, or are padding time out)

And the outcome of any one of those issues is unprofitable agreements, unhappy clients and unhappy staff. Bear with me while I explain why the latter two occur.

If a customer is constantly seeing an engineer because of an underlying infrastructure problem, they’re going to think you’re pretty silly and be not happy with your performance and leave you for someone else. In fairness, that might not be a bad thing because if you’re not making any money on the agreement it’s not a bad thing to not have them – but in the meantime you’ve burnt a lot of time and your reputation on someone who is going to leave as they are unhappy.

You’ll also get unhappy staff, because they’ll constantly be hearing from the same client(s), who will become increasingly angry at them and they will be unable to help.

The last problem is probably the biggest, you’re essentially throwing money away on customers who will leave you because you’re not fixing their underlying issues!!

It’s a strange corollary that the happiest managed services customers are always the ones with the highest average hourly rate, they’re paying to avoid problems and are avoiding them so are happy. Regardless of how charming/good looking your IT people are, very few of your customers ever want to see them! Managed services is a partnership, clients pay for you to avoid problems and the business case is that you’re incented to do so because you’re more profitable if you’re doing less work for them.

So, back to pricing, if you know what your resources cost you, you can very quickly understand why pricing MIT agreements properly is essential – get it wrong at your (contractual term length) peril!

 

 

 

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