Last time, we looked at how each “line of business” is performing. This time, we’d like to focus on:
When you bring on a new Managed Service client, most MSPs establish a fixed monthly fee for each client. You may have a formula to determine that fee, or you may set the fee based on more subjective factors related specifically to that client. But the question is: Did you PRICE it right?
So today’s discussion is all about evaluating the pricing of your Managed Services contracts. Some questions that you may want to consider in this exercise might include:
- Taking into account the amount of engineering time (and cost) that we are spending with this customer, are we charging them appropriately?
- Which Managed Service contracts am I LOSING money on?
- NET RESULT: Which Managed Services contracts should I re-negotiate based on historical results?
Let’s take a look. Here’s some thoughts on how to get started.
We’re going to look at the revenue as it relates to just three variables to answer this question:
- Monthly Fee: This is the amount of the invoice in ConnectWise.
- 3rd Party Costs: This is the fee you pay 3rd party providers where you are selling their hardware/software/service. The cost you pay the 3rd party providers should be reflected in the “Products” section of ConnectWise, so that it is then automatically included in the invoice line item.
- Engineering Time (and Cost): Look at how much engineering time you are spending on each contract each month, also taking into account the cost of that engineer’s time. You’ll find the hours recorded as time entries on service tickets posted against this agreement. You’ll find the cost of each engineer in the ConnectWise Member screen.
- Net Profit: Taking the above three factors into consideration, we can determine the net profit to your firm for each Managed Service contract each month.
Once you have those figures, you might want to consider questions such as:
- What is my “target gross margin %” that I want to make on each Managed Services contract? Is 50% gross margin acceptable? 80%? 30%?
- Which contracts am I NOT achieving my target gross margin?
- Which contracts am I LOSING money on?
- Do I need to:
- Better control how many hours my engineers are spending on certain contracts?
- Renegotiate contracts with my clients based on the historical number of hours that you are spending servicing their contract?
- Consider moving some clients to a “not to exceed” hours cap for their monthly service.
Early in the calendar year is often a good time to open discussions on re-negotiating contract terms, perhaps because it’s a new year and people are thinking about “new starts”. So now might be a great time to evaluate your Managed Services contracts and make necessary adjustments in the terms.
THE NEW HAVEN APPROACH
At New Haven, we tackle this exercise using our “Labor Loaded Gross Margin by Agreement” report. It breaks down the gross margin (i.e. profit) on each Managed Service contract into monthly buckets. You can then see when your profit rises or falls each month, and we “color-code” the rises/falls to make them easier to spot. You can view the gross margin as either a percentage, or as actual dollars. Here’s a quick look at the report, showing the gross margin dollars:
Looking at “Jazz Pharmaceuticals” contract, we see that we actually LOST money on them in April and June of 2014, and looking at the “Total” column on the far right, we see that we actually have lost over $500 on their contract over the last year. Clearly, this is a candidate for potentially re-negotiating the terms of the agreement.
Looking at the same report from a “gross margin percentage” viewpoint yields:
Looking at the “AVG” column on the far-right, we can then look for the contracts that are yielding below our gross margin percentage target (You can sort them in order by clicking on the column header). Those contracts yielding BELOW our target percentage goal should be considered for potential re-negotiation.
Hopefully this discussion will encourage you to take a look at your Managed Services contracts, looking at the return on investment from each one. Having a “fact-based” discussion with the client is a great way to grow the relationship, even as you continue to build your Managed Service practice.
At New Haven Technologies, we provide access to information so that you can make data-driven, informed decisions about your MSP business. Our service is provided on a month-to-month basis, and starts with a free two-week trial on your network with your data. We also include customized reporting at no additional cost as part of the service. If you are interested in learning more, just “reply” to this e-mail, or you can sign up for your free two-week trial at https://www.newhaventech.com/Trial
Best Wishes for continued success in building your MSP practice!
Founder and Chief Consulting Officer
New Haven Technologies, LLC
Stop Guessing. Start Knowing.