SMART IT GUIDE: 5 Steps TO Pricing Managed Services Evolving from break/fix service revenue to recurring revenue
Table of Contents Introduction...3 Step 1. Calculate an Hourly Rate...4 Step 2. Determine Costs & Profits For B/F Services...5 Step 3: Determine Costs & Profits for MS Model...7 Step 4: Calculate Price-Per Desktop for MS Contract...8 Step 5: Price Additional Services & Develop a Price Per User...10 Executive Summary...11 About the Author: Len DiCostanzo Senior Vice President, Community & Business Development Len is one of the most widely-recognized figures in the IT industry with more than 25 years experience in the channel. He joined Autotask in 2008. Len develops and nurtures Autotask s strategic industry alliances around the world. He also works tirelessly to ensure the continued success of Autotask s global client base by developing and delivering business building and product education content via live and on demand webinars, events and other digital media. Before Autotask, Len was founder and CEO of a business technology solution provider that was one of the first to develop a managed services practice, generating recurring revenue by delivering scheduled and consistent IT services to clients in support of business operations. Len currently sits on CompTIA s MSP Partners Executive Council and the Vendor Advisory Council. Len has a BS in Computer Science from Brown University, Providence, Rhode Island. 2 Smart IT Guide: 5 Steps to Pricing Managed Services
Moving from an hourly-fee based break/fix (B/F) service model to a managed services (MS) recurring-revenue contract model provides benefits to both IT Service Providers (ITSPs) and their clients. For ITSPs, the major benefits include predictable revenue streams, more efficient resource allocation, and the ability to quickly scale to add new clients and manage more devices without adding resources. Clients benefit through more predictable IT costs, more reliable performance from technology assets, and having a single point of contact for all things technology-related. ITSPs often struggle with pricing services to achieve desirable profit, and managed services and resulting MS contracts have added a bit more complexity to the process. On top of that, each company has unique variables, so no singlebest calculation exists. But these five basic steps provide a customizable pricing framework to get you started pricing your services, MS bundles and contracts for profit. Each table includes a column with the universal formula, results from our example and cells for your responses. Customizable Framework I use the example of one technician and 250 desktops in this guide, but the formulas can be customized for any billable resource and any type of device, i.e., pricing for a high-level engineer who works with servers or routers. Additionally, I use U.S. dollars as the currency, but any currency will work. Author s Note: I am not a CPA. Please check with your accountant or other financial adviser to ensure your pricing works for your business. 3 Smart IT Guide: 5 Steps to Pricing Managed Services
Step 1. Calculate an Hourly Rate Historically, ITSPs have billed by the hour or some rate based on hours (e.g., daily rate), so let s start by calculating an hourly rate. The variables of this calculation are the same, but values can vary widely by company, so confirm your values with your accountant. The variables and calculation in this table are for a single billable technician who will be key in helping you move from B/F pricing to MS. Now that we have an hourly cost and sell rate for the technician, we can profitably price individual B/F or other services delivered by the resource. Table 1: How To Calculate Hourly Rate For One Technician Factors & Formulas Hourly Rate Calculation Technician base salary $75,000 Total payroll hours in a year 1 2,080 Base salary hourly cost 2 $36 Base salary + example of 30% burden $97,500 rate 3 Burden: Per/employee benefits and taxes unique to your business. Revised hourly cost after burden added 4 $47 Potential billable hours 5 1,920 Potential billable hours based on example 1,152 forecasted utilization rate of 60% 6 Tech s true hourly cost based on utilization $85 rate 7 Hourly cost plus overhead of 30% 8 $110 Billings needed to cover true tech costs 9 $126,720 Overhead: All costs to keep the business lights on, i.e., rent, phone, insurance, etc. Hourly sell rate after markup of 30% 10 $143 Annual revenue per technician 11 $164,736 Annual profit per technician 12 $38,016 Estimated # of seats supported 40 to 125 Your Values & Results 1 Hours per pay period X number of pay periods [e.g., 40 hours X 52 weeks = 2,080] 2 base salary/total payroll hours 3 salary + (salary x 30%) 4 (salary + burden)/total payroll hours 5 Total hours - non-billable hours* *Non-billable hours (160) = vacation (40) + training (16) + sick/pto (40) + holidays (64), etc. 6 potential billable hours X 60% 7 (salary + burden)/billable hours per utilization rate 8 (True tech cost + calculated overhead 9 [Hourly cost x Potential Billable hours 10 hourly cost + (hourly cost X 30% 11 (hourly cost + markup) X billable hours 12 Revenue per technician - tech cost 4 Smart IT Guide: 5 Steps to Pricing Managed Services
Step 2. Determine Costs & Profits For B/F Services In this table, we have listed seven common B/F services delivered by a technician to fix a user s desktop computer that was clobbered by a virus. Without automation, these are hands-on services (or B/F services) delivered by the technician, who has been sent to the site after a call was received at the ITSP s service desk. The job requires the technician to troubleshoot the desktop asset configuration, and determine what happened; as a result, they then apply a patch (or patches) and a service pack; uninstall and reinstall an application; and execute other remediation services to get the computer up and running. Table 2: B/F Model Pricing Service provided Estimated hours spent on service Hourly tech cost 1x travel costs Total service cost Desired markup Profit Sell price 1 Review asset.5 $110 $100 $155.30 $47 $202 inventory 2 Install software.5 110 55.30 17 72 package 3 Update antivirus/spyware 1.5 110 165.30 50 215 4 Apply patch & 2.0 110 220.30 66 286 service pack 5 IT policy control N/A 110.30 (none!) 6 Execute machine 1.5 110 165.30 50 215 maintenance (defrag, etc.) 7 Service desk.5 110 55.30 17 72 Totals 6.5 $110 $100 $815.30 $247 $1,062 5 Smart IT Guide: 5 Steps to Pricing Managed Services
This is a realistic example based on feedback from hundreds of ITSPs, with variance based on the level of ITSP sophistication. It points to some of the weaknesses in an hourly B/F service model, which is reactionary and manual instead of proactive and automated as an MS model would be. First weakness: It s expensive. It costs the ITSP $815 to resolve this incident, and costs the client $1,062! The example is for a problem on one desktop. If the customer had 20 desktops that needed the same servicing, the price would be $21,240 a fee most clients would surely balk at. Second, without automated time-and-expense collection and billing, the ITSP might not get the invoice out for three-to-six weeks, and the client will take 30 to 60 days to pay. By that time, the client will have forgotten how stressful it was when his employee could not work, and how valuable it was to fix the machine. The client might hesitate to pay that bill and try to negotiate, and you might say, Give me $800, and we ll call it a day. Based on the ITSP cost of $815, you ve just paid $15 to fix a client s computer! Finally, where s the room for upselling this client? If you have a reactionary relationship with a client, with stressful B/F engagements, you will have unpredictable revenue and a slim chance of growing that relationship into one that s longer term and more profitable. 6 Smart IT Guide: 5 Steps to Pricing Managed Services
Step 3. Determine Costs & Profits for MS Model While B/F work will never truly go away, using automation in an MS model removes B/F model weaknesses and improves profitability, while providing an opportunity to build a long-term, professional relationship with clients. Let s start pricing managed services delivered to desktops using the B/F technician s hourly-rate calculation we used in Step 1, and modify it with an automated MS spin. This table explains how. Table 3: Hourly Rate: B/F Vs. MS Author s Note: Column 1: B/F hourly rate from Table 1 Column 2: MS hourly rate calculation Technician base salary $75,000 $75,000 Total payroll hours in a year 2,080 2,080 Base salary hourly cost $36 $36 Base salary + example of 30% burden $97,500 $97,500 rate Burden: Per/employee benefits and taxes unique to your business. Potential billable hours 1,920 1,920 Revised hourly cost after burden $47 $47 added Forecasted utilization rate.60 1.0 Potential billable hours based on 1,152 1,920 forecasted utilization rate Hourly cost based on utilization $85 $51 Your calculated overhead 30% 20% Hourly cost plus overhead $110 $61 Billings needed to cover true tech $126,720 $117,000 costs! Your markup 30% 70% Hourly sell rate after markup added $143 $104 Annual revenue per technician $164,736 $199,680 Annual profit per technician $38,016 $82,680 Estimated # of seats supported 40 to 125 250+ I use 100% utilization in the MS pricing calculation because we plan for the technician to be 100% focused on delivering MS across the ITSP client base. I anticipated, based on feedback, automating processes and delivering managed services remotely results in a 10 percentage-point reduction in overhead. With a 70% markup, the calculated hourly rate would still be more affordable for clients, and more profitable for the ITSP over the long haul when delivering MS. Consider marking up your managed services cost based on value as you will be delivering way more value to your clients. Scalability will vary based on the MS tools in use and the knowledge and responsibilities of the resource, but Autotask ITSPs have reported that one technician can support from 200-500+ desktops/devices; and three technicians can support 5,000+ desktops. Once you get rolling, you will understand how many desktops one of your technicians can support, and better determine how you can price and add resources going forward. 7 Smart IT Guide: 5 Steps to Pricing Managed Services
Step 4. Calculate Price-Per Desktop for MS Contract Now that we have the hourly cost and sell rate for the B/F technician who will soon be delivering the same B/F services listed in table 2 as automated managed services, we can develop a price-per desktop for managed services. A variable you will need is the number of desktops you are currently managing across all of your clients, with a forecast of how many you will transition to your managed services bundle. This is an example for an ITSP with 250 desktops to be transitioned in six months. Table 4: MS Per-Desktop Pricing Model Service No. of desktop machines to be transitioned Hours spent per managed services per month Hourly MS tech cost from table 3 Managed services event cost Desired markup Per device service monthly price Estimated revenue per month Estimated profit per month 1 Asset 250 8 $61 $1.95.7 $3.32 $830 $343 inventory 2 Software 250 8 61 1.95.7 3.32 830 343 package 3 Anti-virus/ 250 16 61 3.90.7 6.63 1,658 683 spyware 4 Patch & 250 40 61 9.75.7 16.58 4,145 1,708 service pack 5 IT policy 250 8 61 1.95.7 3.32 830 343 6 Scheduled 250 16 61 3.90.7 6.63 1,658 683 machine maintenance 7 Service* desk access 250 0 61.7 Monthly totals 250 96 $61 $23.7 $40 $9,951 $4,103 *Service desk falls under per-user calculation, covered in Step No. 5 8 Smart IT Guide: 5 Steps to Pricing Managed Services
In this table, the calculations result in a cost per desktop ($23) and a selling price per desktop ($40) per month based on a markup of 70%. Note that as the number of desktop devices under contract scales up under the same number of technicians (one), the cost per desktop will go down while the profit component rises. So using automation to deliver bundled managed services drives up profits as you grow, and it will be a happy time when you need to add another technician to your managed services delivery team! Also note that we have not maxed out this tech s earning power in a managed services model as only 96 hours are accounted for to manage 250 desktops. Additionally, with an MS model, you ll be delivering these automated services on an ongoing basis, which will minimize breakdowns and incidents. This will reduce the stress in your client relationship and lead to better, long-term client relationships. The key will be to initially remediate any instability in the environment, then lock everything down and bolt on your fixed-fee MS contract to keep the technology infrastructure secure and updated. Of course, you will need to go through this pricing process with other devices (e.g., fileservers, laptops, mobile devices, printers, etc.) you manage to develop a complete MS catalog, with MS bundles and contracts, but the benefits should make it a worthwhile exercise. 9 Smart IT Guide: 5 Steps to Pricing Managed Services
Step 5. Price Additional Services & Develop a Price Per User Up to this point, we have: 1. Calculated an hourly rate for a B/F technician; 2. Priced a series of B/F services delivered to a desktop clobbered by a virus; 3. Automated those same B/F services using an MS toolset; and, 4. Set a price per desktop based on supporting a client universe of 250 desktops. In this next table, we demonstrate how to extend MS desktop pricing to a per-user bundle price by adding user access to a service desk and a cloudbased email service. Table 5: Per-User Calculation (services in addition to those in Table 4) Service No. of users with desktop Hours per month Hourly tech cost Hard cost per unit, device, service Per device cost Desired markup Service event profit Per device price Help desk/ 250 12.5 $61 $7 $10.7 $7 $17 service desk Email box/ 250 4 $61 $5 $6.7 $4 10 cloud service Monthly totals 250 16.9 $61 $12 $16.7 $14 $27 10 Smart IT Guide: 5 Steps to Pricing Managed Services
By adding these additional user-based services to your desktop MS bundle, you have effectively built a per-user MS bundle priced at $67 ($40 + 27). You can add even more user-based services (e.g., other cloud applications, mobile device management, etc.) to this bundle to make a complete user package unique to your user base. This is becoming more important as professionals use multiple cloud applications and devices (i.e., smartphones, laptops, tablets) to accomplish their work. ITSPs should also consider bundling in server access on a per user basis, as well as access to other network devices (e.g. printers), and you can move completely to user-based pricing versus pricing per desktop or device. The nice thing is, once you understand the cost for all devices you manage for a client, you can build an allinclusive price per user or move to pricing per client site or other pricing bundle. No matter how you price your MS bundles and contracts, the caveat is to make sure you have priced your services right, and have profitable contracts in place. You can do this by regularly reviewing profitability results and adjusting pricing as you evolve. As this example demonstrates, moving from an hourly-fee based service model to an MS contract model provides obvious benefits in both directions. As the Internet and always-on technology becomes the norm for business, ITSPs and their clients will have a chance to rethink pricing and redefine value based on keeping systems running and up-to-date, and allowing the business to use technology to drive revenue and growth. Executive Summary So how do you transition a client from a B/F contract to an MS contract? This can be a long answer, but if you and the client understand the comparative pricing and stress related to servicing one machine in a B/F model versus servicing all the machines in a less stressful MS model, it can make sense very quickly. Learn more by viewing 4 Tips to Improve IT Services Profitability. 11 Smart IT Guide: 5 Steps to Pricing Managed Services
www.autotask.com sales@autotask.com Telephone +1 518 720 3500 IT drives the world. We drive IT. Autotask Corporation helps IT organizations worldwide work smarter with a complete, cloud-based IT business management platform that enables efficiency, accountability and access to the metrics that drive intelligent business decisions. With built-in best practices and workflow automation, Autotask speeds time to revenue while continually improving service delivery. Autotask is available in seven languages and used in over 70 countries. Headquartered in New York, Autotask has offices in Beijing, London, Munich and Sydney. Visit autotask.com for more information. 12 Smart IT Guide: 5 Steps to Pricing Managed Services