As a Business Development Manager for a large, nation-wide IT firm, a large part of my job is to analyze the data and metrics we have about service operations and help tweak our policies and procedures to ensure we are performing both up to client expectations and in the most efficient way possible.
Much of the client-facing portion of my job is explaining the value of our proactive, often-unseen services, and how we endeavor to minimize the number of reactive support calls we receive; showing clients the cost savings of our service agreements and helping them plan for the future.
To meaningfully evaluate whether an IT service contract is a good investment, both sides—the service provider and the client—must calculate the effective billing rate (EBR) for the agreement in question. This simple calculation provides a quantifiable metric against which performance can be measured: is the client saving money and is the service provider operating efficiently.
A sample client has a $2000 monthly service agreement, which covers all proactive and reactive IT support. If their IT company would normally charge $200 an hour for service, it’s easy to see that the client would be saving money with the contract if they used more than 10 hours a month of IT support. What may not be so readily apparent—and as such becomes my responsibility to educate—is the value of the proactive, behind-the-scenes work that reduces the frustration and downtime of something breaking. For most potential clients, I suggest they wouldn’t be far off in estimating IT labor equal to half an hour per workstation and server to be managed each month. Knowing the service provider’s hourly rate, this should be a simple calculation.
Does that mean that the value of a service agreement is a zero-sum game, in that for the client to come out ahead, the provider must lose out on potential revenue?
Automation has been a boon to daily business and life since the invention of the printing press, later made famous and spread globally by the industrial revolution. Previously I’ve written about one of the hardest working system administrators I’ve ever known, and how he did everything in his power to automate as many processes as possible, to make sure that the only alerts he saw were meaningful and actionable.
In this way and by utilizing professional services automation (PSA) tools, an IT vendor is able to service more clients with the same staff than if they were strictly billing for time and materials. Software and automation has allowed providers to run disk cleanups, hardware failure analyses, antivirus scans, server updates, and security tasks on a set schedule, customized to fit their best practice recommendations. Rather than hiring someone to manually scan each network and perform these tasks, it can be done correctly and efficiently by the PSA, calling attention to any issues or problems it finds.
The process of streamlining and automating the specific services applicable to a given client can be a labor-intensive one—the adoption of best practices can be slow or there may be unique circumstances and situations the client wants monitored. In the first few months of an agreement, the IT vendor will likely see their EBR fall far below their normal hourly rate, because all of that preparation and configuration is designed to ensure a much smoother and stable environment moving forward; the up-front labor cost effectively buys a more advantageous position down the road.
In 2019 my company took over managing the IT needs of a local financial services and investment firm. The client switched away from a small, two-person IT outfit that always seemed to be reacting to crises rather than helping prevent them, and they were very interested in a flat monthly fee they could budget. Looking at their needs and the size of the network, I quoted $2,500 per month for the service.
As we sat down for an annual service review last week, the client was absolutely beaming—not only had their systems not crashed since we came onboard, we had kept them up to date with important changes to the industry, security alerts, and served to help them transition to a full-remote workplace during the pandemic. They had done the EBR calculation I mentioned above, and even before adding in our regular business consultations, antivirus, and other covered services, they found they were effectively paying less per hour than with their time and materials vendor, all while getting better service to boot.
What makes my senior management happy about that account, other than the stream of referrals they pass to us, is the fact that, by utilizing the powerful software tools and process efficiencies I’ve recommended, we are actually coming out ahead on the contract—we are effectively charging more per engineer labor hour than we could if they were time and materials only. Our use of technology has enabled us to provide better service, with fewer labor hours, than would otherwise be possible. We’re meeting client expectations and the agreement contributes meaningfully to our company’s bottom line.
When determining how valuable a given contract or agreement is—whatever side of the table you sit on—it’s important to consider not only the numbers but also the relationship as a whole. While I help many clients—even those for whom we don’t end up being a good fit—calculate the effective billing rate for existing or proposed IT services, the most important aspect of any service agreement is whether or not both sides feel respected and valued. I have let accounts go that, on paper, were wildly profitable because they always second-guessed our proposed solutions and didn’t view us as partners. Conversely, I’ve fought to keep accounts where the EBR wasn’t necessarily favorable on our side, because they actively valued our expertise and they were always a joy to interact with.
All that said, knowing the EBR is a very smart way to start qualifying the value of the arrangement, to measure value over time and the true financial benefit of an IT service agreement.
Do you have questions about the value of IT? Please email me and I’m happy to talk to you about what’s most appropriate for you and your business.
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