Would any MSP or IT Services firm ever set a fixed-price contract based on charging a client $40 – 50 / hour for all of their work? No way. That said, through our recent benchmarking study with MSPs from around the country, we found a large gap between what MSPs think their underlying pricing model is and what they are realizing from clients. As a 3rd party accounting service provider, we’re uniquely positioned to help our clients understand their pricing and cost structure in a way that leads to better decisions.
In general, most MSPs we work with approach pricing in a similar fashion (there’s generally an underlying pricing model based on assumed bundle of hours in a worst case scenario). If quizzed, most MSPs would think their realized price / hour would be between $80 – $150 / tech hour provided. After, fixed price contracts are supposed to improve margins over time, right?
However, once you factor in lost time, the actual realized pricing drops dramatically. Only 7 out of 18 in our data set were clearing more than $80 / tech hour! The average for the rest was $57 / hour with a minimum in our data set of $44 / hour. Pretty hard to generate much profitability at $44 / hour, fixed contract or not.
So, what’s broken? Is it pricing or COGS? If its COGS, is it utilization, poor process or lost time/activity? Only a deeper dive into individual company data can generate actionable recommendations. Unfortunately, without proper accounting data, it may be hard to identify the root cause. That said, here are some recommendations to consider:
- Recurring Revenue / Technical Payroll over time: establish a ratio that works for your company. Use this to inform timing of hiring decisions
- Utilization by service type: One common problem that can drive a cost structure issue is high-level techs resolving low-level issues. This will over-work your best talent and over time you may over-hire the most expensive people. Set targets for what % of level 1 tickets can be worked by level 2 or 3 techs.
- Make sure your PSA system is easy to use: Often clients have PSA or time tracking systems, but if they are dated or difficult to use, tech puts it off until mistakes or omissions happen. One recent study by Decision Tree Labs found that 60% of firms with PSAs recognize $100/hour on average, while only 38% of firms outside of PSAs recognize average rates like that. Clearly this isn’t only driven by PSA-using firms being able to justify higher pricing, their capturing client services better as well.
- Consider results-based pricing: True MSP pricing should move beyond a fixed rate for an un-fixed amount of service, it should align customer needs with your revenue. Here’s a great article from BCG on the future of IT Services pricing at the enterprise level. Some suggestions are applicable today, other practices may take a while to trickle down.
About CoEfficient Services
CoEfficient works with IT Service providers and MSPs by providing outsourced finance, accounting and benchmarking services. Our passion is the help our clients understand their financial performance enough to drive improved profitability and growth. Our deep industry experience with MSPs allows us to provide MSPs to benefit from our learnings across the industry. Our specialized MSP offering ranges from standalone monthly benchmarking to fully outsourced accounting.