In business, the general rule is that the more business you can get the better. On the other hand, there is a rather popular saying that rules are made to be broken. In the case of the MSP (managed services provider) industry, there is evidence that having more customers may not always equate to higher profits. Many times, your clients may actually be costing you money! Here's why.
In the general tech space, there is a lot of “scope creep” that occurs in projects. In other words, projects that slowly grow in scope, yet no additional compensation is offered.
That scope creep is born of two different points of views.
- The customer feels that he/she is not getting what they contracted for and is trying to not feel ripped off. Unfortunately, there are other customers that are simply abusive and will try to squeeze extra services out of existing arrangements because they are unethical. Either way is bad for the MSP.
- The MSP (or any service provider for that matter) says yes to everything ‘extra’ that a customer wants for fear of not getting the next order or getting a bad reputation in the market place.
The above scenarios aren’t good for business and they can many times be attributed to errors that the service provider has made or has allowed to occur. Before we offer remedies to some of these situations it is imperative to have the MSP ask some questions about their business.
Do you truly understand your costs of doing business?
While it might seem counterintuitive to operate a business without knowing the costs associated, it is not uncommon. Business owners get caught up in the flow of working in their business rather than working on their business, and as a result they don’t think about the overall picture.
Some questions to ask about specific subjects include:
- Do you truly know how much it costs to onboard a client? Are you charging enough to make that money back over the period of the contract? Are your processes well defined so there is no room for any abuse of your services?
- How much does it cost to bring the customer in the door? What and how are you paying for sales and marketing per customer?
- Do you have an accurate customer lifetime value (CLV) calculated?
Ongoing Customer Support
- Are customers paying for all of the hours of support they are getting?
- Are you accurately measuring the actual time spent in support?
- How much does your support cost? Are you paying more for your support efforts than your customer is in getting them?
- Is your support cost structure scalable? Would it make better sense to outsource service desk activities to a third party?
Additionally, here are some good questions to ask when considering an outsourced service desk.
What’s Your Reputation in the Market?
People talk. If your company has the reputation of doing anything for a customer, that’s usually a good thing. But if you also have the reputation of not charging for that additional service, then you may ultimately be hurting yourself in the long run.
Are You Seeing the Upside?
If you are being so generous with your services are you seeing other project work? Are you getting strong referrals?
How To Avoid Clients Costing You
If you are already in the throes of dealing with customers taking advantage of you, you have some hard decisions to make as to how you change that behavior moving forward. If you are earlier in that cycle and have some control over the matter you can save yourself money and headaches.
Either situation really requires the same actions:
- Make sure you have hard caps in your Master Services Agreement and SLA’s as to how much time can be allotted to services under the current contract. Make it clear that anything above and beyond the contracted level will be charged at the agreed upon rate.
- Understand your business completely. When you are sure of exactly how much time is being spent outside of an MSA, you can be confident in charging for the proper amount for your services.
- Measure everything; like average time of resolution for each tech, average customer satisfaction per tech (consider Net Promoter Score as a metric), lifetime value of your customer, acquisition costs etc. This will give you a strong idea of where your costs and your revenues are, and where you can make improvements.
- Be upfront with costly clients. Don’t be afraid to voice your needs to your clients. They are business people just like you and should understand your need to turn a profit. You don’t have to demand that they pay you more, but simply state the situation clearly and make sure they understand how they’re costing you. If they truly value your services, they won’t have a problem paying you what you need to be profitable.
- Fire them if you need to. If you approach your clients about them being costly and they aren’t accommodating, don’t be afraid to fire them as a client. Sure, no one wants to lose a client, but if they are flat-out costing you money, it’s ok to cut the cord.
In the end, running a successful MSP requires you to be a businessperson. Bringing on new clients is crucial to growing your business. But it’s also important to look at your current clients and how they’re impacting your revenues. If your clients are costing you, don’t be afraid to talk to them about it and try to fix the issue. If all else fails, sometimes it is necessary to fire a client.
By Carlos Borges
By Ray Vrabel