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4 key requirements for migrating your business to service contracts

Posted by HarmonyPSA on Aug 21, 2017 2:58:01 PM

As an MSP moving away from break/fix into service contracts, what are the top four considerations for buying a PSA tool to make that move successful?

For 30 years, MSPs have used software that was optimised for break/fix operation. From the ticket workflows and billing methods to the customer reporting, these ticket-centric systems did exactly what was needed.

But now the world is changing as managed services replaces break/fix as an operating model.

So, if you are on this journey (and you should be), what are the key requirements you should look for in your PSA tool and why?


Well, just to be confusing, let’s start at the end with your billing. In break/fix, billing was in arrears and credited to the revenue account on release of the invoice. As you move to managed services, increasingly you will be billing items in advance, not against timesheets but against a contract.

Key requirement #1 strong contract management; the ability to model service contracts with flexible terms are vital to making this move successful. Service contracts need to be modelled on both the buy and sell side (remember, you will be reselling cloud offerings from others and making a margin) and automated invoicing will help you grow this business without cost drag. Contracts need to be able to model recurring agreements and be flexible enough to model changes as they occur throughout the contract term. If you are moving to AYCE (All You Can Eat device-based billing) as many are, you also need both the ability to model and classify assets in a way that maps directly to your billing methods. Then automating this process around your measurement date will improve scalability. Ideally, your RMM should be populating assets by billing class through its discovery scans, so that the process becomes fully automated end-to-end.

But while services billing moves away from being timesheet based to contract based, labour is still needed and this is moving to prepayment agreements (aka block-hours). Again this moves billing from in-arrears to in-advance, so helping your cash-flow, but see below for accounting consequences.

Key requirement #2 a la carte prepayment management; work not covered by the service contracts is then drawn down against the fund you have created and either set to top-up regularly, or in an ad hoc manner. The way you operate your prepayment funds is a key differentiator and not to be ignored. Of course, to differentiate, you need a PSA tool that allows you to operate different models, for different service offerings and at different discounts, even against different SLAs. Whether the fund is denominated in time (the most common), cash (enabling kit funds and expenses), or tokens (abstracting the cash value) your PSA tool needs to move with the times or you’ll be stuck with a system that cannot respond when the market moves.

OK, so now you have your contracts and funds but do you know if the pricing is tuned right? Again, with break/fix it was simple, profitability was all driven by a single metric, utilisation reporting vs target. You set a rate for the techs to charge that related to profitability via % billable targets and that was a fine, if a little volatile, way to run a business. With service contracts, this is no longer the full story.

Key requirement #3 real-time profitability analysis; as support becomes increasingly forward looking and automated, profitability analysis is the vital tool for assessing whether you are charging the right price. Take AYCE contracts as a good example. Here revenue is no longer tied in any way to timesheets, so how do you know whether you are charging the right price? Charge too much and you will lose the account, too little and you lose money. Charging the right price (and being able to adjust this by customer) is vital to growing a modern MSP. Staff utilisation is still interesting, but it is no longer the single metric you need.

Now, all three of these assume the numbers are correct. As your billing model moves from simple cash-book accounting (monthly in arrears) to contract and fund-based billing, the relationship between an invoice and revenue gets harder to control, and this logically undermines #3, the period revenue numbers needed for profitability assessment at a customer level.

Key requirement #4 correct balance-sheet accounting; as soon as you start a contract in the middle of the month, or bill quarterly, or allow a fund to carry-over an amount to the following period, you break the link between the invoice value and revenue. If you don’t know the revenue value in the period, no profitability calculation will make sense and so you can’t optimise your prices. The winners will be the ones who can do this easily.

So, if you want to survive the move to managed services without significant cost and administration drag, don’t buy a PSA tool if it doesn’t hit these 4 key requirements.

Tags: BUSINESS, contracts management, customer profitability, MSP BUSINESS, pre-payment fund accounting, selling, MSP

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