Many small and mid-sized businesses waste valuable time and money interviewing multiple Managed Services Providers (MSPs) without a strategy or budget in place. This puts way too much faith in the hope of formulating a plan after reviewing 5-10 different proposals from organizations not likely to be in the same service class. National IT providers are different from regional providers, local boutiques, and “one-man bands.” With this in mind, the following considerations will empower you to be more intentional in your search and help you spend more time getting to know fewer, but more viable candidates.
Although there is no such thing as a perfect formula to determine how much you should invest in IT systems, Gartner Group Benchmark Analytics provides a real-world recap of spending across all major industry categories. Updated annually, they track IT spending as a percentage of revenue, and they arrive at a cross-industry average of 3%.
Before you question whether 3% of annual sales is the right reference point for you, keep in mind the right IT investment varies by a host of factors including, but not limited to operating mentality, maturity of the business, IT staffing levels, categories of equipment, subscription services, as well as hardware and risk tolerance. As you might have guessed, they conclude that under-spending on IT can adversely affect productivity, efficiency and customer relations.
The MSP industry
Fixed-fee MSP services for small and mid-sized businesses are relatively new -- gaining popularity over the last 10-12 years -- and the barriers to entry are extremely low, creating wild swings in business outcomes for end-users.
According to Gary Pica of TruMethods (one of the more successful MSP owners turned MSP consultant), best in class MSPs charge at least $150 per person per month. This general “all in seat price” includes a bundle of security services, vendor management, support for line of business apps, phone systems, carrier services, user help-desk and network support; so it’s much broader than headcount. It’s also much more than reactive, user support. Eighty-five percent of what a good MSP does is “behind the scenes” administration, strategy, documentation, backup, monitoring, troubleshooting, maintenance and enforcement of cyber security policies and best practices.
When these dynamic pieces work in unison, your systems are quieter, your users need less assistance, your business risk is lower and your entire company is in much better stead to excel in its core competencies. When MSPs make dramatic pricing concessions and undercharge, it’s almost impossible to deliver and operate in a profitable manner, which means their clients suffer, too.
Comparing the options
A common tactic for offering upfront pricing concessions in a fixed-fee managed services proposal is either scaling back the deliverables or including all potential deliverables and hoping the client will not request coverage for the services that are more difficult to deliver. Vendor management, network management, user training, vCIO consulting, business continuity planning and portable documentation are notoriously under-delivered.
Another tactic is quoting a low-ball, monthly budgeted amount, then using a metered billing rate for remote and onsite support. For instance, some companies charge $99 per hour-billable in quarter-hour increments for remote support, and $149 per hour-billable in quarter-hour increments for onsite support. This is a reactive approach that quickly absorbs the low-ball budgeted amount and can rapidly escalate into unpredictable price swings and monthly accounting headaches. Forget about creating and sticking to budgets with this type of contract. It also puts clients in an uncomfortable position; thinking twice about calling their IT services provider because every ticket is “pay to play,” so they develop a habit of self-resolving, which not only affects operating agility but can also mask deep-seated issues within IT infrastructure.
The last, most popular tactic is top loading your MSP with Level 1 engineers and claiming you have a coverage advantage over MSPs that may have fewer engineers but only employ Level 2, Level 3 and Level 4 resources. The former are less expensive to keep on the payroll. They are also less efficient than the latter -- higher level engineers who may cost the MSP more to employ, but justify the investment by being the first to know when there is an issue, quickly resolving problems under pressure, and proactively preventing further complications in the future.
The team at ProviDyn® is always glad to be a resource when it comes to formulating IT strategies and budgets. We look forward to lending a hand.