Are Time & Material Contracts Helping or Hurting Your Business?
If your IT business is one that provides “managed services” than you probably view T&M contracts as somewhat counter-intuitive. After all, it took years for the industry to evolve to the MSP model that is so popular today.
The truth is T&M or break-fix contracts still exist, and almost every MSP I have talked to still has a few laying around. Sometimes customers simply don’t want to pay a fixed monthly rate, even though they would likely benefit from it.
To help you better evaluate these contracts and the impact they have on your business, we have put together some of the pros and cons of break-fix IT contracts.
Pros of Break-Fix IT Contracts
Fixed Profit Margins
What I believe to be the most beneficial part of a T&M contract is that your profit margins are somewhat fixed. Assuming you have your resource rates well documented in your professional service automation platform, a simple pull of a Profit & Loss by Contract report will show you exactly how much your labor cost was and how much you billed.
The opposite is true with a fixed rate contract, since labor time varies, thus making some months more or less profitable than others. If users submit more tickets to your service desk than originally anticipated, these contracts can eat up profit margin very quickly.
Easy To Sell
One thing that makes break-fix contracts so enticing is that they are incredibly easy to sell. Sending your prospect a few labor rates instead of a monthly quote packed with service line items creates far less friction.
Sometimes customers simply don’t know how much service they need and until they peel back all of the layers of their business, it can be difficult for you to know either. Starting on a T&M basis to test the waters for both sides can sometimes be more beneficial than stretching out the sales cycle going back and forth with fixed rate quotes and projections.
More Customer Restraint
When a customer receives a detailed invoice at the end of every month they know exactly what they paid you for and the value that they have received in return. They are also able to recognize when use of your help desk becomes excessive or if work is being done that is out of scope.
With fixed rate managed services contracts this can be a sticky situation, as pushing back on your customer can create tension. Customers that are on T&M are more likely to police their users and encourage them to self-remedy desktop issues when possible.
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Cons of Break-Fix IT Contracts
The major downside of T&M contracts is that revenue is inconsistent. There is a reason why almost everything seems to be available “as-a-service” these days and that reason is cash flow.
We have attempted for years to use data to forecast service desk usage but it is simply not feasible. When there are no issues to resolve in a month, it is likely because you have done your job. Ironically, with T&M this is when you are compensated the least.
I have spent many hours of my life reading through notes on 15 minute time entries, and manually posting or un-posting them for billing. This incredibly tedious billing process is prone to errors, thus why I always managed it myself.
We eventually streamlined this process a little more through a change in our workflow and team training, but its never perfect. Processing thousands of time entries each month will always be a challenge for any IT company and the more volume you do, the more difficult it is.
Longer Payment Cycle
We found that when customers pay a fixed monthly rate, they are more likely to pay on time. This is mostly because a fixed rate invoice does not need to be “reviewed” the same way a break-fix invoice does.
If invoices have to get approved or if the customer has questions about time entries, it can lead to extra communication needed to get invoices paid. This drags out the entire payment process. If this happens often enough, it can put a lot of stress on cash flow.
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Once we fully analyzed the pros and cons of our break-fix T&M contracts and the data that we had to support them, we ultimately realized that these contracts were not so bad after all. We still continued to offer Managed Services contracts first and foremost, but if customers wanted to go the T&M route, we were happy to entertain.
We even created incentive plans for them to lower their hourly rate by scheduling IT projects in order to better adhere to our best practices. This helped us get more work from the customers even when there was few Level 1 & 2 issues to resolve on the front line, eventually making these a few of our most profitable contracts.