Where Does Managed Service Provider Income Come From? 2024

Published 15 days ago5 min readBetrayal by MSP Vendors...

Managed service provider income and where it comes from will be the riveting subject of today's article and who knows, it may even come as a surprise to some. I must admit I was quite surprised at the diversity and variation of how this changes from one service provider to another.

During the turn of the century, the primary method of extracting a living from running an IT business was to wait until something stopped working at which point someone called you and you would jump in the car and visit the person in need or often they would bring their computer into your workshop.

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During the early 2000s someone had a moment of clarity and said to themselves “Instead of waiting for things to break, how about we charge a relatively modest fee each month and work towards preventing things breaking in the first place” And the modern MSP was born.

While most service providers will offer some form of break fix or adhoc service as well as project work, it is usually a fraction of the income created from other areas.

Why Is Break Fix Not More Popular?

This is purely anecdotal and from direct experience. Lets face it, if a client only ever engages with their IT service provider in a break fix arrangement then either they are very small or they are going to be an awful client that you do not want to be anywhere near.

The reason for this is because break fix is always going to be significantly more expensive to the client over a given time frame so the inexperienced will be scratching their heads and saying “Well that is a good thing, you will make way more money for the same work”

Unfortunately it does not work that way. What will happen is that there will be a psychological attack pretty much considered a form of warfare from the client where they will attempt to condition you into agreeing that large amounts of your work on their systems should either be free or are your fault and should also be free.

Potential clients that demand to be billed only when they have a problem simply do not comprehend the value your organization will bring to them. They will minimize at every turn your effort, ability and judgment.

They will not pay their invoices until you contact them and then they will spend hours arguing over every single minute you have charged. My advice is to never under any circumstances entertain the idea of doing business with a company that demands time and materials only.

The only time I would make a small exception here is if the client is prepared to pay for say a minimum 50 hour block of time in advance. This means you do not begin doing any work for them until that money is in the bank and you make sure you send a new invoice at the 10 hour remaining mark.

I also strongly advise to never be the party that is owed in this arrangement. In my experience these arrangements rarely last to the second block because the cost of maintaining a network with which you have not undergone a basic client onboarding process is horrendously expensive because even the easiest job will take large chunks of time to complete.

Service Agreement And Project Work

So at the very highest level of MSP income and where it comes from is generally broken into several broad categories and that is managed service agreements which is the maintenance undertaken for clients and billed in advance each month. The other is project work which involves work undertaken for a client who has a specific task they need completed. Then there is the small amount of time and materials work we do for our agreement based clients.

Project Work

In my experience, project work tends to fluctuate between about 20-30% of the total paid work undertaken in any one financial year. It can be quite enticing to go after project work from non managed service clients however I would strongly advise against this especially if you have had no working relationship with the client.

I understand that government tenders and things of that nature are different, however I have found that agreeing to take on decent sized projects (anything over 100 hours) with a company that you have no history with and have no knowledge of is about the riskiest move you can make.

Even with an upfront payment for say the project hardware, you are still behind the 8 ball the moment man hours start being applied to that project so it is not a solution to the significant risk at this point.

If you absolutely think this new client is such a great opportunity then at least request the cost of the hardware along with 50% of the labor cost as an up front payment before computer hardware is ordered or a ticket gets created.

My own strategy with IT project work was to only ever undertake projects for existing clients so a prerequisite was to already be an agreement client. It means that you already know the client both at a technical and personal level and are much better positioned to plan for the project's success.

It also avoids that slightly unpleasant situation where you have long term loyal agreement based clients that you are ignoring because this angry wildebeest of a blowin who is not an agreement client is jumping up and down demanding all of your attention.

The attention is something you have to give because the thought that you have not yet been paid keeps hanging over your head.

The project client has all the power and your loyal agreement clients are treated like second class citizens while you try and get paid. This is not a good long term plan for client retention that is for sure.

Time And Materials

Even though I spoke about this above, I need to mention it here because it still tends to make up between 10-15% of most service providers and realistically, it always will.

The reason is because your agreement clients are always going to need work done outside of the existing agreement. New computers installed, new wireless access points or a new computer cabinet installed. These among many other common tasks all fall outside of an agreement and that work is considered either ad hoc or time and materials.

When I ran my MSP, I would work into any service agreement to include a 20 hour block of time paid in advance for these sorts of jobs. Some clients are great with this arrangement and others will prefer to just be invoiced separately for each job undertaken outside of the agreement.

That is OK and I would say half of my clients went that way instead of the block agreement however I would run into problems if the client was poor at paying or liked to argue over every cent.

I tried and pretty much succeeded in filtering out the penny pinchers over the years. One of those filtering techniques was the level of pain they put me through when it came to paying invoices and paying them on time.

I would prefer to lose a client with my rigid payment terms rather than put up with them complaining over things that they really did not even understand what they were complaining about.

Service Agreement Work

This is where the bulk of most modern service providers make their money. I legitimately believe that charging a monthly service fee or agreement and coming to agreement as to what is included is best for both the client and service provider.

There is a polarization of service providers that tends to really separate professional and well funded MSPs with those that have to promise more than they can deliver.

Having worked with at least 15 MSPs over the last 10 years and being tasked with increasing the performance of the documentation and systems being used, the difference between an organization that has invested substantial time into processes and procedures is significant.

The main issue with MSPs that have not invested in process and procedures is that they cannot scale up or down in any area. They also never seem to improve over time when it comes to repeatable tasks. The task that took an hour 3 years ago, still takes an hour.

Almost every area of technology can be packaged in agreement form, even computer and network hardware. It works so well because as MSPs, we have a set known income making it easier to plan and maintain a clients infrastructure.

Service Agreement Achilles Heel

The largest problem when it comes to engaging a client with a managed services agreement is that it is very difficult from the clients perspective to evaluate if they are getting value from the agreement or if they are paying too much.

The first issue is they are not technical people normally and so there has to be a significant level of faith that the service provider is doing the right thing.

What I have found is that clients tend to mistake value with effort. Often a service provider will legitimately provide far more value when the level of effort appears to be the lowest. What I mean by that is if a service provider has excellent technical documentation standards that are regularly updated meaning they do the same thing the same way every time or they have good support guides then it means less effort is required.

Suddenly staff are not ringing the support desk as often and the times they do, it takes less time to rectify the issue. This leads to clients asking that difficult question - What are we paying you for?

I do not pretend to know how to approach that question because I have faced it a number of times and the results of how I handled it were quite hit and miss.

Sometimes showing clients dozens of reports showing how your existence actually reduces their staff's downtime will not persuade them that they are being diddled in some way.

You have to let those clients go. It is absolutely true that if a client is paying you for a service and all else being equal, I would get far more billing disputes for a 15 minute invoice than I would for a 2 hour invoice even if the job was identical.

Conclusion

While there will always be some residual work of around 10-15% that is time and materials, and 30% project work, the percentages do not increase beyond that leaving over 50% of most service providers work coming from managed service agreements.

It is also reasonably rare that service providers will undertake one off projects or time and materials work for clients that are not already managed service clients as the risk of significant loss is higher due to lack of history with the potential client.

So in that sense it could be argued that nearly 100% of income from managed service providers is sourced from managed service agreements.

We have a number of other IT Solutions Provider articles listed below that will provide you with more detailed information on a number of related topics:

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