Your MSP Contract Makeover

Hourly Billing vs Fixed Fees for IT Support & IT Projects

Article by Samuel Hatton on November 20, 2020
Samuel Hatton
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Most Managed Service Providers (MSPs) have a fixed monthly fee as part of the contractual agreement. This monthly fee usually covers a core set of services, such as managed antivirus, patching, alerting, monitoring and possibly strategic consulting for the information technology (IT) environment. Services above and beyond the core services are usually provided on an hourly or fixed-fee depending on customer preference. We are going to look at these various aspects of MSP agreements.

All the labor service that an MSP does can be broken down into these four major categories:

  • (1) IT Strategy: This is all the planning and design of the computer network to maximize technology for your business model.
  • (2) IT Maintenance: This is all the systems administration, security, and monitoring of your computer network to make sure that your computer network stays online.
  • (3) IT Support: This is mostly in reference to the day-to-day reactive technical support deployed through a technical support helpdesk.
  • (4) IT Projects: This refers to moves, adds, and changes to the computer network and infrastructure.

Since most MSPs include “Strategy” and “Maintenance” types of activities as part of a fixed fee regardless, let’s explore various managed service provider agreement structures, particularly looking at items 3 & 4, “Support” & “Projects.

Pay-By-the-Hour Pricing for IT Support Services

Almost all managed service providers will offer options in how the contractual agreement is priced. In other words, if you want to pay-by-the-hour for technical support, you can. However, this is something that you may want to reconsider because this can cause problems. Consultants and smaller managed service providers often price their IT support this way.

These are the two biggest problems I notice with the pay-by-the-hour MSP agreements: 

Problem #1: Billing issues - You must take extra administrative time to manage all the bills each month. Since each month, you must review and approve invoices, this can eat up hours, counting the costs and managing your IT budget. This can lead to using the vendor's services less, so problems fester and ultimately your workforce is less productive. 

Problem #2: Unpredictable monthly costs - Organizations can find it difficult to budget and plan when IT spend varies considerably from month to month. This forces you to pull funds from an emergency budget pool for a function that is considered an operational expense to run you business.

Problem #3: Bad IT - Your IT provider is only rewarded when your technology fails. This incentivizes bad behavior. This is risky. The only way to cover for this risk is if the MSP guarantees, promises, or statistically proves that they are solving problems in such a way that drives down noise in the computer network. 

Fixed Monthly Fee Pricing for IT Support 

To solve these issues, MSPs started offering a productized services model giving you unlimited IT support services for a fixed monthly fee. This means that not only is business IT strategy and systems maintenance included in the fixed fee, but so are IT support services. This encourages greater use of the helpdesk because you don’t have to pay anything extra when you use the helpdesk. And these are the very reasons why customers like utilizing a fixed monthly fee pricing model. 

The two biggest problems with hourly billing (outlined above) disappear when IT support is included in a fixed monthly fee.

  • (Problems #1 & 2 Solved) Billing is more straightforward. When you spend the same month-over-month on IT services, you don’t have to worry about bills and wonder if you are out of budget or not. Instead, your budget is known. Also, you are no longer randomly getting hit with giant bills.
  • (Problem #3 Solved) Your IT provider is rewarded to drive down IT issues. Now the vendor is no longer being paid per issue. It's now in their best interest to find the root cause of what is causing issues in the first place. Essentially, you are now paying for a result, not for hours of labor. You benefit.

Managed service providers have been offering support included in the fixed monthly fee since the emergence of the MSP industry. But including projects in the fixed monthly fee is something rather new. Let's explore.

Fixed Monthly Fee Pricing for IT Projects

We identify IT project services as any labor involving a move, add, or change to the customer network. This could include things, but not limited to, server migrations, workstation builds for new employees, and infrastructure builds.

Most MSP contracts don’t include IT project labor in the fixed monthly fee. Instead, it is priced hourly. If a project takes 30 hours, then the customer is billed for 30 hours of labor. If the project takes 80, then the customer is billed for 80 hours of labor. There is no guarantee that the vendor will work efficiently or inefficiently, unless IT projects are included in the fixed monthly fee.

Including IT Support & IT Projects in the Fixed Fee Reduces Your Risk 

Not all MSPs are willing to offer a productized IT service that also includes unlimited project hours. The reason being, more of the risk is now on the IT provider. But now, you have certainty that you have all the support you need to get things done right. If you keep coming back to the IT vendor with projects, they might see this as losing money, but a mature MSP will gladly take on the work. They know the value of driving out noise in a computer network. 

MSPs who have several clients in your industry should be able to average out all the labor costs over the course of years. This allows them to factor all project service pricing into the fixed monthly fee. 

Interestingly, the more an MSP moves into a model where all labor is included, the better IT gets for the customer. Earlier I outlined some benefits that come from taking the IT support function to a fixed monthly fee model. Those very benefits get even better when you also add IT project labor. 

  • Billing is even more straightforward. Also, comparing the costs of doing a project vs not doing a project, becomes much easier tooIn other words, if you are already paying for project labor, approving a project that is necessary for excellent technology becomes a no brainer.
  • You are also incentivized to drive down IT issuesBy paying for project labor in a fixed monthly fee, you are committing to having good technology. You have already approved the labor needed to eliminate recurring issues that result from outdated technology. The alternative is both you and your provider struggling around the core issue that could have been solved with a project.

Next Step: Talk to Your Managed IT Provider 

Your managed IT provider may be willing to write up a new agreement that includes more of the labor costs into the fixed monthly fee. Granted, that fixed monthly fee will be larger, but if your provider offers competitive pricing, it’s usually always going to be a better deal in the long term.

Sometimes just exploring a new pricing model can make it much easier for both the customer and MSP. If you are not a customer of Endsight and would like to discuss what that might look like, we are always happy to have that conversation.

Get started today with an IT Assessment!

Tags: IT support, IT management

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