Contracts are a necessary part of MSP businesses as they clearly outline what responsibilities are being offered to clients and what clients need to provide for MSPs. Some MSPs will create their own tailored contracts, however others will go down the route of making Break-Fix contracts. Also called T&M contracts, these seem like counter-intuitive contracts, especially since it took years for the MSP model to be what it is today.
The reality is that T&M contracts are still prominent today and MSPs nonetheless have these kinds of contracts laying around. Often these are convenient solutions for some customers as clients might be turned off from fixed monthly rates for a variety of reasons.
Because of this possibility, it’s worth determining whether these contracts are relics of the past, or if they do deserve to be integrated in the current MSP model. To help, here are some pros and cons to these contracts.
Pros Of Break-Fix Contracts
Fixed Profit Margins
The biggest selling point of these contracts is that the profit margins are somewhat fixed through these contracts. Assuming an MSP has resource rates documented in a professional service automation platform, a simple pull of Profit & Loss by Contract report can reveal labour costs was and how much was charged to the client.
The opposite is also true with fixed rate contracts – labour times will vary from month to month, but if the rates are fixed, it’s clear what kind of profits or losses will be. MSPs will also recognize that when users submit more tickets, these contracts will end up eating up profit margins fast.
Easier To Sell
Clients receive quotes from businesses all the time for various personal and business purchases. As such, it’s normal for clients to be getting quotes and are thus warmer to buying products from different businesses. MSPs can leverage this as well since they can do the exact same thing — present a quote outlining the exact services provided and a fixed price.
Another consideration is that clients don’t always know what services they need or don’t need for their business. MSPs can mitigate this by providing tier options at different pricing points as these contracts also provide an easier avenue.
By starting these contracts, both clients and MSPs can get an understanding of exactly what kind of services are being needed. This removes a lot of the back-and-forth sales cycle process.
More Customer Restraint
Through this model, clients will get a detailed invoice showing exactly what they paid for and what they received. This invoice style can also help clients as they can recognize when the use of the help desk is excessive or whether work is done outside of the initial scope of what they wanted.
These kinds of issues are problematic when the contracts are fixed rate managed services contracts. These problems are lessened in break-fix contracts as MSPs can use them to police clients and encourage them to self-remedy desktop issues whenever possible.
Cons Of Break-Fix Contracts
Even though the revenue is fixed and somewhat predictable, the revenue is going to be inconsistent. There is a reason why everything now is being offered as a service and the answer is clearly cash flow.
There will be days where help desks are not going to be needed that much and there will be times where help desks are flooded with calls. MSPs can’t control when those happen. The only upside is that when MSPs are using these contracts and aren’t getting calls, it’s a clear indicator that they are doing their job right.
Because these billings are precise, MSPs need to outline exactly what services were provided every single month to clients – if any at all. This can be time consuming and tedious to do. The process can be automated, but processing thousands of entries at a time will always be a challenge for any MSP.
The more volume that an MSP gets in service calls, the more work that’s created for billing and the tougher it is to justify using this billing method.
Longer Payment Cycles
When using fixed monthly rate contracts, it’s easier for clients to set up automatic payments or to be paying on time. This is because there is no need for the bills to be reviewed in the same way that break-fix contracts do.
When invoices must be approved or when the customer has questions about certain entries, this leads to further communication between the MSP and the client. This can drag out entire payment cycles which can put a strain on cash flow.
Which Is Best?
Despite the obvious flaws in these contracts, break-fix contracts are not terrible contracts to be using. There will be problems down the road for MSPs if this is the only contracting option and the MSP is looking to expand. An MSP that is able to provide both regular fixed-rate contracts and break-fix contracts will find an easier time as customers are given more options and flexibility for what kind of agreement they want.
About MSP Corp
MSP Corp understands you’ve worked hard to build your business and you want to protect it. With a mission to be a world-class business partner for MSP owners across Canada, we actively seek to acquire and partner with owners looking to secure the value of the business they have built and provide a seamless exit process that ensures business continuity and employee and client stability.
Contact us today to learn more about selling your business and maximizing its value.