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Remember the days when the PC was king of the office and every business needed someone to manage its servers? Back when the break-fix model was lucrative and new projects were icing on the cake? A technically advanced IT services professional could build a formidable business selling block hours and maintaining a fairly consistent Rolodex of clients. Sure, there were headaches, just as there are today, but many companies saw a lot of success following that formula.
Until innovation and competition shifted the market. Early adopter of managed services, the cloud and a host of other “as a service” offerings saw their monthly incomes increase and their personnel costs diminish. Proactive support and non-technical solutions revved up their profits.
Those who waited too long to join the MSP revolution found themselves losing customers and often scrambled to catch up — scores of those businesses simply faded away. Owners retired or went to work for someone else. The ones that remained adapted their practices to remain relevant in the shifting IT landscape.
The one big problem with that last scenario is that while many have adopted the managed or cloud services recurring revenue model, a fair number of those channel firms fail to solidify and revitalize the financial side of the business.
In most cases that doesn’t mean they’re charging too little. With small business customers as a prime market, rate increases should be consistent and providers need to remain competitive — though the unique value and insight they bring should elicit a fair premium. Two of the biggest financial issues in the IT services community go back to common business practices of the 1990s: (1) hard to enforce, short-term contracts and (2) antiquated billing and payment processes.
Enhance Your Services Agreements
Multi-year contracts with strong termination clauses and penalties for non-compliance should be the gold standard for every channel firm. A solid agreement becomes the foundation on which a real business relationship can be built on. Its terms and conditions should create a framework for each party, outlining the obligations and timelines they must adhere to. The clearer the language —especially related to penalties for non-compliance — the easier it is to enforce.
On the accounts receivable side of an IT services business, contracts are essential. The agreement language must clearly outline company policies and procedures for payments. When can the client expect to be billed? What form of payment is accepted? What terms are applicable?
Contracts are capital. That’s an important point for MSPs who may be looking to sell their businesses, bring on new partners, or gain more leverage with their vendors. Prospective investors and potential business buyers pay more for comfort. When a firm has multi-year contracts with strong opt-out penalties in place, it minimizes the financial risks involved in the transaction.
The CompTIA Quick Start to Mergers and Acquisitions guide provides several tips for IT services companies looking to improve in this area, including bumping up the timetable for renegotiations with current clients. The goal is to get them into longer-term contracts with stronger termination clauses and greater penalties for non-compliance. It’s also a great time to update payment options to lessen delays and improve the IT firm’s cash flow.
MSPs frequently entice clients into renegotiation by offering “value adds” to existing service offerings, such as a free annual compliance or security assessment, or a customer portal for tier one help desk services. A lot of these creative ideas are shared in peer groups such as the CompTIA Communities and at major industry events like ChannelCon.
Antiquated Billing and Payment Processes
The second financial holdover from the 1990s relates to if, when and how providers get paid. Twenty-five years ago, payment options were minimal and the customer was always in control. Business checks were common, often paid within 30-60 days of receiving the invoice. When mailing and processing delays are figured in, it was not uncommon to go three or four months between delivery of a service and cash in the bank.
That is, if they paid at all. The advent of managed and cloud services and their monthly fees altered that scenario somewhat. Credit card payments became more commonplace, as did the fees incurred on channel forms for the privilege of having banks and processing companies convert charges to cash. That still didn’t complexly resolve the delays or ensure prompt payment as it can still take several days before providers gain full access their hard-earned funds.
The reality is that traditional payment processes have not changed much over the past two decades and excessive fees can still be a major drag on a firm’s cash flow. Manual billing and collection is slow and inefficient, and may require frequent follow-up — further reducing employee productivity.
The good news? MSPs and cloud providers can upgrade their billing/payment systems and improve cash flow easily today. They can automate everything from invoice creation to bank deposits when they integrate their PSA platforms, accounting packages and payment processing programs, and look at options like ACH (Automated Clearing House) to ensure timely compensation. They can even add mobile payment options. The future is here, what is the tech industry waiting for?
The hardest part for most channel firms is making a commitment to follow through on implementation and customer conversion. Contract terms may need to be renegotiated or upgraded to include new payment terms and conditions. Investments may be required to upgrade tools, complete the integrations, and train employees and clients.
Vast improvements in cash flow and productivity, as well as fewer sleepless nights thinking about accounts receivable, make it a worthwhile endeavor. With summer vacation time on the way, there is truly no better time for IT services entrepreneurs to move their back-office processes into the 21st century. Automate and enjoy life.
Brian Sherman is president of Tech Success Communications, a channel-related content and social media development firm. He served previously as chief editor at Business Solutions magazine and senior director of industry alliances with Autotask. Contact Brian at Bsherman@techsuccesscommunications.com.