The Evolution of Flat Fee Maintenance

The Evolution of Flat Fee Maintenance

- Lessons Learned, Episode 40

In the last installment, I talked about how we came to prefer flat fee projects. About the same time (early 2000's), I had standardized what we do for regular monthly maintenance of servers, workstations, and networks. We had checklists for everything. And checklists were customized per client.

With thousands of endpoints and dozens of clients, it was very clear how long it took our team, with our checklists, to perform these tasks. That's when I broke out the Excel and started trying to standardize the pricing month-to-month as well as client-to-clients.

I explained this almost twenty years ago in a blog post where I first defined "Break out the Excel." And the process because a book chapter in Managed Services in a Month. So I won't repeat all that hear. (See https://blog.smallbizthoughts.com/2007/09/managed-services-in-month-part-two.html.)

The important part, without all the details is this: Once you have sufficient data about your service delivery, you can analyze that data. And you don't need a degree. You just need to learn some of the basics of Excel. 

So, what constitutes enough data? That comes down to the two most important things that flow through your company: Money and time.

Money

You should have a very clear picture of the money piece of the equation. It might not be at your fingertips, but it should be easy to acquire. 

• How much did a client pay you in the last month (or year)? 
• How much did they pay in hardware/software? 
• How much for hourly labor? 
• How much for flat fee projects?

Note: These numbers will vary over time. That's why we separate projects and HW/SW. For the most part, the hourly labor should reflect the income from maintenance. And, in most cases, that number will vary a lot less.

If your goal is to create a flat-fee service, there will be months when your price will be above the average and there will be months when your price will be below the average. The current exercise (in Excel) is to find that average. It's there. And it's not difficult to find. You just have to do it.

Once you have the average for each client, you can do two easy calculations. Zoom in and find the average revenue per user per year. Then divide by twelve to get the average revenue per user per month for that client.

Next, zoom out look at averages across all clients. What is the average revenue for all clients across all users. As with everything else, there should a normal distribution around a central number.

These are all pretty easy. Money. Users. You know these numbers, or have them at hand.

Time

The other thing that flows through your company is time. You buy time from your employees. With some, you buy it by the hour. For some, you buy it by the month. In either case, there is a reasonable number of hours they are expected to work (normally 20 or 40 hours per week.)

Some of the time you buy is used for checking email, driving around town, doing training, and sitting in meetings. Most of it should be sold to clients.

If you're selling time by the hour, you need to track this time so you can bill for it. If you decide that some work was re-work or just took too long, you can charge the client for less time. But you have know how much time was used by the employee because it comes from a limited pool of resources - in most cases 40 hours per week.

You have to track this time.

If you use employee time to deliver flat fee projects, you still need to track this time so you can determine whether the project was profitable. Assuming it was profitable, you should know HOW profitable. That's determined, for the most part, by how much labor was used to deliver the project.

You have to track this time.

The most important piece, when you're trying to develop a "managed service" business is the time and money related to regular, predictable, maintenance labor. This does not vary dramatically from month-to-month within a client. And when you zoom out, you find that it is very predictable on a per-user basis for tiny clients, medium size clients, and large clients. 

We went through these calculations around 2005 and settled on our first flat-fee maintenance agreements. 

Note, please, these are NOT all-you-can-eat contracts. There is really no such thing as AYCE. Every contract has to have limits. Please don't use the term All You Can Eat. Clients will think you mean all you can eat. And then you spend time arguing about how much is all they can eat. (Answer: If you let them, they can eat all the profit inside your business.)

 To make flat fee contracts profitable, you need to have very clear lines about what's included and what's not. I've written a hundred times about adds-moves-changes, so I won't repeat that here. Maintenance contracts (managed service contracts) should cover maintenance. Adds are extra. Moves are extra. Changes are extra.

In order to keep this profitable, you need to continue to monitor time and money. And, to be safe, you should evaluate how you're doing every three months. Be ready to make changes if you've included too much labor. You have to manage time and money in order to stay profitable.

No one ever argues that you should track money. But lots of people say you don't need to track time. My experience is that everyone who tracks time well makes more money than anyone who doesn't track time on flat fee contracts.

Time is the most expensive thing you buy and the most expensive thing you sell. Track it well.

All comments welcome.

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Episode 40

This Episode is part of the ongoing Lessons Learned series. For all the information, and an index of Lessons Learned episodes, go to the Lessons Learned Page. 

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