In summary, the managed services model is a subscription model for IT services. To put it simply, long-term contracts are preferred over one-time jobs.
A company that provides IT services on request usually has a price list, including services with fixed fees, like setting up a new machine or reinstalling an operating system on a broken device. For more complicated cases, they charge per hour of work needed to complete the job. This type of service is usually called the “break/fix” model. Any time there are one-time service contracts only, it is a “break/fix” model.
Managed services imply a long-term contract. Customers pay a fixed fee for a certain level of service and additional fees on top of their contract. In exchange, they get proactive support for their infrastructure and higher quality of service, as the MSP knows and manages their infrastructure.
The primary differences between management services and break/fix models are proactive management and long-term contracts.
Break/fix model
The break/fix model is easy to implement, and many MSPs start with that model. One or a few IT professionals get fed up with corporate jobs and start their own business. They publish ads in the local newspapers and social media groups, promote their services via friends and family, and start helping people on a one-time basis. They only need basic IT skills and prices that local business owners and residential customers will pay.
The model is highly unpredictable. Sometimes, the demand for IT services spikes (thinking migration from Windows 10 to Windows 11), and sometimes, it dies down with economic fluctuations, changes in the demand from the local business, or competitive pressure with a rival computer shop offering break/fix services at a lower price. There are no long-term customer relationships, and switching service providers is easy for them.
Managed services model
The managed services model is predictable if adequately implemented. Long-term contracts guarantee a certain income level, and MSPs can estimate their margins, given that they know their costs. It also allows them to scale their business with a limited number of IT technicians. As they manage their customers’ infrastructure, they can set up the tools they need to manage it remotely and set up backup and security solutions to prevent incidents and decrease the workload for handling the issues.
Given the long-term relationships, the MSPs can become trusted advisors for business owners and help them increase efficiency using modern IT solutions, increasing the value of their services, charging higher prices and getting higher margins.
The managed services model is more challenging to establish, requiring capacity planning. There are multiple questions to answer:
- Given the existing resources, how many customers and incidents can the MSP handle?
- What service level agreements (SLAs) can they provide when responding and resolving issues?
- How can they maximize their margins by lowering the cost of people or technology and increasing the value of contracts?
- What is the plan to increase capacity in case of a peak workload?
- Do they use subcontractors for services outside of the area of their primary expertise? For instance, many MSPs outsource security and physical network installation.
However, even given the more complicated planning required, the MSP model allows for a stable business that can scale. The break/fix model is unpredictable and hard to scale, and scaling break/fix almost always requires hiring more technicians, who have been in high demand and low availability for the last few decades at least.
Contracts in the managed services model
Most MSPs support multiple contract options based on customer requirements: monthly, annual, and multi-annual (usually two or three years). Longer-term agreements are more predictable, but many customers prefer not to commit to long-term agreements. Thus, MSPs have to maintain a mix of different contract types. Higher maturity MSPs usually don’t offer contracts under one year.
Multi-year contracts are a good negotiation tool when customers try to lower the monthly payment; an option is to offer a monthly payment with a longer-term agreement. Many MSPs prefer to trade margins for predictability, planning to increase margins with growing efficiency.
Frequently, contracts also include onboarding and offboarding fees that cover the expenses of MSPs to take over the customer infrastructure or transition the customer to the new MSPs. Onboarding fees are usually waived for long-term agreements and serve as a tool to negotiate an annual contract instead of a monthly contract. Offboarding fees are often replaced with a 30-day notice for termination requirements, allowing MSPs to execute the transition while still being paid by the customer they are offboarding.
Pricing in the managed services model
There is a great variety of pricing options used by MSPs. In general, most MSPs estimate their costs and add a margin on top of it; however, the way the price is calculated for the end customer may differ, and it may depend on the customer, on local practice, or on the way MSPs sell their services to the customers.
The most popular models are per device and per-user payment, and less popular models are per hour and per incident.
In the per-device model, a price is assigned per device under management. It may vary between types of devices (workstation, laptop, server, printer) or maybe a flat fee per device under management.
In the per-user model, it is either the total number of users — employees of the company or the number of users using the IT infrastructure daily. For instance, in a store with three shifts per day, it would be tough to charge per employee while only about a third of the staff is on duty at the same time.
Per-incident and per-hour models usually include a minimum monthly fee under the contract, including a certain number of incidents or hours, and everything on top of that is charged according to the price.
Models can be mixed. Monthly payment is calculated based on the number of devices or users; however, the pricing is calculated hourly for non-standard situations not covered by the monthly fee.
Pricing tiers
Some MSPs include everything in their per-user or per-device pricing, and some add additional charges for software, consumption of services and cloud storage as separate lines on the monthly invoice.
Those that include everything into one monthly payment usually offer options for the customers for the level of service they receive — tiers. It allows them to offer additional tools and higher quality of service while maintaining their target margin.
The tiers may differ by the SLAs on response and resolution time or by the services included and usually follow the “Good — Better — Best” pattern. One example could be the Silver, Gold and Platinum tiers of one friendly MSP I know. Silver includes basic security software, remote management and incident response within 24 hours. Gold includes backup and additional endpoint security software with a 12-hour response SLA. Platinum includes email security, backup for M365 and a 6-hour response SLA.
Some MSPs may offer local backup only in the lower tiers and cloud backup in addition to the local backup in the higher tiers. Another example is a lower tier including antivirus only and a higher tier including EDR solution.
Services
The core services that most MSPs provide are remote infrastructure management (computers, servers, network), data backup and security. At a fundamental level, MSPs can use free tools to provide services, such as remote desktops for remote access, built-in backup, and antivirus software for backup and security. However, as MSPs scale operations, the basic tools are not enough, and they transition to professional solutions for MSPs, jointly with the expansion of the portfolio of their services.
As MSPs grow their portfolio of services, they offer proactive infrastructure management, driving hardware and software upgrades and advising customers on how to increase their IT productivity. Successful MSPs grow from the “break/fix” shop to the “trusted advisor” when they deliver measurable value to their customers’ businesses.
Business Automation
At any reasonable scale, MSPs need automation for their operations, starting with the basic need to receive and track customer requests in a ticketing system. Tracking requests and the time spent on them allows MSPs to better plan capacity, identify problematic customers and implement solutions that decrease ticket volume. Without a ticketing system, it is next to impossible to understand the performance of employees and the cost of maintenance of each customer.
The other important parts of automation are contract management and billings. While smaller MSPs use Excel spreadsheets or accounting software to calculate monthly bills at any reasonable scale, it becomes hardly manageable and time-consuming. Not to mention that time spent on back-office operations takes away time that could be spent managing customers or selling services to new customers. A good billing solution would track contracts and expiration, time and incidents, and calculate and issue invoices with minimum time spent by the MSP.
The third piece of automation is a Customer Relationship Management (CRM) system to track customer interactions. Having solid customer data helps successful MSPs to upsell additional services or upgrade customers to higher offering tiers, as well as to prevent churn of customers by building stronger relationships and acting as trusted advisors to the business. CRM is also extremely important for recruiting new customers — collecting information on prospects in one place and acting on it promptly is necessary to sign up new customers continuously. An MSP business that cannot recruit customers risks getting shut down, as the existing customers can churn for various reasons.
Conclusions
The managed services model benefits both the customer and MSP. The customer gets reliable and cost-effective IT services. The MSP gets predictable revenue and the opportunity to provide proactive maintenance to increase the reliability of the infrastructure while decreasing their maintenance cost — resulting in a growth in their margin.