Back in October of 2016 I posted a blog called “3 Best Practices to Improve Resource Utilization for IT/Technology Solution Providers”, which included a link to the Promys PSA Labor Utilization Guide. Years later, it’s still one of the most read blogs on the Promys PSA web site.
BUT, the question I started to ask myself was “In a Managed Services world, is resource % billable utilization, now a Bullsh!t statistic?
Back when most channel partners used to roll trucks, service attachment rate and % billable utilization were the holy grail of most technology solution providers and were critical to driving overall company profitability.
But more and more technology solution providers are moving to a Managed Services and Subscription focused models and “break-fix” time and material billing is becoming the exception.
So how exactly do you calculate “billable utilization” when you’re billing monthly for Managed Services or Subscriptions, and then either proactively scheduling preventative maintenance, or responding to customer issues on an ad-hoc basis, but with no billing associated with those hours?
THREE DIFFERENT APPROACH OPTIONS
Approach #1: Recurring Services
So one approach I’d heard discussed was, you could bill the Managed Services or Subscriptions as a bundle of recurring hourly “services” at a flat rate, only showing the flat rate to the customer, but internally tracking “x” quantity of estimated billable labor hours at a particular bill rate. That would solve the problem of being able to compare how many billable hours vs. how many actual hours at the company level, and calculate overall company % billable utilization. But the billable hours would not be attributed to any particular resource (the actual hours would be), so you would not be able to easily calculate individual resource % billable utilization (Bob, Joe, Sue).
From a resource utilization % reporting perspective, you could treat all hours worked by resources on Managed Services or Subscription Contracts as “billable”, but that would not account for when the estimated hours to support the recurring Contract (contract profitability target) are exceeded. For example, if all a particular resource did was work on Managed Services/Subscriptions Contracts for the month, they might show a 100% billable utilization rate which would be fantastic, but the Contract itself might have taken too many hours to support and lost money.
I’d also have some concerns with this approach regarding accounting audit compliance, since most auditors require that Services are only billed as they are delivered and in a Managed Services/Subscription world, most channel partners are billing in advanced of the actual services being delivered.
Approach #2: Recurring Contracts
Another approach would be to bill the Managed Services or Subscription as recurring Contracts. This would solve the accounting audit problem, but this approach still suffers from the same challenge as the Recurring Services approach, in that the Managed Services or Subscription Contract billing revenue is typically attributed to a Managed Services/Subscription Contract profitability tracking account, but not to individual resources.
So the Professional Services team would have all of the hourly costs associated with supporting the Managed Services/Subscription Contracts attributed to them, but none of the correspondng revenue. The recurring Contract approach can provide good visibility into Managed Services/Subscription Contract profitability (recurring Contract revenue minus total hours costs to support the Contract = Contract profitability), but won’t provide very good visibility into individual resource (Bob, Joe, Sue) or company % billable utilization.
IS BILLABLE UTILZATION % NOW A BULLSH!T STATISTIC?
So, back to the original question. Based on those two scenario’s “In a Managed Services World, is Billable Utilization % now a Bullsh!t Statistic?” and should technology solution providers and MSP’s now be focusing on Managed Services/Subscription Contract profitability tracking instead of billable utilization %, as their primary success criteria?
So my perspective is “yes and no”.
Technology solution providers and MSP’s should absolutely be focusing on Managed Services/Subscription Contract profitability tracking as one of their primary success criteria. I’ve heard that some PSA’s use an arbitrary flat rate to calculate hourly resource cost, against the recurring revenue to determine Contract profitability. I’d recommend using the loaded hourly cost per resource (Bob loaded rate $65 hr, Joe loaded rate $60 hr) to calculate Contract profitability instead, in order to track true Contract profitability. Most PSA solutions will also allow you to attribute RMM, remote login and other license costs, or other Contract infrastructure costs to the Managed Services/Subscription Contract, to determine true Contract profitability.
Having said that, I personally would not throw resource billable utilization % out the window just yet, as a key success criteria metric.
Approach #3: Fixed Fee Project equivalent approach to calculating % billable utilization for Managed Services/Subscription Contracts
My recommended approach would be to treat the Managed Services/Subscription Contract the same way you would a Fixed Fee project, with an estimated number of hours required to support the Contract, for the term of the Contract (12 month Contract x 10 estimated hours of Services per month = 120 estimated “billable’ hours to support the 12 month Contact).
I would also suggest taking the recurring Contract billing approach (vs. the recurring Services billing approach) to avoid any accounting audit issues and for % billable resource utilization purposes, I’d treat the hours estimated to support the Managed Services/Subscription Contract as “billable” up until the 120 estimated hours to support the 12 month Contact are consumed. And then to treat any additional hours as “unbillable” for resource utilization billable % calculations, the same way as you would with a Fixed Fee Project.
This approach yields 4 excellent profitability metrics
This approach would provide excellent visibility into 1) Company % billable resource utilization, 2) Individual (Bob, Joe, Sue) % billable resource utilization, as well as provide, 3) Visibility into Contract profitability tracking and 4) The ability to cycle implementation/Contract support lessons learned, back into the quoting process.
Those four metrics are the stats that should help your team run a more profitable Managed Services/Subscription based Line of Business.
For more information about the best approach to tracking billable resource utilization, download the PROMYS Labor Utilization Guide.