Break-Fix Customers: Keep Them or Dump Them?
Normally, I like to keep my blogs to advice and tips on how to market and sell managed services. This month, I am going in a different direction. I want to ask you a question that I am unsettled on. I want to hear your opinion and get your thoughts on this. After making the switch to a managed services business model, what do you do with customers who refuse to give up your break-fix services?
Do you fire them or keep them on as break-fix clients. A lot of my Virtual Administrator partners ask this question, and I honestly don’t know what the correct answer is. I understand and get both arguments. My conundrum is that they both have valid points.
Here is my take on both sides.
Keep Them
Three arguments for keeping them on as a break-fix client:
- The economy is tough. It makes no sense firing long-time paying break-fix clients in favor of new unproven managed services ones.
- When the economy improves, the break-fix clients are likely to switch to managed services anyway. Let’s keep them on and hope to convert them down the road.
- Keeping your break fix clients on will help pay the bills while building your managed services business.
Dump Them
Three arguments for cutting them:
- Break-fix clients always nickel and dime you to death. They argue every bill you send them, so why keep them around and waste the effort.
- Your managed services business model becomes cloudy and difficult to build when you are offering both break-fix and managed services simultaneously. Having clarity and a single mindedness with your business model makes building a business easier.
- Doing work for break-fix clients will detract from the attention you should give your better paying manages services clients. Trying to balance both can be difficult, and you should focus your efforts on the long term managed services business.
My Take
If I were starting a managed services practice from scratch, I would focus my 100% effort on acquiring just managed services clients. No break-fix customers for me. I think it makes your business easier to build when you have a single minded focus. If owned an existing break-fix business making the change to managed services, I would think long and hard about firing my break-fix clients. I would enact a plan to slowly wean my business off of them until I had adequate managed services clients to pay the bills.
So what do you think is the right answer?
Paul Barnett is marketing director for VirtualAdministrator, which offers hosted solutions for managed service providers. Read all of Paul’s guest blogs here. Guest blog entries such as this one are contributed on a monthly basis as part of MSPmentor’s 2010 Platinum sponsorship.
Great question but the real question is this: What Client mix is going to deliver you a recurring revenue stream at the highest possible margin AND delivers the best value for the Client.
We have hundreds of Clients; some just use our hosting services, some just our hourly services, and the majority are on multi-year all encompassing contracts.
Each type of Client has a different margin, and contribution to our business. Focusing exclusively on managed service (i.e. recurring revenue) contracts certainly makes sense but beware the staffing pitfalls of that. You will need to staff for the peaks in requests and having some break-fix work will make the valleys less un-profitable. Our Clients expect our Service Desk to have limited wait time on the phone and onsite responsivness within 1 hour. No way to understaff and still deliver on those commitments.
The break-fix model is broken for sure, BUT if you ensure all time is pre-paid and explain that this is a best-effort service level it can be a great addition to your revenue streams and those Clients are typically happy with the arrangement. And hey, if they come to you wanting a fixed price arrangement, put them on a managed services contract!
Edward Stringfellow
CEO/President
http://www.stringfellow.com
Dega Systems like I’m sure a lot of other companies reading this have great examples of clients that were once break-fix are now great Managed Service Clients. Lots of Start-Ups that can only afford break fix now could be your best client in 3 years time or less.
We look at prospective clients like many Venture Capitalists look at their investments. The key indicator we look for is GROWTH. Ask prospective clients – what their future plans are. A company can be just two guys with sub-leased space – but if they’re telling you they plan on creating a huge company and you see them with the real drive to make that happen – take them on and decide how long you’re willing to wait for them to grow into your ideal client – 18,24,36 months. If after that time there’s no growth and they’re nowhere near being an ideal client – think about letting them go.
We’re also on the lookout for companies that have remained the same size in revenues and head count for the last 3+ years – if they’ve remained the same for that long – make sure the way they are now is acceptable to you – because chances are in 3 years they’ll look the same.
Our approach is to keep a portfolio of some break-fix clients – along with our managed services clients – they can be high risk – but can also be high return – the main thing is to decide on how many you want to take on at once and cap it at that.
I guess I’m lucky. I don’t have any problems with my break-fix clients they call me up when they have a problem and I fix it bill them and get paid quickly. Its my whole business right now but I am working on adding manged services, among other things, then it will be an extra infusion of cash into my business every now and then. So for me I don’t see myself every dropping them as clients if I bring managed services on-board and they choose to stay as break-fix clients which given their small size they likely will.
The answer Paul is that it depends.
– If you have a good base of managed services clients you will start to look at those break-fix clients and ask questions about their profitability. Am I really making good margin on that revenue or could I be better off focusing my resources on the clients that pay me every month?
– If you don’t have a good base of managed services clients you tend to look at any revenue as good revenue. You do still have to pay your bills.
It took us years to transition out all of our break fix clients in favor of clients on a managed services agreement. Sometimes we converted them and other times we parted ways. We didn’t do it all at once and I tell my members to choose their revenue based on where they are in their business.
We did, however, do about 20-25% per agreement dollar in Tamp;M or Project services for our Managed Services clients.
Cheers,
Bob Penland
CTO
TruMethods
http://www.trumethods.com
If you have a ton of deal flow and a solid sales process for closing managed services deals, then this is great advice, BUT the majority of companies out there may need to build relationships and then upsell to managed services. One of our customers recently did a test where they GAVE AWAY monitoring only to companies that were not interested during the 1st sales attempt in signing a managed services deal. Within 6 months, 57% of those customers had converted to a managed services deal when approached by our client a 2nd (or 3rd) time. Sometimes the sale doesn’t happen right away for everyone. Every IT business owner is not a great salesperson, so sometimes it’s better to let them become a customer amp; have a process for converting them in the medium or long term.
Great topic for conversation!
Jeff Johnson
Technology Marketing Toolkit, Inc.
Ivory tower point of view: dump ’em
Feet on the street point of view: keep ’em
We’ve kept our break-fix clients that didn’t move over, but new engagements always start with at least our base MSP plan.
-Chris Chase
http://www.directive.com
Remember that your break fix clients can also be a good source of referrals. Their direct revenue is only half the story.
It comes down to ROI. In theory, there is no such thing as bad revenue. But there is a cost to that revenue, and some of those are opportunity costs — what else could you be doing?
The key question is what would you be doing with your resources if you weren’t doing break/fix?
— Could you make your NOC more efficient?
— Could your increase your Managed Services pipeline?
— Could you increase your customer satisfaction with your Managed Services products?
— Could you refine or expand your Managed Services portfolio?
— Could you avoid backfilling someone who leaves the company?
These are just a few examples, but compare the return on what else you could do with those resources and compare it to the net profit contribution you achieve from Break/Fix. That should tell you which way to go.
– Michael Halperin
Michael,
Your points expand on my concerns about retaining break-fix clients. When you keep them, it muddies the waters of your managed services business model.
The entire point of doing managed services is to build a predictable revenue stream and therefore build a predictable rate of growth. If you support X amount of machines, you need Y resources to support them. It makes the business easier to scale. You don’t have that with break-fix.
Still, I’m torn. For existing break-fix shops making the change to managed services, it’s painful to turn away paying clients, especially in this economy.
Paul Barnett
Marketing Director
Virtual Administrator
There comes a certain point on the scale to where if you’re running a successful MSP with legacy break-fix clients that your operating expenses are covered by Managed Services revenue. That’s a break through for any MSP (and often the major first goal). At that point it becomes a hard decision whether or not to keep the unpredictable revenue of break-fix clients.
What we’ve done at CSP has been a smart decision in my mind. For daily engineering (non-project work), we have carved our engineering into two different departments, what we call “Managed Services” (MSP) and “Sustained Engineering” (Break-Fix). They work autonomously of each other, run their own Pamp;L, and share resources if in need.
In the beginning there was a lot of resource sharing between the two groups, which was quite a battle. As the MSP practice grew, we slowly migrated resources from the break-fix group into the MS group, all the while managing the true Pamp;L accordingly. Note: Managed Services Engineers work only on MS clients. Break-Fix engineers work only on non-MS clients.
We keep our legacy clients for many reasons, but in particular for the following:
1.) They are generally very good customers with a long history of partnership with our company. They treat us right, and we do the same.
2.) After covering your operating costs with MS revenue, the rest of break-fix revenue is over and above that.
3.) Break-fix clients give great recommendations to new MS clients. They have a long history with us. The revenue they generate doesn’t always explain their true worth to our company.
4.) “Someday they might” transition to a MS plan. That’s great. If they don’t that’s alright too. They are valuable to us.
5.) They understand our business, our processes and staff. They are efficient and understanding. The overhead of educating new clients can be just as “burdensome” as having a break-fix client.
I once heard from one of my great friends that there was no such thing as a lateral move in the job market. Even if you took a lateral move into a different company, it really wasn’t one. You were expanding your network of people by another branch on the tree. Doing business with our legacy break-fix customers is the same in my mind. Sure, at the end of the day the predictable margins may not be as great as managed services, but you’re not chopping down your own tree.
– John Kilgore
Do both and keep the revenue. Leverage a Master ISMO who will manage the break fix on your behalf, in your name. All you do collect the invoice.
A Master Independent Service Maintenance Organization will log the call, diagnose and dispatch field techs who operate on behalf of the VAR or MSP. To find one go to http://www.goismo.com.
For new customers, all we do is sell and market managed services, just our top line offering that is all you can eat for a fixed monthly fee. I don’t even talk to break fix, or partial fixed fee when I am in the first couple of sales calls. Partial only comes up if it makes sense for me and the client (as in I can bill enough to make it worth our time).
I’m curious, has anyone been successful (more than once or twice) in changing clients from a lesser level of service (break/fix or partial fixed fee) to full fixed fee support and management?
I’ve been exploring dedicating a break fix group to just address those issues. In our area the quality break fix choices are severely limited.
Moving your customers away from a break fix model to a managed services one makes sense in the long run both for you and them.
Living with both Break/Fix and Contract Customers
http://www.youtube.com/watch?v=Z6MK95mWkyA
I find that for most of our clients the break-fix customers become disruptive to their ability to predictably manage their MSP and implementation businesses. Once they reach the cross over point where their expenses are covered by their MSP revenues, we recommend that they push hard to convert the remaining break-fix customers to the MSP model and to transition any customers refusing to convert to a friendly local VAR.
Mitchell,
We’re seeing a few MSPs take that strategy to the next level. ETG, for one, only takes managed services engagements in the healthcare market. I believe any non-healthcare other leads are directed to peer VARs and resellers.
-jp