MSPs: Time to Collect Unpaid Invoices
If you believe the hype, managed services are recession proof. But here’s a confession: I don’t believe the hype. I’m hearing from more and more managed service providers (MSPs) that have stacks of unpaid invoices from customers. No doubt, those unpaid invoices hurt MSP cash flow, R&D and business planning. Here are some anecdotes I’ve heard from readers, plus some potential solutions to the unpaid invoice challenge.
The spark for this blog entry occurred during dinner with an MSP software executive a few days ago. The executive shared with me the following list of concerns:
- More and more small businesses aren’t paying their monthly service fees to MSPs.
- The MSPs, in turn, are late paying for SaaS services from the MSP software provider.
- The SaaS provider is working hard to offer extended payment options to the MSPs — but the MSPs aren’t holding up their end of the bargain because they don’t know how to “collect” from their end-customers.
Three MSPs (one in California, one in Texas, one in North Carolina) tell me the unpaid invoice issue has grown from a minor annoyance into a major cash flow problem since around May 2009.
It’s a vicious cycle, proving that MSPs and their software providers will ultimately sink or swim together. In extreme cases, SaaS providers are turning off their services to selected, unresponsive MSPs that show no signs of paying their bills.
Money Management
My central questions:
- Who within your company is responsible for ensuring customers pay their invoices on time?
- And is that same person up to the task of collecting unpaid, overdue invoices?
The web is filled with guidance on this issue. As GriswoldLAW points out:
“The longer this delinquent debt sits, the harder it is to collect.”
And this debt-collection advice, offered by MoreBusiness.com during the dot-com implosion, certainly remains time.
Recession Proof? Not Quite
Generally speaking, MSPs continue to weather the economic storm better than traditional break-fix folks. But this “myth” that MSPs are recession proof and riding high during the recession has to end.
As CNNMoney pointed out in February 2009:
A new analysis of Small Business Administration-backed loans found that the failure rate has hit the double digits, with 11.9% of the SBA’s loans last year going into default.
Are your small business customers struggling with debt and therefore failing to pay your invoices? Is it time to cut them loose? Or can you find a way to have them pay up and keep them on your customer list?
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I’d be interested if this particular issue is slightly taking the pricing pressure off some MSP’s who have to factor in those unpaid invoices, or at least taking the reseller pricing pressure off of SaaS services. As MSP’s I’m sure we’ve all had at least one of our clients shut their doors in the past year and lost ‘recession-proof’ revenue and had to make it up elsewhere.
I think it was a mistake to ever think MSPs were recession-proof. Recession “resistant” might be better – but only for true MSPs genuinely developing relationships with their clients.
We’ve worked hard over the last year to actively help our clients reduce costs and minimize their liability with aging hardware. I believe this has helped strengthen our partnerships with clients. And, of course, strong relationships help in getting paid on time. We haven’t been immune to the late payments, but when clients feel you are working in their best interest, they tend to put you higher on their list.
We have had a far worse time working with our vendors – whether it’s having to wait for a refund for months or their help desk staffs being reduced to the point where it affects our customers. We are having to really re-evaluate some of the companies we work with.
John: I’ll poke around Breakaway to see what MSPs are saying about potential easing of price pressures.
Rebecca: You raise an important point. Build close relationships and your clients out you higher on their list as they prioritize which bills to pay first.
This topic is near and dear to my heart as we have recently focused a fair amount of time and energy collecting some MSP dollars that aged over 90 days. I agree with Rebecca’s comment that the majority of clients are good payers that value MSP services, but that does not keep good clients from struggling in this economy.
Let me share some steps we did to bring these accounts up to date.
1. Do what your contract states- Our agreements include a quarterly review; we used this as an opportunity to learn about how the economy is affecting our MSP client’s individual businesses. We also used this as a great opportunity to address outstanding receivables with the client in person.
In most cases this single effort got us paid immediately and strengthened our client relationship.
2. Tighten your terms- We moved all new agreements and renewals from Net 30 to Net 15 allowing us to accelerate the collections process.
3. Create or revisit your collections process and stick to it- We learned from many of our clients that the “squeaky wheel gets the grease”. If you are not reminding them of outstanding balances, they may not feel the pressure to pay.
Our clients shared that carriers and other suppliers are starting to make calls if companies are a day late on terms accounts, so those have become priority pay accounts. You are not out of line to ask for your money as well. Become a priority pay account (although I recommend some grace period for your better relationships).
4. Your firm is not a bank- It is okay to remind a client that you are no different than they are, cash flow is king! Share that as much as you might like to, you cannot provide what amounts to a 0% interest loan.
5. Look for trends- If a client repeatedly falls behind on payments and forces you to have to take steps beyond the norm to get paid it might be time to evaluate the relationship. The time spent collecting money that already should be in your pocket keeps you away from landing new clients.
6. If you are getting nowhere, hire a professional- If you have clients that have reach the over 90 status, it might be time to engage a formal collections company. The older the receivable becomes the less likely it is to be collected, it may be worth engaging a pro and letting them take a piece of the pie once the money is collected.
Remember a customer is a company that pays, anything else is charity. An MSP should truly be a partner with their clients, and good clients recognize that and view your payment as their part in insuring your success!
Brian Doyle
http://www.fandotech.com
We’ve been pretty lucky in that we’ve only had three clients who have encountered difficulties, and all three were in touch with us before the problems began to impact all of us. We worked out a modified payment schedule, so they could go easy while times are challenging, and we can cover our basic costs of providing services to them.
Still, I have to imagine that there are no shortage of companies who, like many consumers, bury their heads in the sand and cause real problems for themselves and suppliers alike. Keeping a tight leash on receiveables, and being proactive when it becomes obvious that a client is having difficulties will really go a long way towards getting paid and further cementing client trust and loyalty..
I think the one thing in the MSP model that helps with problem clients and cash flow issues is that well run MSP should be in regular contact with their clients, not just waiting and cashing the checks nor waiting for something to break like in the break/fix model.
This increased level of interaction with the clients is really advantageous when things get tough as plans can be made and surprises can be limited.
Stu
We’ve signed up for the Final Reminder program from Transworld System. This is a 54-day program whereby a series of demand letters are sent to the debtors, controlled by you as to when to stop or pause the program, or push into the collection phase. Transworld Systems indicates because of the professionalism of this program that debtors take the potentiality of marks on their credit as a reason to pay that invoice. Upon receiving the funds, you suspend the demand phase series of letters and a thank you for payment goes out. Check it out: http://transworldsystems.com/services/final_reminder.asp