Today managed service providers (MSPs) find themselves in something of a pricing fix, jostled by a disorienting array of scope creep, discrepant documentation, inconsistent billing, and contracts that can diverge widely from one customer to the next. The result is a confusing financial blizzard that can leave providers struggling to keep track of profits and cash flow, in turn threatening to put serious pressure on their bottom line.
When you consider that badly managed contracts alone can cost a business up to 9% of annual income, you begin to understand how problematic things can get. For smaller MSPs that rely on incoming cash flow to sustain the business, inconsistent billing can be a disaster waiting to happen. Beyond the constant looming liquidity crisis, billing errors threaten to seriously sour the customer experience, potentially pushing clients into the arms of a competitor.
For any MSP that hopes to ride this financial tempest successfully, navigating the following considerations regarding billing accuracy can be crucial to long term viability and success.
Growing Billing Model Complexity Brings Benefits and Challenges
In today’s managed service ecosystem there is increasing demand for a complex array of offerings -- including the likes of Hardware as a Service (HaaS) and Infrastructure as a Service (IaaS) -- and MSPs can have a tough time keeping their billing in check.
A number of billing types can be found in the services industry, with each carrying its own advantages or drawbacks. The two most common types are arrears billing and advance billing, but others include time and materials (T&M) billing, pass-through billing, and rebate billing.
In order to better understand billing accuracy’s importance, it’s beneficial to examine the different types of billing, their benefits and their drawbacks:
Essentially arrears billing means that the client pays after delivery of a service, allowing a provider to accurately charge for all services rendered. However, delays or prolonged payment periods attached to this billing type can put a serious pinch on smaller MSPs, quickly giving rise to cash flow and liquidity problems that can severely affect business.
As the most common alternative to arrears billing, advance billing sees the client pay for services up front. While that doesn’t carry the same problems with regard to cash flow -- in fact, quite the opposite, with advance payments providing liquidity that can be quickly converted into growth -- it does create the potential for downstream billing implications. Consider if the client is not completely satisfied with a service or a project creeps beyond the original billing parameters, the provider can face the prospect of having to cough up a refund that has already been reinvested, or engage in a protracted cash chase that may end in them having to eat the cost of additional services rendered.
T&M billing effectively means setting an hourly rate for a project and then adding the cost of materials to the total price. This is a particularly effective approach to tackling a project with loosely defined parameters, or for which the scope is not clear, guaranteeing that the provider is not left out of pocket, as can happen with a fixed-price contract.
However, it can also be hard to come to an agreement, not only because of differences in opinions regarding the value of a provider's time, but also because the client may fear spiralling costs under such an open-ended arrangement and be reluctant to commit.
Pass-through billing essentially means that the cost of a particular service is passed on directly to the customer, as part of a service package. This will often relate to the inclusion of enticing add-ons and may sometimes involve a third-party taking responsibility for that particular service. For the provider this can carry the major advantage of allowing them to offer a range of services that goes far beyond what they are capable of offering in-house, therefore allowing them to take on larger or more complex projects than they may have otherwise.
But it carries a level of risk, because if the third-party’s costs rise, or their relationship with the provider breaks down in some way, it can be extremely difficult to communicate this with the client without diminishing their confidence or damaging a relationship that may have taken a long time to build up. Even when things run smoothly or without the involvement of a third-party, this type of billing is particularly complex, and complexity carries risk, with the likes of budget forecasting difficulties threatening to severely dent a provider’s margins.
Also known as commission billing, rebate billing generally relates to packages that include software as a service (SaaS), and involves the provider crediting the IT service provider with a commission. That can be ideal for forging loyalty with the IT service provider.
However, it can end up proving costly to the provider, because it can also eat into profits at inopportune moments later on, as well as complicate future planning based on available cash flow, depending how the rebate arrangement is structured.
Before diving further into billing accuracy, it’s important for MSPs to recognize that, in some cases, problems surrounding billing are actually planning issues. For example, in the case of advanced billing, downstream difficulties created by unexpected rebates can be avoided through sounder planning of revenue reinvestment.
Regardless of the nature of the billing issue at hand, one of the biggest problems it causes MSPs is diminished growth.
Billing Accuracy Can Impact MSP Growth
For those MSPs whose growth model revolves around regular cash flow, or who simply need consistent income to be able to keep going, inaccurate billing can cause serious problems. Because in the absence of accurate and reliable billing, major disruptions to expected liquidity can scupper reinvestment plans, and in extreme cases put operations at risk.
According to one cloud-management provider, many of its clients see revenue leakage that reaches 5%. While that is significantly lower than the 9% figure associated with badly managed contracts, it still means that for every $1 million in annual revenue, $50,000 is being bled away. The impact is compounded when accounting for already thin operating margins.
For our part, we have worked with large ecosystem vendors who report revenue leakage amount to over $1 billion per year to billing inaccuracies. These are avoidable losses that could be pumped back into growing the business.
Accurate Billing is Critical to Customer Experience
Just as inaccurate billing can severely diminish customer satisfaction, an MSP can evoke satisfaction and certainty in their customer base simply by getting it right. Because when a client knows that there will be no hidden expenses to worry about, they are able to enter agreements with confidence, and are all the more likely to come back.
Providers who manage to promote positive user experience and bolster customer engagement have been shown to have more success generating uptake of electronic payments (e-payments) and adoption of self-service options.
One director we work with -- who runs an MSP with 12 staff members -- has reported that reconciling billing issues costs him a full eight hours at the end of each month. He says that the matter is so critical to maintaining the firm’s good standing with customers that he has considered hiring additional staff purely to manage the issue. For larger scale MSP businesses with over 100 customers and 1,000 endpoints managed, it’s nearly impossible to scale without adding operational headcount.
Accurate Billing Offers Rich and Accurate Data
When an MSP consistently gets its billing right, that can be a valuable source of data around which to base future plans and strategy. Because generating reliable stats on the likes of “cost per customer” and “cost per employee” lets the business understand exactly how much goes into individual services and projects, allowing for robust and accurate costing of future jobs that protect your bottom line.
When you understand how much you spend on an average customer, it allows you to identify customers that are costing too much, in turn offering the opportunity to either upgrade service agreements, or end a relationship should those costs reach the point where they outweigh the client’s value.
If you gather data in a fragmented way, and have it spread across a variety of platforms and tools, you will struggle to build broad and insightful data-driven perspectives, which can in turn lead to lost opportunities, unchecked inefficiencies, and revenue leakage that undermines your profitability.
How MSPs Can Better Attain Billing Accuracy
In the highly competitive managed services space, identifying and eliminating financial inefficiencies is crucial to both protecting your bottom line, and being able to provide competitive prices to potential clients. While problematic billing often isn’t understood to be a serious problem among MSPs, as this article has highlighted, it can have extremely detrimental effects on operations and for smaller providers represents a major risk that is avoidable through robust planning.
Key to establishing a robust and efficient billing regime within your organization is understanding the advantages and drawbacks of different types of billing, and implementing that which best suits your needs.
Accurate and reliable billing is not only crucial to promoting growth and retaining loyal customers, but also key to an organization’s efforts to be able to generate and use reliable data to inform future strategy. In a world in which rich data is increasingly important to business planning, MSPs that fail to capitalize on this opportunity are in danger of being left behind.
For MSPs who believe they could benefit from improving their billing regime, a number of professional service automation (PSA) tools can be extremely useful. The likes of PSAs that automate billing or allow for flexible contract modeling, and especially those that track data regarding income and costs in order to build a clearer picture of profitability associated with individual contracts will be crucial tools in the future.
For MSPs who want to mitigate the 9% of total revenue leakage, adopting such tools sooner rather than later will pay dividends down the road.