Have you achieved the Holy Grail of MSPs? Are you acting as your customers’ virtual CIO; a trusted adviser, driving discussions at a strategic level with senior business executives to identify how the latest technology and services can help them to achieve their business goals?
If so, are you making any money out of it? Because what may have started out as a helpful chat can, over time, morph into free consultancy, with the expectation that just because your role is ‘virtual’ your fees should be too.
In this the third in our ‘Hidden Cost’ series, we look at how much being a vCIO could be costing you – and also how you can make it easier to move to a chargeable vCIO service.
But first, why is there an expectation that IT advice comes free of charge?
One view is that MSPs who have transitioned from selling high-value systems/hardware were accustomed to ‘bundling in’ advice. Customers familiar with this model may resist having to start to pay for what they previously got free of charge.
With the focus now much more on supplying services rather than shifting products, the margins simply aren’t generous enough to absorb free consultancy – particularly if it is distracting you from billable projects.
How much could acting as unofficial vCIO be costing you?
Customers value face-to-face meetings with providers, and they’re good for your business too as they give you the opportunity to show off your expertise and strengthen the ongoing relationship. Many SMBs need access to technology experts who can take a strategic view of their business and help them to create the best IT solution to meet their needs.
But do you know what it could be costing you to act as unpaid vCIO? And how do you begin to charge them for this?
The cost of free advice
Denes Purnhauser, CEO of ReframeYourClients, puts forward the following simple calculation to help you put a figure on it.
His aim is to work out the potential lost revenue opportunity when you don’t charge your customers for advice – and ‘advice’ can range from casually chatting about their plans to putting together project proposals:
Cost of free advice = [number of clients] x [average free advice/hours per month] x [hourly rate]
Example: MSP with 20 contracts spending 1 hour per account each month at an hourly rate of $200 amounts to $48,000 every year
And it’s not just the cost of the face time you spend with customers in providing advice. There is the additional cost of preparing for these meetings: the production of quarterly business reviews, creation of documents, planning, project/vendor management, and so on. Purnhauser points out that these tasks are often performed “inefficiently”, without processes, templates or even an automation tool, to keep the costs down.
Finally, if you are not offering chargeable vCIO services, there is a very real revenue stream that you could be missing out on.
Purnhauser suggests that customers with more than 20 seats are open for vCIO services. If the starting service fee is not more than 20% of what they’re currently paying for the managed services, he concludes that this is “an easy sell”.
Opportunity cost = [MSP contracts with 20+ seats] x 1.2 x [upsell effectivity]
Example: MSP has 10 contracts with more than 20 seats. The average monthly recurring revenue (MRR) is $3500. In the next year 7 of them will be transferred to a new vCIO offering, which will generate $4900 additional MRR for the seven clients, or $58,000 new revenue per year.
Time is money and applying this kind of calculation to your own business could show just how much giving ‘free advice’ is costing your business.
Moving to a chargeable vCIO service is not always straightforward, but here are four things to bear in mind that could ease the transition. These are extracted from a blog by Purnhauser :
1. Avoid bundling MSP and vCIO contracts together
They are totally different types of services, delivered by different resources, with a different focus.
When you price managed services, there is normally an automatic mechanism to scale up service charges in line with an increase in number of users, devices or locations. That makes sense to your customers.
But you can’t ‘scale up’ your vCIO charges in the same way. These would tend to increase to reflect an additional complexity in your brief or changes in the customer’s organisation. If you try to add in a notional additional fee to your user-based price to cover vCIO charges, you risk the end figure being so high that your customer won’t buy – or so low that you can’t cover your costs.
And the delivery of vCIO services normally uses your most expensive resources – probably you! If you bundle your hourly charge into the managed services contract you again risk being overpriced compared to your competitors for customers who don’t delve too deeply into the ‘extras’ they are getting with you.
Virtual CIO services need to be identified and priced separately.
2. Focus on the right customers
Virtual CIO services are particularly relevant to SMBs who could not afford to retain a CIO in-house, ideally those with 50-150 staff. Below this and you are likely to encounter a lack of budget and lack of interest.
3. Make sure you are dealing with the appropriate counterparts
The vCIO should be dealing with ‘C’ level executives – the CEO ideally. Conversations should focus initially on their business strategies and concerns, with technology services following as an enabler of these. In other words, your relationships with them should not be focused on technology roadmaps or IT-related issues – as vCIO you need to be talking about their business, processes and financials.
4. Be sure you have the resources/budget to deliver
Virtual CIO services are resource-intensive and require your most expensive people. If offering them means your existing managed services business will suffer – or you risk not delivering on the vCIO promise, then it is probably best to avoid it for the present.
You don’t become a vCIO overnight. You need an in-depth understanding of your customer’s business firsts. Gaining this level of understanding often requires a ‘process of discovery’ to spot opportunities to add value and to help them to achieve strategic business goals. It takes time, but is necessary to understand the business context and engage senior management. And some of this time will have to be given on a speculative basis – just be sure that customers don’t expect this to be the norm moving forwards.
Partnering to free up your time for vCIO services
This might be a good time to partner for some of the more routine managed services such as NOC and Service Desk – to free up your own time to plan and deliver virtual CIO services. We can help.