Over the next few years the managed services market is forecast to grow at 11%, reaching global sales of around $242.45 billion by 2021 . By offloading the responsibility and hassle of providing their own infrastructure and support to a Managed Services Provider (MSP), companies can get on with developing their businesses, with the majority of IT costs appearing as monthly operating expenses, and at a lower cost than most companies can provide using their own resources. It’s a bit of a no-brainer knowing that your MSP will manage ‘your mess for less”. It’s a great time to be an MSP too – but it’s not without challenges.
The growing market presents economies of scale and resulting cost savings, that can be either used to create a competitive advantage, or banked to the bottom-line. Similarly advances in technology continually present new ways to deliver services so standard services catalogues, that are the bedrock for pricing and quoting, need to be continually reviewed and updated. So throughout what is typically an extended sales process - and hopefully an even longer customer relationship - the underlying costs keep changing. What’s more, given the upfront cost of winning a client and servicing their requirements, means it may be some time before they break even.
Because of this, the performance measures and financial accounting needed in a managed services business are far more complex than in either a typical technology business or a professional services provider. Below are three recommendations to help get better visibility into the process, and to develop a shared understanding of what is involved in creating a profitable customer.
Embed finance skills in your bid team
Having a few savvy management accountants on your bid team will help alleviate major headaches and heartache. They will be on hand to help their commercial peers better understand the financial implications of the decision they make in preparing bids and quotations.
Ensure everyone knows how revenue is recognised
Since January 2018 any company that files under Generally Accepted Accounting Principles must recognise the revenue of managed services over the duration of the contract, even if the contract is paid in full, up front, at the time the deal is closed. As a result, in any period the commercial activity, profit and loss account and balance sheet can look distinctly out of step, and give a false picture of the real health of the company. Building an awareness of this external reporting requirement, helps those involved in customer facing roles appreciate why other performance measures such as revenue growth, customer churn and gross margin contribution are much better indicators of financial performance in the short-term. Focus on these and profitability will follow.
Move away from spreadsheets - throughout the company
Spreadsheets are hardly a suitable solution to support a business-critical processes, such as revenue recognition, that external auditors will want to scrutinise. But neither are they appropriate tools for managing contract negotiation, where service levels and quotations are set in stone.
This is because the planning assumptions built into bids are based on specific service level agreements, project scope and cost estimates that are constantly in flux. While they are undoubtedly good personal productivity tools, there are undoubtedly risks in using spreadsheets for enterprise-level processes, where critical assumptions such as future service costs need to be centrally controlled, and where data needs to be shared between users. In addition, spreadsheets lack enterprise-level security, are difficult to audit and frequently contain hidden errors. But there is an alternative.
The Anaplan Planning platform provides users with secure access to a single source of data, robust and easy-to-use modelling methodologies, transparent planning assumption and fast assessment of cost and profitability of alternative bids. Ultimately this allows your commercial teams to:
- Quickly and accurately price multiple service level agreements, using centrally controlled assumptions about current and future service costs.
- Respond quickly to changes during contract negotiation.
- Win contracts that will be profitable throughout their lifetime.
[1] http://www.marketsandmarkets.com/PressReleases/managed-services.asp
To learn more about using Anaplan in managed services join our event in London on 4th December, 10am – 1pm. View the agenda and register .
Meanwhile if you would like to talk to one of our team call +44 (0) 1158 943 983 or e-mail info@profitand.com.
