Certain types of service organizations are prone to feast-or-famine cycles, scalability issues and client loyalty challenges. This might be CPA firms who are overwhelmed in tax season. It might be technology consulting firms who see a deluge of demand when a major manufacturer revs their products. This might be management consulting firms who realize tremendous demand when government regulations change.
No matter what type of firm, the challenge remains the same. At certain times their hands are empty and other times they can’t handle all of the work. Usually these firms share a common approach: project-based deals have a start, a delivery cycle and a finish. When the project is done, the team members who served the client are costing you money even though you may not have billable projects for them.
In this article, I want to build the business case for why firms who face these conditions should adopt managed services. Managed services, unlike project-based services, are usually based on year-round contracts with clients who share a long-term perspective with the service provider. Here are ten reasons you should adopt managed services.
TEN REASONS TO ADOPT MANAGED SERVICES
I want to be clear that managed services are not right for every type of service provider. For instance, litigation is an inherently project-driven engagement. It should have a beginning, middle and end. But I’ve discovered that many service organizations with greater than 50% project work can greatly benefit from managed services.
We’ve helped these types of firms reduce the inherently up-and-down nature of projects into predictable revenue streams. This gives firm leaders greater peace of mind and the ability to plan for the future.
When I use the term managed services, I mean services that you provide to a client on a regular basis, usually monthly. Often the billings for managed services are also monthly or quarterly at most. But the most important part of the arrangement is the long-term client contract, which usually has a term of at least 12 months, if not more.
These types of business relationships typically take longer to form than project-based work. Managed services also often begin with a small or trial project. But the effort is worth the payoff. Here are my top-ten reasons for adopting this model.
- Managed Services offer higher perceived-value to clients
- Managed Services improve your profits
- Managed Services break feast-or-famine cycles
- Managed Services greatly enhance client loyalty
- Managed Services give you insights into complex problems
- Managed Services provide the opportunity to be seen as the de facto expert
- Managed Services give you the runway to nurture young talent
- Managed Services enhance operational predictability
- Managed Services are more scalable than project-based services
- Managed Services allow you to take control of your future
Let’s explore these a bit.
MANAGED SERVICES GIVE FIRM LEADERS GREATER PEACE OF MIND AND THE ABILITY TO PLAN FOR THE FUTURE.
MANAGED SERVICES OFFER HIGHER PERCEIVED VALUE TO CLIENTS
Many service organizations base pricing on their fixed costs – usually the billable hour. If this describes your firm, I believe you have a tremendous opportunity to transition away from the billable hour to a value-based model. In these models, clients pay you to achieve a specific outcome and the number of hours it takes you to achieve that outcome is your concern. Clients never get a bill for hours worked.
Rob Bernshteyn makes a great case for this in his book Value As A Service. If you have not yet read this book, I highly recommend it. Of the value-based models available today, I believe managed services represents the best-of-the-best. Here’s why.
After comparing the invoice statements and presenting need-for-services from dozens of professional service firms across thousands of engagements, I came to a startling realization. More than 75% of project-based engagements had a follow-on need that was handled via an additional invoice or set of invoices – and these were not anticipated by the client, even though they were necessary to achieving the desired outcomes.
These invoices eroded client satisfaction and perceived value. About 80% of the time, that additional need could have, and in my opinion, should have been recognized and forecasted by the service provider. But that didn’t happen. Here are some specific examples:
- A CPA firm handles tax preparation for an entrepreneur who gets beat up on taxes but does not provide the tax consulting services to ensure the entrepreneur doesn’t get beat up again next year.
- A law firm handles a wrongful termination lawsuit for a corporation but does not provide consulting services and policy oversight to ensure the company does not repeat past mistakes.
- An IT consulting firm integrates a new server and enterprise software application for a client but does not provide enterprise-wide training and support for the company’s user-base.
Let’s look at how these projects could be handled via managed services to produce better outcomes for the clients.
- A CPA firm handles tax prep for an entrepreneur who gets beat up on taxes. The CPA firm puts the entrepreneur on a managed service plan to optimize after-tax income and investments. The entrepreneur’s tax bill the next year is 73% lower.
- A law firm successfully resolves a wrongful termination lawsuit for a corporation. The law firm puts a managed services plan in place to develop policies and procedures and train executives in best-practices. The corporation’s legal spend on wrongful termination suits drops by 86%.
- An IT consulting firm integrates a new server and enterprise software application for a client. They put a managed services plan in place to maintain the application and train current and future users. The client realizes a 20% increase in worker productivity.
When you compare these scenarios, it’s pretty clear who received value and who received an acceptably executed project. An entrepreneur can get their taxes done or get their tax bill reduced by 73%. A law firm can defend a client or keep them out of court in the first place. An IT firm can integrate new technology or impact productivity by 20%. Which of these outcomes produce more value for the client?
I have seen it time and time again. Managed services provide greater impact and better outcomes than project-based services because they address current and future needs and avoid surprise invoices.
MANAGED SERVICES IMPROVE YOUR PROFITS
You should adopt managed services because they improve your profits, often by 20% or more. I won’t go into specific details here about how to operationalize managed services programs. But in every client where we’ve seen managed services implemented successfully, profits have improved and by a wide margin compared to project-based services.
One major reasons for this is because managed services usually allow you to bill for services that you would otherwise give away as a value-add. Project-based services usually have time constraints. In my experience, clients try to get more work than is prescribed in the agreement, especially as the engagement is drawing to a close.
But with managed services, things tend to even out. Let me give you a specific example. Let’s assume you have a managed service agreement with a client that is based on 10 hours a month. I’m not suggesting that you sold it as a 10-hour per month agreement. I’m stating that your projections were that it would take your firm 10 hours a month to deliver the service.
If that client absorbs 15 hours month one, 10 hours month two, but only 3 hours month three, you are 2 hours ahead of the game for that quarter. It took 28 hours to deliver service for that quarter instead of 30. This pattern is pretty common with managed services.
By comparison, many project-based services go well past projected hours needed, often by as much as 50%. Why does this happen? Often, it’s because the client is trying to get the greatest value possible before the service provider disappears. The client is afraid that they’ll be left high and dry.
A funny thing happens when the client knows the service provider will be around next month and the month after. They ease up. They tend to be less demanding. They say things like – we can address that next month. They go back to focusing on their job instead of trying to squeeze every last penny out of an engagement about to end.
MANAGED SERVICES BREAK FEAST-OR-FAMINE CYCLES
Managed services, being month-to-month in nature, usually break feast or famine cycles. They even out your revenue and give you breathing room to take a long-term view. That is not to say that project work needs to completely go away.
Most of my clients want to see enough managed services revenue to completely fund their operational expense and produce solid profits. This puts them in the best position to pick and choose the project-based work that offers the best profits with preferred clients. This means you don’t have to take ugly deals just to ensure you avoid a bad quarter. Nice!
MANAGED SERVICES CEMENT CLIENT LOYALTY
Managed services have built-in client loyalty. If you negotiate the right kind of deal, that client is agreeing to be with you for at least 12 months, if not longer. This means you only have to re-negotiate with clients once a year, rather than on every project. This is the best solution for you and the client because it means you’ll both spend more time on addressing client needs than on haggling over service rates.
MANAGED SERVICES GIVE YOU INSIGHTS INTO COMPLEX PROBLEMS
One of the greatest benefits of managed services for your firm is how it equips you to solve complex problems. Most of our clients who deploy managed services focus on a given market niche. This means they are running into the same types of problems over and over again. This is actually good news.
The more opportunities you have to solve complex problems, the more chances you get to find out what works and what doesn’t work. By learning what works best, you develop valuable insights that allow you to serve as a trusted advisor to clients who see only problems.
Let me use an analogy here. Some people look up into a starry sky and see millions of tiny points of light. Other people look up and see lines between these points of light called constellations. These people make meaning and create connections out of what is otherwise just an overwhelming star field.
The more opportunities you get to make meaning out of what otherwise looks like chaos, the more insights you develop. Those insights are valuable and will help you serve existing clients as well as attract future clients.
MANAGED SERVICES PROVIDE THE OPPORTUNITY TO BE SEEN AS THE DE FACTO STANDARD
Another major benefit of managed services is what it does for your firm’s credibility. Who would you rather hire? Someone who has never solved a problem you are facing today or someone who has solved that problem hundreds of times and for hundreds of people who are just like you?
We have clients who can make the claim that they have more than 500 clients who have achieved certain specific, and often challenging, goals. This provides a lot of comfort and peace of mind to decision-makers about to write a check or sign a deal. When you solve the same problems over and over again, you get the opportunity to be seen as the go-to-provider, the de facto standard.
MANAGED SERVICES GIVE YOU THE RUNWAY TO NURTURE YOUNG TALENT
One of the bigger challenges with project-based work is that it seems you’re always trying to decide which projects are safe and appropriate for on-the-rise talent. Clients only seem to want to pay for experienced talent. Clients sometimes object to being billed for younger talent because the perception is that they are paying to educate your staff.
Managed services tend to fix this issue. When a client signs a deal with your firm for service levels, rather than time, how you staff to fulfill those services levels is your concern, not the client’s concern. In my experience, clients often welcome younger talent because they see them as potential superstars of the future who might be working in their accounts.
MANAGED SERVICES ENHANCE OPERATIONAL PREDICTABILITY
One of the biggest benefits of managed services is what it does to operational predictability. It is so much easier to staff for managed services than project-based services. Human capital costs, from attraction to compensation to retention, are usually the biggest expense for service firms. If your costs rise and fall erratically based on project-demand going up or down, you have an inherently unpredictable operational model.
But with managed services, you usually know exactly what human resources you need to deliver against service levels. This means you can see what’s coming down the road and plan accordingly.
MANAGED SERVICES ARE MORE SCALABLE THAN PROJECT-BASED SERVICES
As much as managed services deliver predictability, they also deliver scalability, especially when compared against project-based services. In my experience, managed services are usually best applied to situations where the need for service is present month-after-month.
It is the month-to-month nature of managed services that allow for the scalability. If you have 10 clients who all need similar service levels and you’ve figured out how to deliver against these comfortably, then it’s usually pretty easy to add an 11th client. Or a 12th or 13th or even more. Client acquisition and on-boarding becomes incremental rather than monumental.
That is not at all the case with most project-based services. Some project-based engagements can be one tenth the size of the next engagement. The very up-and-down nature of this model means you never quite know what’s coming. It is difficult to scale what you cannot anticipate.
MANAGED SERVICES ALLOW YOU TO TAKE CONTROL OF YOUR FUTURE
This may be the biggest reason of all to adopt managed services. In my experience, managed services give you visibility, scalability, predictability and higher profits. The cumulative effect of all of these benefits is peace of mind. You get to ease into each day knowing that you know what’s coming – in most instances.
This gives you the opportunity to dream about the future and plan for where you want to go. More than that, a successful managed service firm feels more in-control than many project firms, which seem out of control. I don’t know about you, but I like feeling in control of my future.
If you’ve enjoyed the ideas I’ve presented in this article, you might find an Action Guide I’ve developed to be even more insightful. The Action Guide is called 7 STEPS TO DOUBLE SERVICE FIRM REVENUE and it’s available for free right now on our website. This resource contains 7 videos and numerous downloadable tools – all for free.