When our managed services company made the commitment to growing the business and stabilizing our profit margins, we knew that we were going to have to leave some customers behind. This is one of the most difficult things to do, because your oldest and most loyal customers are usually the ones that restrict your movement and become the skin that needs to be shed in order to grow.
Not only is this a complicated process on a personal level, but it is also a difficult thing to quantify and present to a customer. They will inevitably want to know “why” these decisions are being made and having the numbers to support your decision will go a long way in easing the tension of the situation.
Evaluating fixed-rate service contracts
As we began our customer evaluation, we all had a sense of which customers would end up on the bottom. But, because no two customers are the same, we also knew we had to prove it with data. Some customers paid a fair rate, but over-utilized our help desk, which equated to an abundance of labor costs that were associated with what appeared to be a decent contract. Others simply got a better deal than we could afford to give them, often because their contract originated at a time when our company was much smaller. Our costs simply outgrew the agreement over time.
Regardless of the situation, there had to be a way to easily evaluate each customer on a more detailed level than our accounting system was allowing us. We finally found it when we stumbled upon the Profit & Loss by Contract report in our Professional Service Automation (PSA) platform.
Improving data accuracy
The P&L by Contract report gave us all the service level detail that our standard P&L didn’t offer. It totaled our labor cost and cost of goods on a contract level for any given financial period, and compared it against our revenue for the same contracts.
The problem with this report (and most other PSA reports) is that it relied on the accuracy of our data input. This meant that we needed to be incredibly diligent about tracking the hourly costs of our employees and keeping it up to date in our system.
It also meant that every time one of our Help Desk or Project Engineers worked a ticket, we needed them to input these time entries accurately (down to the minute) and use the appropriate contract and billing codes so that we knew what was “billable” work and what wasn’t. This one report now suddenly required a cultural shift in our company, since up until this point our team had the impression that these numbers “didn’t really matter.”
This shift toward accurately tracking time in our system should have been easy, but human nature said otherwise. The habits of working through tickets without regard for documentation had already been developed and were difficult to break. These bad contracts affected our Help Desk the most, so we thought that getting rid of them would make their life easier and this would be all the incentive they needed to change their ways. Unfortunately, this was not enough. It wasn’t until we came up with an incentive plan, that we started to make some progress.
Presenting usage to customers
The incentive was simple: track the time you spend working tickets accurately and you will be rewarded based on your monthly time logged. Not only did this give us the data we needed, but it also increased the productivity of our Help Desk and gave us more insight into who was “working hard” and who was “hardly working.” After a few months, we finally had the data we needed to fix our bad contracts and move the company forward.
When we presented the P&L by Contract to customers (less some cost details), we found it to be incredibly effective in getting across our message. The customer could see why their rate was too low or how their use of our services was exceeding the compensation we were receiving. We could now present an option to renegotiate the contract based on their actual usage and give them the option to accept and stay a customer or decline and move on.
P&L by Contract became one of the most powerful tools in our toolbox. It was the key to keeping both our customers and our employees in-check and informed. Most importantly, it became the standard for new customers that we brought on as we grew, so that we would never find ourselves in this position again. Ever since, customer contracts could scale with us in perpetuity.
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