The Dying Case For Hourly Billing: 5 Talking Points For Winning The Managed IT Discussion

By Derrick Wlodarz, FireLogic Inc

This is the first of a two-part series authored by Derrick. Click here for part two.

As an IT service business owner that has seen both sides of the spectrum, I can say one thing with certainty: Hourly billing as a primary revenue model for the modern IT firm is dying, and it couldn’t come soon enough. The concept of MSP and its associated contract-based “Managed IT” approach has been around for over a dozen years now. I admit even my own firm FireLogic was late to the game.

But even in 2019, it’s a discussion many IT service business owners tiptoe around, especially smaller ones. The objections I hear are numerous and many equate to excuses for inaction:

• “My clients won’t see the value.”
• “I’ve been billing my clients hourly forever, so why switch now?”
• “I can’t risk upsetting the status quo.”

You may recognize some of these objections as your own.

Yet converting out of the endless black hole of pure hourly billing into a sustainable, reliable recurring revenue model isn’t rocket science. I decided to start the journey a few years back, and our business is seeing the rewards of taking a new off-ramp. We’re accelerating growth, bringing on new staff, and picking up clients with more ease than ever before. It would have never been possible by sticking to pure hourly billing.

How is my firm making it happen? Here are three of the five ingredients to our recipe for success thus far. Check back in a couple weeks for the other two.

The “Nobody Wins” Paradox Of Hourly Billing

This is perhaps one of the largest unspoken cruelties of hourly billing as practiced by the IT services industry. Yet, in a strange way, it’s completely an unintended consequence of the nature of the beast, caused by neither the provider or the client.

In this legacy billing methodology, the IT service provider only makes money when things are failing, issues are happening – things need fixing. While the client is fully aware that this is the natural order behind using an hourly provider, there is always the lingering question that makes everyone uncomfortable.

Is my IT company purposely causing problem x or y to keep their pockets lined at my expense?

While I can’t speak for all providers out there, most companies with a quality reputation at stake like my own firm, wouldn’t fall victim to such practices. But the very fact that this paradox exists in the hourly billing relationship further leads me to believe hourly billing only has a place in limited controlled circumstances like project work – where its purpose is well defined and (arguably) no better alternative exists.

Flip The Conversation – Would A Client Rather Pay For Downtime Over Uptime?

Let’s face it: most hourly billing is nothing more than “paying for downtime” with a little lipstick and a fancy title. Is this truly the end goal for a client? Fully unintentional, yes. But if a client is only calling you to save the day when the sky is falling, they’re rewarding you to put out fires and keep the shaky boat afloat. These are the same clients who don’t have RMM on endpoints, no proactive monitoring, no monthly patching – they’re in this never-ending cycle of doom leading to more work for you. An unhealthy relationship at best.

When I’m converting my legacy hourly clients over to managed IT agreements, this is a common case I’m making because it’s an easy picture to paint that entails numerous facets in a single statement. Not only does it have a hard-hitting mental cue, but it really makes the client step back and admit to being party to an admittedly flawed approach to their IT needs.

Some clients won’t be talked out of this billing model surrounded by quicksand. But perhaps this could be the sign that these aren’t the ones you should be holding onto. Every IT provider needs to trim off the “fat” when it comes to clients not worth supporting, and this can be the perfect chance to cull the self-curated deadbeats.

What’s The Dollar Figure On Lost Revenues Per Hour Of Downtime?

This is another bullet point that can easily paint the benefits of a managed agreement without focusing on your contract price point. But it’s one that a lot of IT service providers fail to put into focus on. Yet it’s such low hanging fruit that leaving this on the table is almost akin to gross negotiation negligence.

There are numerous sources and methods for calculating this figure, but even if one is hard to come by for a given client, you can resort to something relatively non-scientific for the purposes of discussion. You (or the client) can take yearly revenue and divide them down to a per-work-hour basis on a companywide or even per staff member basis. The main takeaway is that there has to be a price tag placed on every hour that a firm either has partial or total inability to function when it comes to critical IT systems.

If you can quantify losses caused directly by IT downtime, most managed IT agreements begin to look a lot more appealing and actually, may I say it – attractive?

About The Author

Derrick Wlodarz is a seasoned IT Specialist who owns Des Plaines, IL-based Managed IT Service firm. He has more than 12 years of IT industry experience across the private and public sectors, with numerous technical credentials from Microsoft, Google, and CompTIA. He specializes in providing SMB clients with managed IT support, consulting, and training. Derrick is a long-serving member of CompTIA's Subject Matter Expert Technical Advisory Council that shapes the future of CompTIA exams across the world. FireLogic is a partner of TBI, a master agent who assists partners through their upmarket technology and marketing needs so they can communicate their expertise.