Why the “Break-Fix” and “MSP” Models Force you to Compete on Price

Posted by · June 13, 2012 4:24 am

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Competing on prices sucks. There is always some idiot that is out there willing to work cheaper than you are. The simple fact is: if you work at it, you can usually find some provider of some service that is willing to give you a portion of it for free, falsely assuming that they will get an opportunity to upsell you later. When, in fact, they just attract tire kickers who will ask your advice, keep you on the phone for two hours, make you come to their place of business, interview you, have you write up a proposal that takes 4-5 hours to write, and then tell you that the “other guy” is cheaper, so you need to drop your price or lose the business.
Despite having had this happen to you (and it has happened to everyone, guaranteed), you would be gravely mistaken to believe that you have to sell your service at “cheap” or even “reasonable” rates. Of course, this requires you to rethink your business. Until now, you have only ever heard of two models for the IT business: break-fix and Managed Services (MSP). Here are 9 reasons why these models actually force you to run on the hamster wheel of price, and why the RR model fixes all these issues in one, swift, blow.

Break-Fix.

Break-Fix models simple say: “when something is broken, call me, I’ll fix it for a fee.” There are two problems with this approach. Firstly, you create an atmosphere of hostility between you and the client. Because, you are not a digital white knight in shining armor who can swoop in and save the day. Instead, you are an obstacle between the client and a fixed computer. You are this person who knows how to fix the problem, error, or virus, but who is going to charge them a fee to do it. Whether or not the client admits it, the break-fix model leaves clients who are in desperate need feeling like they are being extorted. There is a whopping “if” statement that stands between you and a relationship with the client. “I’ll fix your computer for $200” sounds perfectly reasonable. But let’s look at other service industries who use similar tactics and models. How do we feel about them? The car repair place? You take your car in for a little noise, and they tell you that you need $1,300 worth of repairs or the car will blow up. People are forever looking for a “trustworthy” mechanic. Car repair shops use this model, and people hate them for it. What about lawyers? Most people don’t seek out a lawyer until they have already been slapped with a lawsuit. Here you are, in your greatest time of need, and the damn lawyer won’t do anything without a $4,000 retainer, and then, they won’t even guarantee results. It leaves the client feeling: extorted. Now, let’s look at a third industry that uses the break-fix model: doctors. You feel sick, you are injured. You have a health issues that’s not covered by insurance. The doctor sees you, tells you what is wrong, and on the way they collect your information, and tell you that they will send you a bill. When you get it, there is a $1,600 office visit. You’re shocked. And what’s worse, you already had to buy a $300 prescription. Highway robbery you scream. It’s not the doctor’s fault: it’s the break-fix model’s fault.

MSP

So, if you are running an I.T. Business that uses the break-fix model, you can now see that something needs to change. Most I.T. Business owners naturally migrate from the break-fix model to the MSP model. Usually, the move is triggered by dreams of stabilized cash flow, recurring revenue, and being seen as a “trusted advisor.” But anyone who has ever sold managed services packages inevitably comes up against the cost goblin: you try to convince your clients and customers that it actually “saves” them money in the long run to have your managed services product. But there is a simple, logical, objection that is extremely difficult to overcome: “How do I save money compared to not spending any?” This question is usually couched in terms of “How does that save me money?” At this point, you have to either present case studies that the client would believe, or make up numbers in examples for how much money they would save by having you manage their IT. Of course, the numbers are very rarely right, because you don’t have the client’s real numbers to work with. And, what’s worse, is the client is not willing to give you their numbers because they don’t want to “help” you win the sale. They want you to earn it.

The MSP sales process is inherently flawed because it requires that you “earn” your status as a trusted advisor AFTER you get the account. The MSP sales process has another fatal flaw: it is product and process specific. Regardless of what type of MSP contract you give to your clients, you end up relying on transactional automation and specific products to manage the account. In order to make any money, you have to sell them things like “monitoring,” which they usually don’t understand, nor do they see the value in.. You have to provide them with usage statistics, monitoring metrics, and a whole slew of paperwork.

What’s worse, is retaining the client is a function of the contract not the relationship. It does not breed trust because despite the terms of the contract, you still don’t really have much contact with the client outside of problem solving. You have to chase them down to do quarterly reviews. You have to chase them down to get them to help you reproduce the problem. While you desperately want to be seen as the trusted advisor, it takes way too long to attain that status, and the road is fraught with challenges that can be devastating to the relationship because the buyer of your MSP services doesn’t understand what you do, and therefore does not have the capacity to find the value in it.

The MSP Sales process is an inevitable time bandit. It steals your time and your sales people’s time. Most MSP sales models use a three step close, which usually has three appointments. If you measure this in hours, the sales process for one MSP account is upwards of 7.5 hours of work before you get a yes or a no. Most of this time is spent convincing the prospective client that while your service offering is complicated, it is very necessary. The rest of it is spent trying to overcoming objections and inventing reasons why the objection is “nothing to worry about” or why it is “covered.” And, no matter what you do, you always end up having to deal with price negotiations simply because you’re not the only MSP provider in the area. Or, because the prospective client can Google what you’re offering and price shop you to death.

The final nail in the coffin that caused me to develop the new RR model was a sad realization: under the MSP model, if all systems are working, your client starts to wonder “what do I pay you for?”

We all know that a quality IT provider manages, monitors, and maintains networks and systems so that problems are never show stoppers. There is no pain to the network. It is reliable. It “just works.” But a reliable network is a double edged sword: because it appears to always work, your client may falsely assume that you are no longer needed. Because the MSP model sells things like monitoring, patching, and other maintenance items, it perceived value plummets once you have done a good job for a long time. Customers and clients use very simple logic that runs counter to the MSP model. While the MSP model proclaims you must maintain your systems so your overall cost of ownership is lower, the client simply counters with: “If it ain’t broke, why must you constantly fix it?”

The RR Model: A Paradigm Shift.

The RR model is a relationship based, recurring revenue model of providing service to your clients. (RR, by the way does not stand for “Recurring Revenue.”) It answers all the hardships of the MSP model by allowing you to complete irrespective of price. It allows you to make yourself inherently different from your competitors because you are no longer a service provider. You are no longer a product provider. You are an “answers” provider. (If you haven’t read our other blog entry, [link to blog 1], you should add it to your to do list).

For starters, the RR model encourages the “right” behaviors in customers. They there is no more chasing them down to do a quarterly review. There is no more complaining about the bill. There is no more waiting on invoices to be paid. The customer appreciates the fact that the network works and their systems are up, and never wonders “what am I paying you for?” There is no tracking of assets for billing purposes (you can, of course, track them because it is just good management). There is no more complicated billing. Billing is straight forward, transparent, and easy.

The greatest advantage of the RR model, however, is not just its simplicity, but the fact that it focuses on creating real value for your clients. Our industry has a term: “VAR,” which means “Value Added Reseller.” However, contrary to the name, very few IT Providers EVER provide additional value to their customers. They just match a product with a consumer, and charge a fee to set it up and manage / maintain it. This is a commoditized service model. It’s outdated. And, it is one in which you will be forced to compete on price every time because it doesn’t truly provide additional value to the customer. Whereas the MSP model focuses on low total cost of ownership, the RR model makes the cost of ownership irrelevant by focusing on actual business growth. Would you spend $1 to make $10? You bet you would. The RR model shows the customer exactly how to do that.

In this post, I have gone over the different problems that you encounter with both the break-fix and the MSP models for IT Service providers. Each of the points can be individually addressed within your own company. I have also mentioned the RR model, which is specific to the Debug Your Business family of Business Strategies. Each of the challenges is a hard one to overcome. We’ve done most (if not all) of the heavy lifting for you. If you’d like a free whitepaper that discusses the RR model in more detail, you can get a copy here: Click Here to Get a Free Whitepaper on the RR Model.