Here’s another example of losing big, this time on scheduling with managed services or staffing.
The client asks to have someone on site full time. This is a great deal as it represents recurring revenue. They can’t afford a full time IT person (or perhaps project team member), so they contract with you to have the person three days each week. The obvious way to make this work is to have that person show up on Monday, Wednesday, and Friday for eight hours each day. You agree on a rate and begin work.
In this case, the sales person wins; at least short term. The rate is $120 per hour, with a burden of $75. This leaves $45 per hour in gross profit, on which the sales rep will be paid. There are 24 hours billed each week, or just under 100 per month.
On the back end, Technical Services is stuck with a contract that takes their engineer on site three days per week, or 24 out of 40 hours per week. This leaves 16 hours of unused time, which can only be used on Tuesday’s and Thursdays. What are the chances that someone will sell a contract using that same person only on Tuesday and Thursday? From my experience, not very good. The engineer’s utilization rate is now at 60%, or just over break-even. I’m sure some work will come in, but not enough to get these numbers where they need to be. Take vacation, sick time, and training time out of this person’s year and you will be at or below break-even before you know it. Even if they do manage to pull in a few dollars over break-even, it’s not a good deal for the company and won’t make up for falling margins on product sales. The goal of managed services and staffing is not to break-even, but to produce stronger profits to make up for the downward trends on product margins.
A final note: If this same contract is sold for two days each week, say, Tuesday and Thursday, the loss is much greater. Never take such a deal!
© 2010, David Stelzl