From our company to yours, follow this series as we share lessons learned and highlight best practices.
Part 3: What to Do with the Data?
In Part 1: Improve Your Business, we discussed why time tracking is so critical for an integrator who wants to build a service business. In Part 2: Building It, we talked through the steps to set up a simple time-tracking tool. In Part 3: Analyze This, we’re going to walk through the steps to analyzing the data for profitability. Having the data is half the battle – the rest relies on knowing what to do with it! Let’s start with some definitions.
Utilization: What percent of your service team’s time is actually going towards client-facing work? Calculate this by:
Utilization = Total Client Related Hours/ Total Hours Tracked
Target Service Gross Margin (TSGM): This is the gross profit margin you expect to make with your entire service team. This should be 50% at a minimum, which represents the idea that you make twice in revenue what you pay your team.
Target Service Gross Margin = Cost of Service Team/Service Revenue
Target Normal Hourly Rate (TNHR): This is the hourly rate you want to make when you charge a client. The minimum here will depend partially on your TSGM but also on what you call a “billable hour” and how utilized your team is, but your TNHR should be value-priced and if you do that correctly it is likely much higher than calculated minimum. You can calculate your minimum Target Normal Hourly Rate as follows:
Target Normal Hourly Rate = 2 x Cost of Service Team/ Total Billable Hours
For example, if the average wage on your team is $25/hour (which equals $50,000/year) and they are utilized 75% of the time (which equals 1,500 billable hours/year) then you need to charge $67/hour at a minimum. But your clients are probably willing to pay $100-$200/hour.
Also, this calculation is much easier if you assume that anything that is client-related is billable (including travel, coordination, advanced support, etc), but if you don’t consider some of that time billable (such as travel or coordination) then you will need perform some manual calculations and maybe even track some time under different tasks in your time-tracking system to be able to figure out your Total Billable Hours.
At OneVision we considered anything client-related to be billable – regardless if we have a high hourly rate and charge fewer hours or have a low hourly rate and charge for all our hours – the amount we need to make is the same.
Urgency Ratio (UR): This tells you the percentage of all your client-related hours that are Urgent vs. Normal.
Urgency Ratio = Urgent Hours/ Total Client-Related Hours
At OneVision we found our Urgency Ratio over the course of any given 12-month period was about 20%, so one out of every five hours we billed was an hour spent on an emergency issue that we had to have reserved bandwidth to accommodate.
Target Blended Hourly Rate: Now that we know the Urgency Ratio we can calculate our Blended Hourly Rate, which takes into account the cost of reserved bandwidth assuming the 4x multiple (which means we need to keep a tech available for 8 hours/day to accommodate two urgent hours every day).
Target Blended Hourly Rate = TNHR x (1 + (3 x UR))
This Blended Hourly Rate is the rate you should be charging on average across your client base to reach your targeted hourly rate. It takes into account the cost of your entire service team ranging from time spent training to time spent on vacation and from your non-billable service coordinator to the reserved bandwidth you need to maintain to accommodate urgent hours.
Effective Hourly Rate (EHR): Now to check and see if you’re actually meeting your targets and goals. The EHR represents the hourly rate you are effectively earning on all the service non-hardware revenue your service team brings in.
Effective Hourly Rate = Service Labor Revenue + RMR/ Total Client-Related Hours
The goal is for your EHR to meet or exceed your Target Blended Hourly Rate – if that’s happening then you’ve got a successful and profitable service team. If it’s not happening then your team is likely overworked – and that might mean that you, the owner-operator, are putting in all the extra time that’s making it harder to build a sustainable and scalable business.
One approach is to try and use two different rates for your clients depending on their needs – So we need to know how much of your team’s time is going to Urgent hours vs. Normal hours.
Pricing an hour of your team’s time is a difficult task. Most companies use what they consider to be traditional hourly rates for skilled trade labor in their region. But this doesn’t quite work out for our industry, not only because we’re missing an opportunity to value price our skills but also because of an issue I call “reserved bandwidth”.
In six months, after tracking all the time data and giving our clients stellar service experiences, we had a good idea for how much our clients used and we knew what we needed to make to be profitable. This gave us the ammo and confidence we needed to have meetings with our clients to charge the appropriate rates or fees so that we could have a profitable businesses while taking care of their needs. This process was a massive success.
We built two reports that we used frequently. One was a snapshot that we ran every so often to justify the fixed-fee service plans we had in place for any given client. Another was an aggregated report that showed us how our various clients stacked up against one another.
The static snapshot (download template here) gave the client an idea of how their last 3/6/9/12 months looked with us. How many hours did they use us, how many were on-site vs. remote, how many were normal vs. urgent, and also gave them a glimpse of the types of issues we worked on and for how long. As much as I hated getting into these nitty-gritty conversations about hours, it was a valuable tool to have to prove to the client how much they actually used us. We rarely reviewed these snapshots after the first couple meetings – clients eventually understood that tech support was a fact of life and they simply relied on OneVision and needed to pay a certain amount each month.
The aggregate report was a useful tool to both understand our own clients and also show a client how they stacked up against others. Almost every client thinks they are “light users” or that they “don’t have much tech” or that “almost nothing is urgent”. This report allowed me to show clients that either they used us an inordinate amount of hours or that they had a high-degree of urgency. We also learned from this report an interesting phenomenon – those clients who used us the least actually had the highest urgency ratios. This makes sense – if you call for tech support rarely, it means you’re probably calling only when it’s an emergency. So actually your lightest clients are some of your most expensive – and I can tell you they won’t agree without a little explanation!
The reports were valuable for that purpose – to educate both ourselves and our clients on how expensive it was to provide support and how much our clients actually needed us.
Interested in learning more about OneVision and our approach to client services? Check out this recent write-up in CEPro.