Security

2 Big Reasons You Should Really Be Tracking Your Time (and How to Get Started)

The source of revenue is drastically different in a services vs. projects model, so cost tracking needs to be addressed differently.

2 Big Reasons You Should Really Be Tracking Your Time (and How to Get Started)
Tracking time is a crucial part of achieving profitability as a service business, but it doesn't happen overnight.

Joseph Kolchinsky · May 27, 2016

If you’re a services business, then this simple fact is true: time tracking is the only way to figure out if any given client is profitable.

Labor is a big component of your gross costs, so if you’re not tracking then you don’t know your cost, which means you don’t know how profitable you are. By the same token, you also may have a harder time understanding exactly how much you should charge. 

To Understand Your Costs

When it comes to hardware, there’s a natural, failsafe way to track what we spend vs. what we receive: bank statements and invoices. Everything we purchase ends up on a statement of some sort and we send invoices to our clients to get reimbursed.

But labor is much harder to report on. I know from personal experience how easy it is to put in extra time (especially as the owner-operator of the business), do that extra little thing, fix something for free, and generally speaking lose track of how much time I’ve put into a project or service engagement. And if you can’t report on how much labor you put into something then you don’t know your cost of labor for that engagement and you ultimately don’t know your profitability.

This has been less of an issue in the integration industry because revenue and profit were tied heavily to hardware with high margins, dwarfing the effect of labor costs. But the modern integrator now has a service team that doesn’t depend on hardware for a majority of its revenue. In other words, the source of revenue is drastically different in a services vs. projects model, and therefore cost tracking needs to be addressed differently.


Related: No, You Are Not a Loser If You Don’t Earn RMR


At OneVision, when we had our own clients and generated $100,000 in RMR, labor represented 89 percent of our annual revenue (hardware was the 11 percent). The industry average is about 33 percent.

So time tracking became an important component at OneVision. But it wasn’t easy and it didn’t happen overnight. We had the same problems everyone does: we multi-tasked on several service issues at once, had some salaried employees who didn’t need to track time for pay, and our team frequently engaged in quick start/stop tasks that didn’t justify tracking a few minutes for (picked up a client call, responded to a quick email, etc). But we solved the problem and it led to some incredible data that transformed our business in many ways.

To Establish Your Pricing

We had a blended hourly rate of $300/hour that we used for our clients. The question is how we calculated that and justified it to our clients when they pushed back (and boy did we get a lot of push back!).

We started with an hourly rate of $200/hour for our work, which is mostly an arbitrary number that depends heavily on value pricing our time for our client base. This number is different for every service provider in every market – it depends heavily on the clients you keep. Let’s call this your Normal rate for a Normal hour of work.

For example, if a client has a bad Apple TV on one of their TVs that needs to be replaced they probably aren’t willing to pay more than your Normal rate for an hour of work. On the flip side, it probably doesn’t carry a premium cost for you either – you can schedule the work out and fill an empty slot in your team’s calendar.

But you’re leaving significant value on the table if you assume that every hour is valued equally. Let’s assume that client is at home during the day and the network goes down prohibiting the family from getting anything done around the house. Do you think they would be willing to pay a premium for the hour of work required to get things fixed ASAP? Absolutely! And if you had to respond to that service call and send someone, it probably costs you significantly more as well.

But do you know why it cost you more? That’s the key here so let’s analyze that. Let’s call this an Urgent hour and figure out how much your corresponding Urgent rate needs to be.

When an urgent request comes through (which we define as requiring advanced support by end of next day), there’s only two ways to accommodate:

  1. Cancel an existing appointment so that you can free up a service technician for the work, or
  2. Make sure you always have a service technician available (not scheduled) so that when these requests come up you can address them with ease.

#1 hurts your brand – you can’t really build a sustainable business with high satisfaction ratings by cancelling appointments on clients.  No client wants to be canceled on.

#2 is really expensive because you have to have to pay a service tech to be available without the guarantee of scheduling them for clients. But this is the only real way to address the problem and it’s called having reserved bandwidth. This should sound familiar – it’s the same as insurance! Regardless if your clients use this time, you are expected to be available in case they need you.

How expensive is an Urgent hour? At OneVision we found that in order to accommodate two Urgent hours every day we needed to keep a service technician available all day. This led us to apply a 4x multiplier to the Normal rate to calculate the Urgent rate, resulting in $800/hour. Yes, $800/hour.

This sounds insane, but it finally explained why we struggled to be profitable at such a high quality of service. We had built up an incredible amount of reserved bandwidth to keep our clients happy but didn’t quite realize what it was costing us. So by tracking our time it helped us figure out what we really needed to charge.



  About the Author

Joseph Kolchinsky is the founder of OneVision Resources and investor of companies in the personal and home technology industry. He is also a frequent speaker on the evolving nature of supporting the connected home and related IoT. Have a suggestion or a topic you want to read more about? Email Joseph at joseph@onevisionresources.com

Follow Joseph on social media:

Joseph also participates in these groups:
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View Joseph Kolchinsky's complete profile.



  Article Topics


Security · Monitoring · Business · Business Operations · Blogs · Business · OneVision · All Topics
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Comments

Posted by Joseph Kolchinsky on May 31, 2016

@andrewinboulder - it’s not about charging your clients $800/hour, it’s about understanding the value of that Urgent hour and then using that value to logically deriver a proper hourly rate.  The takeaway here is understanding that an Urgent hour costs 4x a Normal hour (according to our data) so you have a logical path to incorporating that into the fees you charge your client.  I’ll dive into that detail a bit more in my next post.

Separately, I believe that the 15 minutes you spent getting the system up and running is incredibly valuable.  The system was down, the family was unable to live their day-to-day life without that system, they couldn’t get it up and running efficiently on their own, but you were able to with a) your skills, b) your experience, and c) your availability to go to the home on a moment’s notice and get it all done.  That’s incredibly valuable, and while charging significant money for that short period of time is cost-prohibitive to the mass market, it’s value-priced accordingly to our market and your clients will more than likely pay for it (if you deliver with high-quality service).  This reminds me of the “$10,000 bill for experience” story that’s frequently cited.  http://answers.google.com/answers/threadview?id=183998   Your experience and, in this case, your availability to show up any time, is incredibly valuable to your client.

Posted by andrewinboulder on May 31, 2016

Wow, I have a hard time wrapping my mind around someone paying $800 dollars for a quick service call, even if they are ultra wealthy.  What it if it’s just a component that needs rebooting and your there for 15 minutes?  I guess I need to stretch my mind a lot more on my value.

Posted by Joseph Kolchinsky on May 27, 2016

@2cents - you bring up good points.

Projects vs Service: Your point on this concept is spot on and it’s a very expensive lesson we learned early on.  We were successful with service and won many clients who came to us because they heard our service was great and they weren’t being served well by others in the market.  But for a while when we got project opportunities we would lose most of them because we applied the same service rates to our projects and that made us relatively expensive to the competition.  It’s this lesson that made me realize that the projects business was really a feeder into our service business where we could make significant margins with sustainable revenue, so we dropped our prices for projects to remain competitive and even considered undercutting the competition since we knew we’d make significant profits back on the service end.  The take away is that absolutely your project rates and pricing mechanisms are fundamentally different from your service pricing.

Cost vs. Value: Our base hourly rate was based purely on the value of our service to the client, not on our cost.  Your costs should be used to set your minimum pricing, but the value of your labor/product should determine the actual price you charge.  We knew our market was willing and able to pay $200/hour as a base rate, so we started there (even though our costs were less).

The Actual Rates Don’t Matter: Our normal rate in the very high-end Boston market was $200/hour.  In other markets, with other clients, an integrator’s normal rate will vary significantly.  The most critical component to appreciate here (which I mention above) is that we learned there was a 4x multiple on the cost of an Urgent hour relative to a Normal hour.  So if your rate is $100/hour for Normal then your Urgent rate should be around $400/hour.  So your blended rate might be around $160/hour instead of $300.  It really just depends on what rates you are able to establish within your market given your costs and perceived value to the client.

It Wasn’t Easy: With this logic AND with the guarantee that we would respond with priority attention all the time, we had conversations with our clients explaining the complexity of service and why it had to be priced differently (and more expensively).  Our service was excellent, we responded nearly instantly all day every day, so clients weren’t so ready to find a cheaper competitor.  They knew our service was better and they were willing to pay for it.

If you have further questions please let me know at joseph@onevisionresources.com - happy to connect and discuss!

Joey

Posted by 2cents on May 27, 2016

So if I am reading this right - you are saying that you charge and get PAID for an emergency service call @ $800 an hr for same day or nbd onsite?

Also you are billing an onsite tech for normal work at $300/hr?

I just don’t see it… That would also assume your cost per hour is at least $75? 

Is this rate also applied to projects?  If so, it would seem like anyone could undercut you and still make a good living.  I am not picking on you - I just am trying to get my head wrapped around this having been in this industry for a long time and I don’t see rates like that in our area.

Posted by 2cents on May 27, 2016

So if I am reading this right - you are saying that you charge and get PAID for an emergency service call @ $800 an hr for same day or nbd onsite?

Also you are billing an onsite tech for normal work at $300/hr?

I just don’t see it… That would also assume your cost per hour is at least $75? 

Is this rate also applied to projects?  If so, it would seem like anyone could undercut you and still make a good living.  I am not picking on you - I just am trying to get my head wrapped around this having been in this industry for a long time and I don’t see rates like that in our area.

Posted by Joseph Kolchinsky on May 27, 2016

@2cents - you bring up good points.

Projects vs Service: Your point on this concept is spot on and it’s a very expensive lesson we learned early on.  We were successful with service and won many clients who came to us because they heard our service was great and they weren’t being served well by others in the market.  But for a while when we got project opportunities we would lose most of them because we applied the same service rates to our projects and that made us relatively expensive to the competition.  It’s this lesson that made me realize that the projects business was really a feeder into our service business where we could make significant margins with sustainable revenue, so we dropped our prices for projects to remain competitive and even considered undercutting the competition since we knew we’d make significant profits back on the service end.  The take away is that absolutely your project rates and pricing mechanisms are fundamentally different from your service pricing.

Cost vs. Value: Our base hourly rate was based purely on the value of our service to the client, not on our cost.  Your costs should be used to set your minimum pricing, but the value of your labor/product should determine the actual price you charge.  We knew our market was willing and able to pay $200/hour as a base rate, so we started there (even though our costs were less).

The Actual Rates Don’t Matter: Our normal rate in the very high-end Boston market was $200/hour.  In other markets, with other clients, an integrator’s normal rate will vary significantly.  The most critical component to appreciate here (which I mention above) is that we learned there was a 4x multiple on the cost of an Urgent hour relative to a Normal hour.  So if your rate is $100/hour for Normal then your Urgent rate should be around $400/hour.  So your blended rate might be around $160/hour instead of $300.  It really just depends on what rates you are able to establish within your market given your costs and perceived value to the client.

It Wasn’t Easy: With this logic AND with the guarantee that we would respond with priority attention all the time, we had conversations with our clients explaining the complexity of service and why it had to be priced differently (and more expensively).  Our service was excellent, we responded nearly instantly all day every day, so clients weren’t so ready to find a cheaper competitor.  They knew our service was better and they were willing to pay for it.

If you have further questions please let me know at joseph@onevisionresources.com - happy to connect and discuss!

Joey

Posted by andrewinboulder on May 31, 2016

Wow, I have a hard time wrapping my mind around someone paying $800 dollars for a quick service call, even if they are ultra wealthy.  What it if it’s just a component that needs rebooting and your there for 15 minutes?  I guess I need to stretch my mind a lot more on my value.

Posted by Joseph Kolchinsky on May 31, 2016

@andrewinboulder - it’s not about charging your clients $800/hour, it’s about understanding the value of that Urgent hour and then using that value to logically deriver a proper hourly rate.  The takeaway here is understanding that an Urgent hour costs 4x a Normal hour (according to our data) so you have a logical path to incorporating that into the fees you charge your client.  I’ll dive into that detail a bit more in my next post.

Separately, I believe that the 15 minutes you spent getting the system up and running is incredibly valuable.  The system was down, the family was unable to live their day-to-day life without that system, they couldn’t get it up and running efficiently on their own, but you were able to with a) your skills, b) your experience, and c) your availability to go to the home on a moment’s notice and get it all done.  That’s incredibly valuable, and while charging significant money for that short period of time is cost-prohibitive to the mass market, it’s value-priced accordingly to our market and your clients will more than likely pay for it (if you deliver with high-quality service).  This reminds me of the “$10,000 bill for experience” story that’s frequently cited.  http://answers.google.com/answers/threadview?id=183998   Your experience and, in this case, your availability to show up any time, is incredibly valuable to your client.