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.
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:
- Cancel an existing appointment so that you can free up a service technician for the work, or
- 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.