Justifying the cost of managed services

A friend of mine asked this question recently. They're in a market we don't serve and are considering purchasing managed services from a local company. I thought it worth posting here. It's always interesting to try to dissect other service provider's pricing on managed services.

Question:
Our service provider wants $775.00 per month to provide unlimited hours of service for 1 server and 7 desktop/laptops, or $490.00 per month for a capped hours option. This does not include overage charges ($135.00/hour) or any project or after hours support.

Your opinion about what we need and the fee amount they are charging?

Answer:
Most companies justify the cost by saying that if you have unlimited support you’ll use it more often since you don’t worry about the cost of each call (like having health insurance) and your computer system will be healthier. It’ll cost more in the short run but productivity gains in the long run due to the system being up more and better maintained should make up the difference and then some.

Regarding the capped usage option, look back over your usage of the service provider over the past 6 months. Get an average number of hours per month and multiply it by $135 (we assume this is their normal hourly rate). You shouldn’t be paying more than 20% over that amount for unlimited hours unless something else is included like remote monitoring, managing Windows updates, free equipment upgrades, software, etc.

Industry standards for providing unlimited support range from $250-350 per server and $30-60 per workstation per month. There may be some additional charges for multiple locations and other a la cartes. For these prices most companies will provide remote monitoring, unlimited phone support and onsite support but no hardware or software. If they’re going to throw in a new server, any workstations, software or anything else that would increase the amount.

There’s no reason why you can’t bargain with them either. You can ask for $650 per month for unlimited and see if they’ll meet you at $700. They’re likely to have 20-30% of that as fixed-costs and the rest is a buffer. Sometimes you’ll need more services than the remaining 70% covers but most of the time you’ll use less… much less if they’re good at their job. If they do a good job of keeping everything working and are responsive and good to work with I would suggest that $775 is a good price. You're looking at total value, not the cheapest solution here. You have to factor in the less substantial costs of lost productivity and your internal time lost managing Information Technology that will now be handled by someone else.

Regarding the capped hours option, look back at your average spend with them for the last 6 months. Look at how much service time you’ve been purchasing from them per month; compare that to the number of hours they cap at for the $490 option. If your average is under the cap and you’ve been spending more than $490 per month on invoices for them then it’s a good deal. Otherwise it isn’t.

Complicated isn’t it? I’d probably recommend the unlimited option if there’s no contract term. If they want you to sign up for 12 months or something you might consider doing month to month for a few more months to get a good idea what your monthly costs are going to be and then ask them to reconsider their pricing. Before you get in bed with someone you’re going to sign a 12 - 36 month contract with you should get to know them and get a feel for the quality and consistency of their work. Make sure you’re not just getting 3 months of initial attention and then being ignored for the next 33. If they don't offer that option, ask to have the contract amended to include a honeymoon period of 3 months after which you can cancel if you're dissatisfied. After that 3 months the contract should renew automatically for the remainder of the term unless you provide written notice to the service provider.