December 2009

IT Service Contracts

Creating the Best IT Service Contract

By: Kristin Masters

Because virtually every business relies upon a complex infrastructure of hardware and networking components, computer consultants have great opportunities to grow through long-term relationships with clients.  They also have significant latitude in deciding how to structure their service contract agreements.  While many consulting businesses opt to sell prepaid time blocks or subcontract with a national service organization, the most profitable option is contracting a long-term IT service contract.

Using Prepaid Time Blocks

Prepaid time blocks are an attractive option to many fledgling computer consulting firms, because they provide a step up from one-time service calls for low-level repairs.  Essentially clients buy a certain number of hours, and call the consulting company for all their IT support needs, until the time runs out.  Often consultants will offer discounts for buying a higher number of hours.

This IT service contract does result in up-front payment, which is attractive for start-up companies or during economic downturn.  However, relying on prepaid time blocks has some notable shortcomings:

  • Once the prepaid time block runs out, the client is essentially the same as an inactive customer or a new prospect.  For the client, there is no discernible value in continuing the relationship.
  • Clients usually call only when they have a problem.  While this might not seem like a disadvantage, it means that an IT consultant does not get much opportunity to troubleshoot or improve clients’ IT infrastructure.
  • The prepaid time block does not really constitute–or foster–a long-term relationship with a client. Since time and scope of service are limited, the consultant has little chance to create and demonstrate the value of an on-going partnership.

Thus the most significant disadvantage of prepaid time blocks is that they do not promote the long-term relationships.  These relationships are critical to long-term growth for every IT consulting firm.

Subcontracting with National Service Organizations

A sort of intermediate stage between prepaid time blocks and an IT service contract is subcontracting with national service organizations.  Firms generally choose this model because it offers greater financial stability and removes some of the pressure to obtain clients.  While this form of subcontracting reduces instability and time spent on sales, it also has numerous detractors:

  • National service organizations require time- and cost-intensive training.  Even though most service calls will be for low-level hardware repairs, subcontractors are still required to learn about the latest technologies and platforms.
  • Clients who use this service contract often need only minor hardware repairs.  It is not cost-effective for a client to invest money repairing a $400 desktop computer.  Thus they are unwilling to pay competitive rates.
  • That unwillingness is reflected in the negligible profit margins and low labor allowanced granted by national service organizations.  The organization may allow only $100 for a specific repair, regardless of whether it requires two hours of work, or five.
  • To compensate for reduced profit, companies must complete as many calls as possible each day.  Not only does that undermine the consultant’s ability to build rapport with clients, but it also results in time wasted during transit.

Ultimately, although subcontracting with a national service organization may seem like an expeditious method for gaining a steady stream of revenue and clients, the returns are actually much lower.  These relationships often sacrifice quality for quantity.

Building Relationships with Service Contracts

Long-term service contracts are key to computer consultants’ success because they provide both steady revenue and promote the formation of long-term relationships with clients.  By enabling consultants to become proactive members of their clients’ IT personnel, these sustained partnerships form the cornerstone of successful consulting firms’ business strategy.  Service contracts therefore offer IT consulting firms the best value of any business model.

  • Service contracts offer the ability to provide more comprehensive, high-level services. Instead of simply fixing hardware, consultants can focus on functions like networking or data storage, which will improve their clients’ technological infrastructure.
  • For clients, having a service contract means a single point of contact for all IT concerns, including troubleshooting, upgrades, software licensing, data protection, and system maintenance.  This factor offers the IT company a way to build rapport and present a streamlined, “user friendly” image to each client.
  • Consultants get compensated for time, rather than the repair, ensuring favorable profit margins and improving customer service.  Furthermore, the provider controls hourly rates and scope of services offered.
  • Therefore consulting firms based on service contracts can easily enhance the quality of their clients’ experience and computer systems, demonstrating greater value and increasing the likelihood of continued partnership.

Long-term service contracts provide the ideal blend of profitability and sustainability.  They allow consulting firms to capitalize on relationships to benefit both consultant and client.


Maximizing the Service Contract

A well-written service contract, then, is indispensable to IT consulting firm that wishes to flourish.  Although creating the service contract and the supporting materials may require an initial investment, the return is worth the initial expense.  Crafting a service contract requires careful thought about balancing client value with profitability.  Consultants who decide to use service contracts should consider several factors:

  • Feasibility of fixed-fee service contracts: While it may be easiest simply to charge a flat rate per month, it can often be difficult to accurately predict a client’s needs.  It is critical to select a fee structure that ensures fair compensation for clients, but offers value to clients.
  • Creating a range of service products or packages: Instead of a one-size-fits-all approach, consultants can offer different service contracts that are tailored to different industries or businesses.  This does not mean creating a new package from scratch for each new client, but rather offering several service levels from which clients can choose.
  • Adding value through customer service: In addition to providing expertise, IT consultants can build value through guaranteed speedy response times or discounts on after-hours and emergency service.
  • Incorporating proactive services: Completing upgrades and system maintenance is an excellent method for consultants to show that they are vested in their clients’ success and growth.
  • Building comprehensive and cohesive support materials: Before clients even see the physical contract, they will want to review professional, consistent marketing and informational materials.  Give the sales team the tools they need to complement outstanding IT service.
  • Legality: As always, it is important to have any legal document reviewed by both an accountant and a lawyer, to ensure that it adequately protects both parties and is legally binding.

Initiating a thoughtful and comprehensive service contract program is the first step toward sustained success through mutually beneficial long-term relationships.  Instead of focusing on the short-term gains obtained through prepaid time blocks or subcontracting with a national service organization, service contracting enables sustained revenue and relationship building.