Month-to-month. One Year. Three Year. What do your managed services agreements look like? It’s one of the most popular questions we’re asked.
Three-Year Managed Services Agreements
We utilize three-year agreements for every managed services contract. We do this for three primary reasons:
- Profitability: As you well know, the first 6-9 months of any agreement are the most painful for everyone involved. Between the projects required to get the client up to speed to the inevitable skeletons in the closet, you’ll be lucky if you make any profit during this stretch. If you are using a month-to-month agreement, your client could choose to just walk away at any point during this frustrating phase. If you’re using a one-year agreement, you only have about 90 days of profitability before you have to work on re-signing the client. A three-year agreement allows for a greater length of profitability. We price our agreements at a 65% gross margin. We most effectively realize this over the three-year agreement term.
- Company Valuation: Whether you’re considering selling your company down the road or plan to keep it for the rest of your natural life, you should always have company valuation in the back of your mind. You will get a significantly higher valuation for three-year agreements (or longer) than you will for an annual agreement or for month-to-month service. In the valuation game, month-to-month is no better than break/fix, and you didn’t work so hard to convert your customers to managed services just to be treated lik