Flaws in Business Plans of Remote IT Department?

Anonymous Tech Support asks: "I work for a small technical support company that is hired by local companies to manage networks, fix computers, and be the IT department in general. Last week I was working on a small network of 25+ computers. After a week of emotion and annoyances (long story), I have to ask the Slashdot community: How many of you are employees of small 'outsourced IT departments?' How much does your company charge per hour and how much do you make per hour? What sort of agreements do you have with your employer (non-compete etc.)?" The company charges $65 per hour to regular clients and I make very little of that. It seems like the business model is faulty, pushing us low-level yet skilled employees to start a company and go-it alone. It also seems like outsourced IT departments cannot have employees that will not leave or be disgruntled unless they are either a) paid enough or b) given a stake in the company. Do any of you have experience in this? What sort of business models exist out there for the remote IT department?"

Comments

What I've seen

[caboosesw]

We acquired a company recently who had an outsourced arrangement ... and related to that I have since met a few other outsourcing companies. They all seem to have the same standard model ... monthly retainer with dubious stated hours with an unwritten promise that they will do "whatever it takes."

In practice, these folks try as hard as possible to stay to a fixed amount of hours and charge for change requests ... not that there is anything wrong with that.

We have seen $130-$150/hr ... although I have heard rumors of folks who do it for $75-100/hr in their retainer.

Ideally, someone would give a tiered labor rate based on the skillset (desktop, server, network, security, etc.)

Re:What I've seen

[giberti]

Additionally, the $150/hr to plug in a monitor is a sure thing, they know it's easy and so it's the bread and butter. When they need to outsource for professional services of a DBA or something, their profit margin goes way down. It's really just a matter of business!

Retail stores do the exact same thing. Consider electronics. A new television usually is within a small window of room for pricing. One store will have it for $499, another for $510. It'll probably cost just as much in gas and distance traveled to go get the cheaper one anyway. Ultimately the store is making a VERY small profit on the TV, it's a tight market. BUT, when it comes to things like cables, installation, protection plans etc, the markup is VERY high. Most people expect the high pressure part of the purchase to be the TV, it's really not, when the salesman is in sell mode it's for the add-ons, because that's where they make their money. You want fries with that?

As an owner of a small web development business, I prefer to do the easy work for the same rate as my harder work. Yes it limits the client pool somewhat, but it also ensures I'm not in the business of posting content all day, I can write and debug applications at the same rate as posting a PDF for a company that doesn't have the time, energy, experience etc because it's just easier for them - it also requires less effort on my side.

Back to the initial Hard Drive request. Inevitably, when you go to install that Hard Drive, as the lone IT guru, your going to get a 100 questions, which may or may not be easy to answer... should you need to have the client sign a change of rate order for each question based on the difficulty to answer? No, flat rate it.

Incidently, when I used to manage a larger website with an colo facility contract with SAVVIS, we ran into issues with their services department charging a flat rate, regardless of what they were doing, installing patches, rebooting servers, upgrading F5 hardware, looking for corrupted database tables, defragging hard drives... didn't matter, flat rate. It sucks, but like before, get someone else to do it.

Re:SoHo rates

[Shadow99_1]

Having been in the small time consulting bussiness myself (also on the East Coast, I live in PA) and I can say that it's not nearly as easy as it sounds...

Why you ask? See it's all in the contacts, and the fact that if he leaves now (when he now has contacts at client companies) he's screwed. The company he has worked for will do whatever it takes to bury him before he can gain any clients of theirs he's dealt with. And if (and is most likely the case) he had no client contacts before taking that job he has a 0.00001% chance of gaining clients.

During college I came back from a larger city to the area I'm from and tried to apply my work as a network consultant back there to get me new bussiness here. I ahd no contacts and at least 3 existing companies did much the same as the one he works for (from the sound of it). Major companies (200+ staff within the area and the ones with money to spend) have their own IT departments (however small those may be), so only the small fries need network consultants (aka the 'portable IT department'). The problem? Those companies can't even pay $100/hour. Most of the existing 'firms' charged $80, which was nearly the limit those places coudl afford (in fact I know several that would toss the consultants out when the reached whatever fixed limit they could afford whether the work was done or not).

I came in and found I knew no one... I couldn't even get my foot in the door with most places, so I ended up taking a retail job for five years... It's been a year since then and I have developed a few contacts that will get me work, but I have about half a dozen clients who can barely afford to pay me (I've had to take some assignments on very low flat fees, or even down work for free to get my foot in the door). It's been a very long and tough process. Even now I'm looking at a long term conttract that pays almost nothing compared to what I will do... The contract calls for me to create a computerized inventory system and client database and then set up an online store from scratch (which isn't even exactly within my normal range of skills)... All by myself. What am I being paid? ~$1800/month as a flat fee. At which I'm more expensive per month than their rent and only because they feel I can make at least that much a month for them through the web am I getting this job at all. It will be the most I've earned yet since I came back.

You make it sound so much easier than the reality is...

A few things to look at...

[DecoDragon]

You don't say if your small part of the $65/hr is counting any benefits they may or may not be offering you. You also don't say how much you're billable, so you might want to take that into account. I've been following some small business "managed IT" shops talk bout being happy to get 75% billable out of their consultants, so you might think of that as a benchmark.

This will not endear me to the general Slashdot community, but if you search Yahoo!Groups for some of the MS Small Business Server communities, in particular the smallbizit or "managed services" group, you'll find small business owners discussing the ins and outs of making a business work - including profitability and if you do some archive searchs what they're offering for benefits. If you participate in the OS religious wars, you may want to skip it, but if you can look past that, there's some value. A lot of the discussion is in moving a business from "break/fix" pricing to "managed services." You might Google "The SBS Show" which is a podcast talking about a lot of these issues, interviewing different business owners.

Service Business is tough anywhere

[pprboy]

I have been on both sides and visited with others on both sides. Any trade where the cost of entering the field (barriers to entry) are low see the same thing. I've seen mechanics, electricians and plumbers all hang out their own shingle.
I have also audited change order costs for contract work, including employee costs.
Consider this:
Basic 40 hrs/wk = 2080 hrs/yr
Assuming independent (sole Proprietor), simple basic in US

As an independent you will be lucky to get paid for 50% of that. Employee get paid for all of that, even when sitting around
In US independent pays ~14% SS & Medicare. Employee ~7%, Company covers ~7%
Average Employee costs company ~30% OVER pay rate for SS, Insurance (Unemploy & Group Medical), Vacation & Sick Leave.
Independent has no leave, no unemployment, pays own individual medical.
Employer provides specialized tools. Independent provides them for self.
As independent other 50% of time spent worrying about paperwork, sales, marketing. All the necessary things that don't add a cent to your checkbook.
Employee just has to get their time sheet in.

I've seen lots of people jump between the two. Boom times go independent and get on the gravy train. Bad times grab the paycheck and let the boss worry about keeping the doors open.