Managed IT Services ROI – How Much Can You Really Save?
So you are thinking about outsourcing your IT supprt to a Managed IT Services Provider (MSP). It seems like a no-brainer. You bring in a bunch of experts to take care of your IT needs while you avoid the hassle of establishing your own IT department. But then the CEO says she wants you to prove to her satisfaction that you will save money before she will sign the MSP service agreement.
You go back to your office, open up a spreadsheet, spend hours looking for a template and eventually end up staring at a blank screen. Exactly how much will you save by using an MSP? The answer is, like so many things in the technology industry: “It depends.”
The components we will use for estimating the ROI are the following:
- Overall cost of IT as a percentage of revenue
Overall Cost of IT as a Percentage of Revenue
According to a Gartner paper published in 2017, healthcare organizations spent an average of 4.5% of revenue on IT costs. ROI consultancy Alinean Inc. studied publicly-traded US companies and found the following:
- Large companies (over $2 billion) spent 3.2% of revenue on IT, with an average IT cost of $11,580 per employee.
- Medium companies ($50 million to $2 billion) spent 4.1% of revenue on IT, with an average cost of $13,100 per employee.
- Small businesses (under $50 million) spent 6.9% of revenue on IT.
To determine your high-level cost of IT, take your company’s gross revenue and use the listed percentage to estimate the typical cost of IT for your business.
The primary factor in determining the ROI related to staffing cost is the level of MSP integration. In the grand scheme of things, there are two basic approaches to managed services: in place of IT staff or in addition to IT staff.
- MSP in place of IT staff.
Especially for smaller companies, it often times makes more sense to use an MSP instead of hiring IT staff. That is, instead of hiring help desk staff, network administrators, database administrators, security administrators and someone to manage them all, you pay a fixed fee per month to get all of those services as needed. When new expertise is needed, the MSP provides the expertise at a negotiated cost, with minimal delay.
In this case, it’s relatively easy to determine the human component of the ROI calculation. Simply add together the salaries of the hypothetical IT department, then double it to account for the cost of hiring, training, administration, and all the costs that go along with having IT staff on the payroll. Save this number for the final calculation.
- MSP in addition to IT staff.
This is where the math starts to get fuzzy. If you are using a MSP to augment your existing IT staff, you need to determine the cost of the staffing it would take to fill that function. For example, if the MSP will be handing network support, administration and troubleshooting, estimate the cost of hiring a network administrator FTE. Add up the individual costs associated with each MSP role and save this for the final calculation.
In some small businesses, the IT role is just another hat worn by one or more employees. In other cases, IT personnel have secondary roles in the business. For example, there may be someone on the IT staff who manages the IT vendors. He creates purchase orders, tracks shipments and is responsible for paying invoices.
In each of these cases, you need to identify how much of the employee’s total cost is associated with the IT role. For example, the IT staffer who handles vendors may spend up to half his time working with vendors.
In addition, you need to determine how much time, on average, non-IT staff are spending doing activities that will be outsourced. For example, how often are people fixing printer issues, installing software updates or providing IT support for another employee? If those functions will be outsourced, try to estimate a cost for their time. For example, you could take the total hours non IT-staffers are spending on IT support and multiply it by the average hourly rate for each employee role to estimate the total cost. Save this total for the final calculation.
Every computer or computer system breaks at some point or another. It is important for you to take a long, hard look at your system outages over the past year and estimate the impact on the business.
Revenue lost to downtime:
- Determine the average revenue per hour for your business by taking the total annual revenue and dividing it by the number of business hours in a year. This may be 24 hours per day for 365 days or only business hours Monday through Friday.
- Estimate the downtime hours for your network, Internet, email, servers, desktops, etc. It is important to be brutally honest here and to count all the outages that impacted the business.
- Multiply the average revenue per hour by the number of outage hours to determine the cost of outages. Save this total for the final calculation.
The Final Calculation
You have now estimated the total cost that may be impacted related to staffing, support and downtime. Add together these three costs and add to this number the costs of any existing MSP or outsourcing contracts that will be replaced by the new MSP contract. This is the “existing cost.” By comparing the existing cost to the cost of the new MSP contract, you can determine the anticipated savings.
Another option for calculating the ROI is to find out if your MSP has an ROI calculator that they have used with other customers. Compare the number generated by the MSP’s ROI calculator to the number that you generated and analyze the areas where you came up with different answers. The final, best answer probably lies somewhere between the two.
Calculating the ROI for Managed IT Services isn’t an easy or straight-forward task. It’s not a simple case of adding A plus B equals C. However, going through the process of determining the costs involved with staffing, support and the impact of downtime on the business is a good way for you to develop a better understanding of why you are contracting with the MSP and communicate the benefits to the business.