MSPmentor Blog

Three Tips: Managed Services Sales and Compensation

I have a neighbor who really gets into Christmas.  His house is covered with lights and ornaments.  The combination of bright lights and shiny objects captures lots of attention, even prompting a local TV crew to broadcast in front of his house.

This display of festive spirit and the reaction in the neighborhood made me think of a recent conversation with an MSP.  He said “I can’t stop my salespeople from chasing bright and shiny objects.”

When he saw the puzzled look on my face, he explained that he could not break his sales team’s habit of chasing large one time sales and their payouts. A Managed Services contract that pays smaller amounts over a period of time could not compete with flashier one time sales, even if the payout was greater in the long term.  So what’s an MSP to do?  Here are a few ideas from our website on leveling the playing field for Managed Services contracts with their brighter and flashier cousins.

1. Differentiate between Contract, Project and Product Sales: To influence the right kind of behavior, you must have a different comp plan for Managed Services, project and product sales.  Now this may seem obvious, but many MSPs attempt to incent their sales staff with a one size fits all comp plan.  The result: unexpected behavior and undesirable results.

2. Consider Paying Commission on Full Contract Value: This makes your Managed Services contracts into bright and shiny objects in their own right with a large one time payout and incents your sales team to sell longer and larger contracts.  While this sounds like an easy fix, this strategy does put new cash flow demands on your business as well as higher business risk associated with cancellations.  To mitigate these risks, consider charging a one time “getting started” fee and be sure to include a cancellation fee in your contracts.  Some MSPs even go as far as allocating the first x number of monthly payments to their sales staff depending on the length of the contract.

3. Base Commission on Margin: Managed Services results in higher service levels and lower operating costs, producing higher margins than break/fix contracts and product sales.  As a more profitable business you can afford to pay relatively higher commission, making even landing a small Managed Services contract attractive to your sales team.

Guess what I saw on my street last night? Yup, another house full of lights.  People are always attracted to bright and shiny objects, so to influence the right type of behavior, make your Managed Services contracts bright and shiny.  You can learn lots more on this topic at by watching our IPED webinar entitled “Variable Compensation Plans for Managed Services Businesses.”

Jim Hamilton is executive director of MSP Partners. MSPmentor is updated multiple times daily. Don’t miss a single post. Subscribe to our Enewsletter, RSS and Twitter feeds.

Discuss this Blog Entry 5

Laton (not verified)
on Dec 23, 2008
Jim can MSPs really afford to do item 2? Even with those "getting started" fees and cancellation fees I doubt most MSPs have cash on hand to pay full up-front commissions for customer contracts that will be paid over time. Also I don't think my customers would go for cancellation fees especially if they're canceling because of the bad economy. All that said I like this post and it got me thinking/wondering if there are creative ways for our company to offer option 2 without really stressing our cash flow. Thanks for your thoughts.
on Dec 24, 2008
Hi Laton, Thanks for your thoughts. I agree that point 2 provides some challenges to MSPs. While not easy, here are a few more thoughts: 1)Cancelation fees are a reasonable “ask” in negotiating your contract. Explain cancelation fees to your customer this way – I have real upfront costs that I recover through the length of the contract (s/w licenses, staffing costs, etc.). If you cancel before the end of the contract, I will end up eating those costs. While most business owners won’t like a cancelation fee, they will understand why it is necessary. You could top this off with, “of course, you’ll be so happy with our services that you will never cancel!” 2)Find alternative ways of financing the upfront commission – I mention one creative way above (allocating the first month of a contract to commission), but other options could include borrowing against your accounts receivable, or raising more capital. Not easy answers, but certainly options. 3)A more middle ground approach is to pay a portion of the contract up front and pay the remainder on a monthly basis. While this takes some of the “shininess” away from your Managed Services contract, it will alleviate cash flow concerns.
Joe Panettieri (not verified)
on Jan 8, 2009
Hey Ben: I will make sure Jim sees your inquiry. Thanks for the note and for reading MSPmentor. -jp
Ben (not verified)
on Jan 8, 2009
Hi Jim, I read your article with interest, as one of our New Year's resolutions is to do some reworking of our sales team compensation plans. I agree that as an MSP making contracts more "shiny" for sales staff is a necessity. I'm interested in your, and your readers', thoughts on rolling targets over from quarter to quarter. What do you do if sales staff miss their targets one quarter, then achieve them the next? Do companies still pay the full commission, average it out, make them wait, or something else? As business owners it hurts to pay commission when we know the good month/quarter is only barely paying for the loss in the previous one. But it's also really important to keep our sales staff motivated to perform. I think this will be an especially common problem to come up against in the next 12 months amp; appreciate your thoughts.
on Jan 15, 2009
Hi Ben, Thanks for your thoughts and questions. Essentially, you want to build your variable compensation plan so that it is aligned with your business goals - that is, it doesn't cost you much when business is poor and rewards your team when business is good. The best way to do this is to pay commission as a percentage of total Gross Margin (no more than 25%). This way your incentive compensation is manageable and predictable and you leave yourself room for profit. In bad times, you and your team will share the pain and in good times, you and your team will share the wealth. As mentioned above, we have an excellent webinar on entitled “Variable Compensation Plans for Managed Services Businesses.” that explores this topic in significant detail.
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