Agreement additions, if set up properly, can provide exactly the information you need to create complete transparency for your agreement labor. Since most agreements have both product (A/V, storage, etc) and labor (remote, proactive) in them, we need to understand how many dollars go to each. Once we know that, we can see if you are pricing your labor as well as you would like.
Different Ways to Calculate the Same Numbers
Here is an example:
- A client has a $3,000 monthly agreement for monitoring and tools.
- In a given month you put in 20 hours against the agreement
- As part of the agreement you provide tools that cost you $700 that you would ordinarily sell for $1,000.
How would you calculate the effective rate on the agreement? One option would be to divide the value of the agreement by the hours put in. If you did that you would have $3,000 / 20 hours = $150/hour. Now most clients we have would be happy with a number like this.
How about if you backed out the retail value of the products? Well, that would be $2,000 / 20 hours = $100. If your target was $150 per hour, you may now have an under performing agreement.
Which Number is the Right Number?
Which number would you use? I will tell you that we strongly think the right number is the third option. Why? Because you are doing two things with your agreement, selling labor and selling product. That product is anything that you have to pay a third party for. We would argue that you should make some money on this transaction so the right way to think about it is the total agreement less the value of the tools and products sold. This gives you a clean labor number.
The challenge is often that the additions are not so clean cut in helping you identify product and labor. What rules do you use to separate the two?