The New Accounting Standards Codification 606: What’s the Impact on How MSPs Bill for Services?
As the effective date, December 15, 2017, for Accounting Standards Codification 606 has now become a reality for all non-public companies, let’s take a look at how this will impact MSPs going forward.
What does this mean for MSPs?
First, a quick and helpful summary of what this is all about from CompTIA.
This is a revenue-reporting requirement. It means the various pieces of a service contract now have to be reported individually, rather than as one overall transaction. So, if you have a client signed to an IT services contract that includes ongoing remote monitoring and management, along with periodic integration, customization or routine upgrade services, each of those actions must be itemized as discrete revenue line items. For many MSPs, customers are on a recurring revenue contract that is flat-rate, predictable pricing. A customer pays X-dollars per month for all services. In other words, they get one bill. Now, MSPs will need to have individual pricing for each service, which could complicate how a contract is bundled and sold to a customer, perhaps making it less predictable depending on what they need month to month.
How to Get Out in Front of the Change
While it’s true many MSPs and ITSPs provide one line item with a flat fee price for a bundle of services (e.g., Managed Services – $50 per seat or device), there are service providers already itemizing each offering in their managed service bundle. Whether you itemize or not, you do need to be on top of this new revenue reporting requirement.
My first, and most important, piece of advice is to seek out the counsel of a certified public accountant (CPA). While I offer my opinions, I am not a CPA! Most MSPs (unless they are CPAs) outsource this role and have easy access to these experts so this should not be an issue. When I was in business for myself, my accountant was my best friend, only a phone call away. Your accountant will understand the new revenue reporting requirement and how best to align with it.
While this is about revenue recognition, my big concern if I were in business would be the impact on income and sales tax reporting. When you recognize revenue impacts your income tax reporting. As far as sales and use tax, you either collect and pay sales tax on a particular product or service or not. So, if you do not collect and pay sales tax on a service item when you should be, and then it is discovered on a sales tax audit, it could be a very serious issue for you in terms of penalties and back taxes. I can’t stress enough all technology service providers should be jumping on this early so they are setup properly for 2018 and beyond.
In addition to getting advice from a professional, another key element for MSPs is to have the right solutions in place. A quote to service delivery system combined with a complete Back Office Accounting solution will be critical. A Professional Services Automation (PSA) solution provides MSPs with a complete system to define their product and service catalog with costs and revenue totals, issue quotes for goods and services and then tie these goods and services to a contract and ultimately, invoice their client directly or through their back-office accounting system. And having the PSA and accounting system integrated and working together should make this a fairly straightforward adjustment for MSPs.
The key now is to review contracts in place, determine which products and services need to be itemized and when revenue is recognized based on delivering on your contractual obligations, and to start doing it sooner rather than later! Then make sure all new proposals are delivered with properly defined product and service line items where revenue can be easily recognized and reported.
How to Choose a Pricing Model that Works for Managed Services
If you need help setting up an itemized managed services bundle pricing model that works for your business, our Smart IT Guide: 5 Steps to Pricing Managed Services is a valuable resource detailing step-by-step how to price managed services. It outlines how to create a customizable pricing framework for each managed service you will deliver, designed to optimize profitability based on best practices and includes helpful worksheets. Find it here.