Service Economics Glossary
Clear definitions for service economics and management terms. Understand the language of service delivery, from gross margin to SLA achievement.
A
AI COGS (AI Cost of Goods Sold)
AI costs classified as direct costs of service delivery, sitting alongside labor in the cost structure. Includes inference costs for client work, token consumption, and compute for revenue-generating activities.
AI Cost Attribution
The practice of tracing AI expenses (tokens, compute, API calls) to specific clients, projects, or services. Essential for understanding true margins on AI-augmented work.
ARR (Annual Recurring Revenue)
The annualized value of recurring subscription revenue. Calculated by multiplying MRR by 12.
Attrition
The loss of customers, employees, or subscribers over a period of time. Often measured as a rate or percentage.
B
Backlog
The total volume of unresolved tickets or work items waiting to be addressed. High backlogs indicate capacity issues.
Billable Hours
Hours worked that can be charged to a client. Distinguished from non-billable administrative or internal time.
Blended Delivery
Work delivered through a combination of human expertise and AI capabilities. The delivery cost equation becomes: (Hours × Rate) + (AI Tokens × Token Cost) + Tool Fees.
Burnout
Physical and emotional exhaustion from prolonged overwork. Often results from sustained over-utilization above 85%.
C
Capacity
The total amount of work a team or resource can handle within a given time period.
Capacity Planning
The process of determining the resources needed to meet future demand while avoiding over or under-staffing.
Change Request
A formal proposal to modify agreed-upon scope, timeline, or deliverables. Essential for preventing scope creep.
Churn
The rate at which customers stop doing business with a company. Usually measured monthly or annually.
Contribution Margin
Revenue minus variable costs, showing how much each unit contributes to covering fixed costs. Formula: (Revenue - Variable Costs) / Revenue × 100
Cost Center
A department or function that incurs costs but does not directly generate revenue. Important for overhead allocation.
CSAT (Customer Satisfaction)
A metric measuring how satisfied customers are with a specific interaction or overall service. Usually measured on a 1-5 scale.
D
Deflection Rate
The percentage of inquiries resolved through self-service rather than human support. Higher rates reduce support costs.
Delivery Composition
The mix of human vs. AI resources used to deliver a service, expressed as percentages. Understanding composition helps optimize margin and pricing for blended delivery work.
Direct Costs
Costs that can be directly attributed to delivering a specific service, such as labor and materials.
E
Engagement
A specific instance of service delivery to a customer, such as a project or managed service contract.
Escalation
The process of moving an issue to a higher level of support or management when it cannot be resolved at the current level.
F
FCR (First Contact Resolution)
The percentage of issues resolved on the first interaction with support. Higher FCR indicates better support quality and efficiency.
FinOps for LLMs
Financial operations practices applied to large language model costs. Includes token-level monitoring, cost attribution per project, model selection optimization, and consumption governance.
Fixed-Fee
A pricing model where the price is set regardless of the actual effort required. Transfers risk from customer to provider.
FTE (Full-Time Equivalent)
A unit measuring workload equal to one full-time employee. Two half-time employees = 1 FTE.
G
Gross Margin
Revenue minus direct costs of service delivery. Formula: (Revenue - Direct Costs) / Revenue × 100. Target: 35-50% for most services.
H
Health Score
A composite metric indicating the overall health of a customer relationship, combining multiple indicators like usage, satisfaction, and support interactions.
I
Incident
An unplanned interruption or reduction in service quality that requires response and resolution.
Indirect Costs
Overhead costs that support service delivery but cannot be directly attributed to a specific service, like office rent or management salaries.
K
KPI (Key Performance Indicator)
A measurable value that demonstrates how effectively an organization is achieving key objectives.
L
Lead Time
The time from when a request is made until work begins. Important for capacity planning and customer expectations.
M
Managed Services
A business model where a provider takes ongoing responsibility for a defined scope of services, typically for a recurring fee.
Margin Erosion
The gradual decrease in profitability over time, often caused by scope creep, cost increases, or pricing pressure.
MRR (Monthly Recurring Revenue)
The predictable revenue a business expects to receive each month from subscriptions or contracts.
MSP (Managed Service Provider)
A company that remotely manages a customer's IT infrastructure and/or end-user systems on a proactive basis.
MTTR (Mean Time to Resolve)
The average time from when an incident is reported until it is resolved. Key SLA metric.
N
Net Margin
The final profit after all costs (direct, indirect, and overhead) are subtracted from revenue.
NPS (Net Promoter Score)
A customer loyalty metric measuring likelihood to recommend. Calculated as % Promoters (9-10) minus % Detractors (0-6).
NRR (Net Revenue Retention)
Revenue retained from existing customers after accounting for churn, downgrades, and expansions. Formula: (Starting ARR + Expansion - Churn) / Starting ARR × 100
O
Overhead
Indirect costs of running a business that cannot be directly attributed to specific services or products.
Overtime
Hours worked beyond the standard work schedule. Sustained overtime (>10%) indicates capacity issues.
P
P&L (Profit & Loss)
A financial statement summarizing revenues, costs, and expenses over a period of time.
Priority
The relative importance of an incident or request, determining the order and speed of response.
R
Rate Card
A list of standard rates charged for different types of work or resource levels.
Realization Rate
The percentage of potential revenue actually billed and collected. Formula: Billed Revenue / Potential Revenue × 100
Renewal Rate
The percentage of contracts renewed when they come up for expiration. Target: 85%+ for healthy businesses.
Retainer
A recurring fee paid to reserve access to services, often with a set number of hours or support level included.
S
Scope
The defined boundaries of work included in an engagement, specifying what is and is not covered.
Scope Creep
The gradual expansion of project scope beyond original agreements without corresponding price increases.
Service Credit
A financial penalty or discount given when SLAs are not met. Excessive credits indicate delivery problems.
Service Economics
The discipline of understanding the true cost of service delivery by tracking and attributing all inputs (labor, tools, overhead, AI) to specific engagements, clients, and service lines.
Service Economics Intelligence
Platforms and practices that provide visibility into the true cost of service delivery, aggregating human, AI, and tool costs at the engagement level to calculate real margins.
Service Level Agreement (SLA)
A contractual commitment defining the expected level of service, including metrics and consequences for non-compliance.
Service Level Indicator (SLI)
The actual metric being measured to track service level performance.
Service Level Objective (SLO)
An internal target for service performance, typically set tighter than the contractual SLA.
Shift-Left
Moving resolution capability to earlier (lower) tiers of support to resolve issues faster and cheaper.
T
T&M (Time and Materials)
A pricing model where customers pay based on actual time spent and materials used.
Ticket
A recorded request or incident in a service management system, tracking the issue through to resolution.
Token-Level Monitoring
Granular tracking of AI consumption at the API call level. Includes input vs. output tokens (different pricing), monitoring by model, identifying inefficient prompts, and setting alerts for anomalous consumption.
Turnaround Time
The total time from request submission to completion. Different from MTTR which focuses on incidents.
U
Utilization
The percentage of available time spent on productive or billable work. Formula: Billable Hours / Available Hours × 100. Target: 70-80%.
V
Value-Based Pricing
A pricing strategy based on the perceived value delivered to the customer rather than cost-plus calculations.
W
Write-Off
Time or work that cannot be billed to the customer, reducing realization rate and profitability.