CEO of GeNUIT and developer of Promys, professional services automation software for technology integrators developed by a technology integrator.
Are you happy with your bottom line? For most CEOs, the answer is no. Many technology reseller CEOs struggle with how to address best practices, industry targets and how to emulate industry profit leaders.
According to an industry survey last year, profitability of resellers fell into 3 categories;
- Sub Performers (< = 3%)
- Average (5%)
- Stellar (> = 8%)
A majority of the respondents fell into the sub performer category.
Most of the sub performers have a business heavily weighted to product sales. They have little emphasis on project-based labor and even less on reoccurring revenue like service contracts or managed services. Their product to services sales ratio is 80/20 or less. They act as a moderate value add in the hardware supply chain to their customers.
The average performers understand the services model much better but struggle to get enough profit from their services on a consistent basis. They are typically pretty good at hitting the customer deliverable, but lack the infrastructure tools to maximize their profitability. Commonly they have two or three separate disconnected back office systems combined with Excel Spreadsheets, that limit their ability to produce meaningful reports that forecast labor services and profitability. People in these organizations reference revenue numbers more often then they talk about gross margin and visibility tends to be backward looking off of quarterly P&L’s and balance sheets. Subsequently project and service contract profitability is something that is known after that fact, as opposed to something that is planned for and actively managed toward.
Stellar performers focus more on gross margin and less on revenue. You can see this in how they do their reporting. Sales forecasts, project reports and service activity not only show “real-time” revenue but also accurate margin details that are system calculated and not based on some guesstimate of a rep or project manager. They can evaluate a quote based on the quality of its margin because they see the enough detail and can track changes to the quote throughout the sale process. They can track project labor profitability while a project progresses and not have to wait until the end to find out if the won or lost money. They see and treat labor units like inventory for which every hour is accounted enabling them to see where labor “leaks” into non billable activity. They strive for at least 70% productivity and can accurately measure it every step of the way.
Once you get past the sub-performers, the real difference between the average and the stellar performers comes down to the ability to do three things:
a) knowing in advance what the profitability target is and how to plan for it,
b) being able to get real-time visibility and accurately measure how well they’re doing against those profitability targets during service delivery
c) advance notifications that allow proactive corrective actions when something starts heading in the wrong direction.
Using these categories is a handy way to create a Profitability Scorecard for your business. Stay tuned over the coming months as we tackle other best practices for growing your reseller business.