George Mellor - KloudReadiness, LLC
The Gross Profit Challenge
Updated: Apr 2, 2021
The obstacles value-added resellers, IT solution providers and managed service providers face is margin compression and a shift to subscription-based cloud computing models.
Many of the old profit pools are shrinking and you are under immense pressure to sustain your blended gross margin objectives if you’re leading a channel company. Over the years, you’ve become very adept at holding your operating expenses (OPEX) in check and you’ve probably squeezed the buffalo to the point of exhaustion. There’s not much room left to cut or wring out – now what?
Well, product margins are slim and even the most deft backend dollar Svengali is incapable of making up for the margins that have been sucked out of the product business over the past several years.
Long ago you concluded that you needed other profit pools and that’s what lead you into professional services and then eventually into managed services. Thicker gross margins are there once you climbed the hill and made the investments, laid in the framework and acquired the right talent.
But, I’m pretty sure most of you reading this piece have never really seen those 50%+ gross margins all of the fast-talking consultants espoused during the many conferences you attended looking for the holy grail of profitability.
Damn now after a few good years the cloud era is upon us and providing yet another pressure point on your overall blended gross margin as the deals seep away to new players or legacy competitors who’ve beat you to the subscription-based services punch. We’ll leave why you should be attacking the cloud and monthly recurring revenue space for another day…
Shoot, even your services gross margins are under attack. The margin compression is most likely being brought about from two (2) diametrically opposed profit draining fronts.
The first front is external forces – as mentioned above there is mounting pressure being brought to the marketplace via the subscription-based economy.
In other words, the cloud and monthly recurring revenue players are providing your customers with alternatives that are compelling and cost effective because they can be consumed and paid for monthly – I really hope you decide to move on this enormous opportunity.
The external pressure is real and growing, however, we’re going to spend the remainder of this piece focused on the second pressure point suppressing profitability – internal forces.
The simple reasoning behind placing more emphasis on internal forces verses external forces effecting profitability in this piece is quite straightforward.
Typically, most leaders feel they have more control over their organizations actions than the marketplace and I tend to agree. Plus, most channel partners will take 12 – 18 months to become truly recurring revenue adept.
So with that said, we’ll look at how you can begin increasing your gross margins based on your current business mix and run-rate.
In a word, it all comes down to automation…
If all things are otherwise constant, and I understand they’re not – automating pieces of your world can do wonders to drive your blended gross margins higher and you’re in total control.
Your biggest single expense item is your people and if you can increase efficiencies by as little as 10% via automation in both your selling and delivery organizations the gross margin impact will be significant.
Now I know we’ve all fallen victim to the sirens song and allure of systems that were going to take us to the promised land – I too purchased SalesForce, a PSA and one heck of a remote management & monitoring system (RMM). Complete with green, yellow and red flashing icons.
They made life better and customers happier, but my blended gross margin needle did not move much once we were up and running. I could say I had the tools, but really leverage them – not so much.
Truth be told, the reason behind the lack of productivity and gross margin gains had nothing to do with the tools, they had to do with the inability we had embracing the automated lifestyle. In other words, we never committed to automating out stupid repetitive tasks that were killing us and driving down our profitability.
Think about it, here we are in 2017 and how much more productive and utilized are your engineers?
How many times are you put in a position where you can’t close a project because of all the re-work that must be completed prior to project or on-boarding sign-off?
I’ll bet that your managed services resources don’t manage and monitor any more devices or users today than they did two (2) years ago. That’s a damn shame and directly attributed to not automating the simple error prone activities that they’re mired in daily.
Ergo, we’re still slave to the artists and guru’s instead of operationalizing our culture – which is where untapped profits live.
We’re on the doorstep of the digitization era and your customers are going to be coming to you for direction. That advice begins with understanding the business processes at hand, identifying pieces that can be either eliminated or automated and then measuring and reporting out on their impact.
The key will be to furiously attack issues incrementally to optimize the process and either wring out cost or create net-new revenue streams from the intellectual property produced and the data driven opportunities that present themselves. Watch your clients, they are automating like crazy and I hope you’re imbedded within the opportunity chain.
It’s all about truly committing to automate your business, helping your clients do the same and reaping the gross margin benefits associated.
Put in a way I used to understand – if you can consistently get a solid and sustainable 5% - 10% on average increase in engineer utilization you are able to keep your headcount the same (I used to call this approach - headcount avoidance).
So, if you had budgeted two (2) positions to reach your financial objectives and now they’re not needed because you’ve truly gained a solid productivity increase – you win big. Think what that would do to your blended gross margin! And that’s only one focus area.
Think this is a pipedream and not real? Look at what BitTitan (@BitTitan) has done with their MigrationWiz, DeploymentPro and MSPComplete platform – in short, they’ve taken very complex and time intensive activities and fully automated them, so they are simple to execute and infinitely more profitable than traditional approaches.
Now they’re replicating their success with the introduction of their MSPComplete managed services automated platform. It will help you create a culture that is operational and automated. Take a look - it’s a game changer!
Stay Calm and Automate On…
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