Welcome back to our Thought Leader Podcast series! In this podcast, we speak with industry leaders about their perspective on doing business in the technology industry. Episodes feature interviews with inspiring speakers David Meerman Scott, Jo Burston, Dux Raymond Sy and Mario Carvajal, Carol Roth, Tim Hurson, Kris Plachy, and Mike Harvath and Reed Warren, covering topics from marketing to management to the future of the Intelligent Cloud.
In today’s episode, we hear from thought leaders Mike Harvath and Reed Warren on the subject of partner specialization. Mike and Reed are the Founders of Revenue Rocket, a consulting firm focused on growth strategy and acquisition. Together, they have an in-depth understanding of how Microsoft partners grow and manage their businesses. Over the years of working directly with businesses on accelerating profit, Mike and Reed have learned that the main success factor for partners is the ability to specialize in an overserved market. In this interview they share their thoughts on the potential of merging technology with vertical market specialization.
[VOICEOVER]: Welcome to the Microsoft Partner Network Thought Leader Podcast Series. In this edition, we’re talking with Mike Harvath and Reed Warren of Revenue Rocket. Mike is the company’s president and CEO, and Reed is its vice president. Revenue Rocket is a management consulting company that helps IT services firms with merger and acquisition initiatives and growth strategies. Today, they discuss how partner specialization is key to success, why accelerating profit from the start is critical, and how to approach the different ways to grow your and your customer’s business.
MIKE: Hi. I’m Mike Harvath. I’m President and CEO of Revenue Rocket.
REED: And this is Reed Warren, Vice President and Partner at Revenue Rocket.
INTERVIEWER: Outstanding. Thanks for joining us today. So can you tell us first a little bit about your company?
MIKE: Sure thing. Revenue Rocket is a growth strategy and M&A advisory firm based in Minneapolis, Minnesota. We work with Microsoft partners worldwide. And our focus is to help firms profitably grow and successfully do both buy side and sell side M&A transactions.
INTERVIEWER: Outstanding. So far as the typical partner to partner engagement that you have, partnering for success is a huge thing. Can you talk a little bit about what a typical engagement would be?
MIKE: For us, typically our clients come to us, and when we work with them, we work with them on a service level agreement basis. So [stopped xxxx] it’s a retainer. And we have a very specific program on the strategy side of our business called Revenue Realization. And in many ways, it’s about profit realization and becoming a top quartile performer.
So the whole story’s not told with Revenue Realization as a name, but that’s what we happen to call it. And that engagement’s about nine months. And we transition 140 or so clients that are Microsoft partners through that process to top quartile performance.
So if you’re a partner and you’re struggling with sort of getting — you’re seeing pressure on growth and profit, we certainly can help you with that.
And then on the M&A side — I don’t know, Reed, if you want to talk a little bit about that.
REED: Yeah, I just want to touch base on the top quartile. Typically we define top quartile as twelve to fifteen percent (Inaudible 3:33) as a percentage of revenue with typically about 30 percent year over year growth. And so Mike — and I don’t want to steal thunder from Mike — has created the rule of 45, which really looks at those two components coming together. And if you’re operating between 40 and 45 — so you take your — you (Inaudible 3:50) as a percentage of revenue plus year over year growth. Add those together. If you’re running in that 40 to 45 percent, you really have optimized the efficiency of the organization for both profit and growth.
INTERVIEWER: You talk about optimization. I think that’s one of the values that a lot of partner organizations are looking for. Can you talk a little bit about how a partner organization can arrive at that valuation? What are the things that partners can proactively do to increase their value of their firm?
MIKE: Yeah, sure thing. I want to talk first a little bit about how someone engages with us on the M&A side because I think it’s important to cover that off and answer the rest of your last question, XXXXX.
But we engage both on a retainer and success fee basis in helping companies buy and sell. So about 91 to 92 percent of the time someone engages us, we successfully get a transaction done. That’s much higher than the market. The market’s at about 50 percent for advisors. And frankly, without an advisor, about one percent.
So there’s a business case to have an advisor help you.
As far as adding value and optimizing sort of the value to the market, when we begin any work with a client, we do a review, if you will, or an assessment of your business. It helps us chart the course for improvement if it’s a strategy engagement. It also helps us look at are you really ready to do a transaction. Whether that be buy side or sell side transaction.
And oftentimes, we find when someone comes to us and says, “Hey, I really want to sell my business”, or, “hey, I might want to buy a business”, they’re not ready. And so we move more into a build value/build optimization, get more health and vibrancy into the business. And we do that through our revenue realization engagement.
INTERVIEWER: Can you share some examples of the types of things companies are doing to increase their value? In other words, if someone were going to retain your services, what are the prerequisites that you like to see?
MIKE: Well, you know, maybe the question of sort of what are some of the success factors is probably the question. And obviously, you know, they don’t need to have all of these when they engage with us. But we see the most successful partner really focus on a market or specialize. And that’s really an intersection of technology and vertical market specialization.
Whether you’re an ISV or what we define as a systems integrator or pure play IT services or platform company, the companies that are focused typically on a market and have begun to develop IP around that market, whether that’s process, or cloud offerings, or really even just process, are ones that are most successful. And the reason for that is that we have to chart a course to be number one or number two in the market you choose to serve. And without that, you’re not relevant. And so with relevancy, you have an opportunity to frankly get your unfair share of the customer base in your market.
So we see a lot of success built around those areas of focus. And then I think just having very disciplined approach around the financial side of the business. And we work with all of our clients, really, in helping them determine how to best market, how to best sell, how to manage the business in an effective way, and how to codify those offerings to that specialized market to really be successful.
INTERVIEWER: Outstanding. So kind of taking the flipside of that coin, is there a partner type that is not a good fit for mergers and acquisition. Do you see that there’s ever a time when a partner organization is either too small or has constraints? What are some of those challenges?
MIKE: Well, there’s a lot of things that have to come together in a partner organization as it relates to either buying or selling your business, right. So I think the short answer is probably no. However, I would say that it has a lot to do with expectations. And we’re in an industry where very few partners start their business with the idea that they’re going to run it as a multigenerational family business, right. It just doesn’t occur. It’s usually because someone starts a business, has a passion about technology in many ways — in many cases, or are passionate about helping customers if they’re sort of a sales and marketing type background person. And they have successfully grown the business to a certain size.
For our clients, we typically see a scenario where people will help them with strategy, and then they may do some acquisitions to help accelerate the growth. And then we see them eventually exit. And they typically work with us on that full continuum. And so depending where they are in that lifecycle is kind of where we enter.
But the short answer to your question is not really. The market right now is consolidating. It is our opinion that in general, it’s oversupplied, not undersupplied. So we’re a bit of a contrarian there.
And we think it also drives the case for why specialization becomes important. And as a result, we’re going to see sort of a (Inaudible 8:56) of companies that service niches that drive most of their business, even as a small company globally, through inbound marketing.
And so the paradigm of sort of the outbound sales scenario geography has changed dramatically in the last two years. The way CFOs — or CTOs, I’m sorry — or CIOs buy has also changed dramatically. And as a result, it’s completely changed the way that partners need to go to market to be successful.
INTERVIEWER: Great. As far as — you alluded to that disruption that’s going on in the marketplace. Based on what you’re seeing from Microsoft, what are the trends that you would predict are going to be the foundational components of a good partner going forward? What are the emerging technologies or the emerging partnerships that you think are really going to hold the most value?
MIKE: Well, you didn’t really pay me to say this, but I’m going to tell you it’s all about cloud, right. I mean, we know that cloud aligned partners, clearly those that also have created subscription-based revenue streams of their own, that are sort of long tail on really all the cloud offerings. Whether that’s more infrastructure, or platform, or Azure-based. I mean, it doesn’t really matter. And it needs to be sticky with the client.
But I think what’s interesting is that there’s a greater opportunity than ever for partners now to be able to capitalize on sort of the long tail subscription professional and managed services that exist. And a lot of people when they hear “managed services” think we’re talking about infrastructure managed services only. And we’re really not. We’re talking about application managed services, maintenance and support of custom development environments. Really, everything that’s involved with keeping those systems, and applications and platforms running.
That opportunity has exploded the market for partners. And it’s created an environment where with what Microsoft has built in the cloud, it’s the best time I think ever that I can remember in my 30 year career to be a Microsoft partner.
INTERVIEWER: I would agree. It’s definitely an exciting time for partners to get involved and to double down on their Microsoft engagement. Do you find that — you had said earlier that if a partner is going at it on their own that they have a much lower success rate. What are those hurdles? What do you think is the magic behind Revenue Rocket? And why is that so successful compared to partners that just simply aren’t engaging in or trying to do it on their own?
MIKE: Well, we talked about that in the context of M&A. But I think in many ways, you know, I would say in more broad terms, there’s probably more success available to you by leveraging some of the other advisors that are in the market. Revenue Rocket clearly is one of those companies. And for those of you that are in the audience that would love to learn more, you can learn more about us at revenuerocket.com. And we’d love to talk to you about how we might be able to help.
But beyond that, I would say that it takes a village really to grow your business. As a small business owner, there’s lots of challenges you have. And it’s a bit of a — you’ve heard all these analogies. It’s lonely at the top, or it’s tough going it alone and all that. I believe that, you know, there’s folks out there like Revenue Rocket that enjoy the luxury of perspective. We have a perspective of working with 400 companies over our 15 year tenure. We can bring that perspective to your business, share what we’ve learned, help you optimize your business, both for organic growth and for acquisitive growth.
INTERVIEWER: Great. I would just, you know, Reed, if you could just chime in on that one as well, I would love to get your perspective.
REED: Would love to. Would love to. I think one of the things that people fail to recognize is there’s a real difference between knowing the path and walking the path. It’s one thing to know that I need to lose weight, and if I just ate right and exercised right, I could do that. It’s really different to actually go through the process of doing it. And I think that’s really one of the key components that an advisor brings to the table is they’ll not only be able to show you the path, they’ll walk it with you and help make sure you really actually execute around it.
Because there’s this natural swirl of the business that’s always going to derail you from what you need to be working on as it get pulled into urgent situations. So an advisor either on the growth strategy side or the M&A side is really going to be able to keep you focused on what are the most important things to be working on in that moment as it pertains to those goals and really help you execute.
INTERVIEWER: Outstanding. Great. Any more to add to that?
MIKE: No. I would just say that our clients over the years have told us that this balance between working in and on the business is very challenging for them. They know as business owners that they need to spend time working on the business. I think their greatest value long-term is spent in working on the business.
But the business reality states, particularly when you’re small, that you need to spend a significant amount of your time working in the business. And I think that’s where an outside advisor can really help you. Whether you’re contemplating just accelerating your profit, so that you can have more options in the business. We’re firm believers that the more profit your business generates in real dollars and has a percentage of revenue, the more options you have to invest in additional sales people, to invest in marketing, to invest in taking more share organically.
But it also gives you options to acquire other businesses. And ultimately, because you build value into the balance sheet of that business, it gives you exit — many more exit choices when the time is right.
INTERVIEWER: So really what you’re describing is a service that’s — you know, goes beyond the M&A and really becomes a component of the overall business strategy. You don’t necessarily have to be looking for an M&A type engagement in order to bring your company in and gain value from it.
MIKE: Absolutely not. And we prefer to have long relationships with our clients. I often joke around with our clients that we’re a company for life kind of company. Now, the meter’s not running for life, but we’re always working with you, always thinking about you. We’re always available to you.
And I think if you were to talk to any one of those 400-plus clients of ours, they would tell you that. There’s people we worked with fifteen years ago that we are still very close to, that we talk to regularly, that we’ve been able to provide value to time and time again over that fifteen years.
INTERVIEWER: That’s outstanding. So just to follow up on that, can you give us an example or two of companies that you’ve worked with?
MIKE: Certainly. We have a great example of a managed service provider when we talk about sort of a smaller company. They were a couple million dollars when we started working with them. And they were focused on a geography. We helped them verticalize their business, focus on adding more cloud solutions and IP to that business. And if you fast forward a couple years, they moved from single digit EBITA profit at two million to six million in revenue and 28 points of EBITA. We think that’s a pretty good success story for 24 months. And we ultimately helped them do an acquisition — what we call an adjacency acquisition — very recently.
I would also — you know, to give you an example of a larger company that’s more focused on custom development. We helped a company that was again, a horizontal custom development company that was about $20 million in revenue when we started working with them.
We helped them align their business again, to a vertical market, put some processes in place, and scaled their business to $30 million over a fairly short period of time, about 36 months. And now, in their vertical, they’ve just signed a 5 year, $30 million development contract that will be parked on Azure, and are contemplating a second one.
And that’s a company that we know at some point will exit. It’s part of our lifecycle with them. We know that the ownership at some point in the future will decide to do that. Right now they’re having a real good time running the business profitably and scaling it. But you know, we want to be there for them when that time comes, too.
INTERVIEWER: Outstanding. Go ahead, Reed.
REED: One of the — the path that we typically see with most of our customers is they come in and really help them identify and grow effectively, become a top quartile performer. And once you get that growth strategy dialed in nicely and you have that scalable growth, the next piece to it is really a bi-side engagement to help accelerate that growth. It really is about getting to a million dollars of EBITA, bottom line. And so you want to be able to buy your way, also leveraging your organic growth to get there.
And then really at that point, you start to look at when’s the right time to exit. And it could be one year, it could be many years. But really, you’re trying — you’re looking at this strategy of going from growth, to buy side, to eventually exit while you’re still in that growth trajectory.
INTERVIEWER: So it sounds like it’s more of a marathon than a sprint.
INTERVIEWER: Mike Harvath, Reed Warren, thanks for joining us today.
MIKE: Thanks, Bill.
REED: Thank you.
[VOICEOVER]: Check out the other podcast episodes in this series to learn more from Microsoft Partner Network thought leaders. Keep in touch with us via LinkedIn, Facebook, and YouTube by searching for the Microsoft Partner Network, and be sure to follow us on Twitter @mspartner. And if you like the podcast, don’t forget to rate and review it.