Let’s say you’re a $7M partner, and 70 percent of your revenue comes from project services. Your gross margin is 30 percent, but what if you could grow your margins by 10 percent?
That increase would give you nearly a half million extra dollars to channel back into your business.
Ready to achieve that 10 percent increase in margins? Then it’s time to optimize your business operations.
Optimize operations to grow your margins
In a recent blog, my colleague Jen Sieger introduced our newest Microsoft sponsored IDC eBook, The Modern Microsoft Partner Series, Part 4: Optimize your Operations and talked about the effectiveness of optimizing operations. But we know that actually doing that can be challenging.
To help you build a plan and get started, here are six tips for addressing those challenges and growing your margins along the way.
1. Map out the phases of your processes
So often services firms treat work in an ad hoc fashion and have resources either standing idle or are scrambling to find billable work between projects. Normalizing this through a well-defined delivery model, coupled with a balanced staffing structure, will ensure maximum levels of resource utilization.
As we mention in our recent eBook, “Optimize Your Operations,” building a highly profitable services practice is much like running a factory with hyper-efficiency. It requires careful thought to how the processes work in an interconnected way, preventing bottlenecks from holding things up. Here’s how to examine your process to do just that:
- Clearly define your offering. Many partners today are doing this by finding projects they’re delivering on a repeated basis and creating fixed-fee packages. This helps to limit the amount of scope creep, thus insulating organizations from margin erosion from uncharged hours or unhappy customers who see their budgets increase as a result.
- Break each of your offerings down into key phases of production or process, allotting each one a typical number of hours necessary to complete.
- Ensure the staffing matches the need at each phase. For example, if the phases take varying amounts of time, those with the greatest total hours per project assigned to them should have the greatest amount of staff associated. This will help you ensure that as you acquire more customers, teams who handle the phases immediately behind the labor intensive ones aren’t completing their work and then going unbillable, effectively on standby while waiting for the phase before them to be completed.
2. Align the right resources with the right tasks
Much like a coach assigning players to positions in the field, it’s important to understand the strengths, weaknesses, capabilities, and passions of your staff.
I often see partners use a single resource to deliver numerous types of technology and do things that require high levels of specialization, while at the same time having that resource execute mundane tasks. The problem with this is partners become dependent on these “super hero consultants,” when in fact a less expensive resource could be delivering some of those simple items, allowing more senior individuals to grow by focusing on delivery of complex tasks, leading teams, and mentoring others.
Don’t use a forklift to move a single bucket of paint: Use this opportunity to assign the right individual to the right task, and bring in new, less expensive staff to learn and grow. This will not only help grow your margins, but the newer staff will also eventually become a more skilled resource as things evolve.
3. Inspect the numbers
In the cloud world, what is considered a competitive advantage today likely won’t be 12-24 months from now. To keep up, it’s critical to understand what is driving profitability for your business and relentlessly track it.
Download part 4 of our recent eBook series on the Modern Partner, Optimize Your Operations to see a number of measures for you to incorporate into your own reviews. Review these (especially utilization, billable markup rate, and efficiency factor), put them to use in your business, and challenge your services teams to reach peak performance against them.
4. Use automation to streamline processes
In addition to the persistent measurement of the business, strong cloud partners are consistently looking for new ways to take costs out of their delivery practice through automation.
This has been made possible over the last few years through the development of a boutique industry aimed at creating utilities that lessen the need for human engagement on simple tasks. For example, well-known companies such as SkyKick and BitTitan have now helped partners move millions of seats to Office 365, and more are on the way. MyCloudIT works to enable partners to get customers on boarded and using Azure in a simple, quick, and highly profitable way.
If you’re not regularly looking for these types of solutions to help you increase gross services margins, you should be. Keep an eye out for more information on automation from Jen Sieger on the MPN blog in the near future.
5. Understand what’s profitable and forget the rest
Often times when I have the pleasure of meeting with partners and discussing their offering portfolio, I see them providing a myriad of things. When I ask why, the usual response is that somewhere along the way the customer asked for an additional solution, and not wanting to disappoint or risk losing them, the partner figured out how to deliver it. In most cases that partner isn’t sure whether the offering truly results in profit for the business.
If this story sounds familiar, there is a reasonable chance you’re losing money on those processes.
To resolve this issue, look at each offering in isolation to understand what’s really working. If it’s a services offering, look at the delivery cost compared to the revenue driven and determine the gross margin. If the offering is buried within a larger statement of work, break it down to truly know if having this is a good business decision. If it’s not, find ways to solve for it, either by delivering it with less expensive resources, charging more, or automating the work. If no options are possible, divorce yourself from the practice immediately. While it can be a very hard thing to do, sometimes we just have to say no to the customer to protect our own P&L.
6. Reinvest in key growth areas
As your business starts to grow, one of the biggest remaining blockers becomes having sufficient cash to reinvest. Even for the $7M business in my starting example, with a 30 percent margin, the available cash can get eaten up pretty quickly without significantly increasing capacity.
With the phases mapped out, and a keen understanding for which offerings are most profitable, you have critical insights into how much cash your business is generating and how it can run more efficiently to generate more capital. Use that insight to identify current or potential bottlenecks and correct them, freeing up significant cash to feed back into growing your business.
To ensure you’re operating at—and maintaining—maximum efficiency, check out the resources available on our Cloud Partner Profitability page and download part 4 of the Modern Microsoft Partner Series, Optimize your Operations. Then, be sure to join the General Sessions at WPC 2016 focused on the Four Pillars of the Modern Partner in July!