There is no doubt that the cloud market, although growing exponentially, is still in a state of relative infancy. According to the IDC Cloud Partners 2.0 eBook, the average partner has a tenure in the cloud of just over 2 1/2 years. However, this same study shows that within this short time, more than 83 percent of all partners have driven at least some form of cloud revenue. Partners on average are making 26 percent of their revenue from cloud-related products and services, but these same partners expect to be at 40 percent in two years’ time. Now, if you are one of the many partners looking to grow your cloud revenue beyond where it is today, but are struggling to figure out where the opportunity lies, you may want to look to your profit pools to be your guide.
What are your profit pools telling you?
“What is a profit pool?” you may be asking yourself. It’s a good question. Profit Pool is a strategy model that focuses on profits, rather than just on revenue growth. The method was first conceived by two consultants from Bain & Co., and they presented the following definition for Profit Pools: “the total profits earned at all points along the value chain of an industry…Companies that see what others do not see, will be best prepared for capturing a larger share of the profits in an industry.” (“Profit Pools: A Fresh Look at Strategy” HBR, May 1, 1998).
The key point is that companies that see what others do not have the opportunity to capture emerging and profitable trends. Although the concept of profit pools is described at a macro level, companies are analyzing their profit pools or profit pool opportunity at a micro level within their business. They are doing this by analyzing the core activities in the business that generates or will generate the highest gross profit and then taking actions to increase the share of revenue against that profit pool moving forward. As some activities are more profitable than others, partners are quickly seeing the depth of the profit pools as they analyze them. Before you begin analyzing your profit pools, I believe it is important to make a deliberate effort to get yourself to the thirty thousand foot level and get away from the day-to-day of your business in order to more clearly see it in strategic terms. We have partners that have done this by organizing the executive leadership team to participate in the process in a half or full day off site where they analyze their profit pools and determine what steps they believe they need to take as a business moving forward. Some partners are also hiring outside help to lead the exercise.
To analyze profit pools from a micro level within a business, first look at all of the revenue streams that flow into your business and all associated offerings and business models. Once every form of revenue has been accounted for, create a profile for each activity that drives a revenue stream. In this profile, include details on the amount of revenue and associated gross profits. You’ll also want to have a discussion around the future of each activity. How will the activity shift with industry changes? Are they at risk of becoming obsolete? Are there new activities to consider? How do the costs associated to sustaining these activities change in the future? How many of these activities can be exercised with each client? Are you delivering commodity based services, for instance, or is there something unique that differentiates your value to a customer and the value you can charge for it? If you have a profit pool that is 2X more than other profit pools but is only a small amount of your revenue, should you put more increased focus on it and revive it to drive more share of revenue?
For example, Catapult Systems looked at the synergies between mobile systems management and SharePoint and determined that the sum was much more than the parts in terms of customer value, which would likely drive more profit. According to Emily Lynch, VP of Marketing at Catapult Systems: “There are a lot of opportunities for us to transverse from Profit Pool to Profit Pool within a client with cloud as the instigator. For instance we look at mobile systems management and SharePoint. We have effective solutions where we serve business applications to mobile devices through SharePoint online or through Azure where SharePoint is a tenant. Then we are exercising three Profit Pools at once with cloud as our leverage point.”
It is not too late to begin planning. According to the IDC eBook, cloud-oriented partners have been in the cloud for 3.5 years versus 2.3 years for the others – this is only a one year gap between the leaders and followers! Also, the partners who have been in the cloud the longest had almost 15 percent revenue growth over those in the cloud the shortest amount of time. And the cloud leaders are more profitable and have a strategy around their best performing profit pools. Start looking at what your profit pools are showing you.