The Gross Profit Challenge: Overcoming Obstacles in the Cloud Era

gross profit

Many of the old profit pools are shrinking, and if you’re a leading channel company you are under immense pressure to sustain your blended gross margin objectives. 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 – so, now what?

Well, product margins are slim, and even the deftest 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 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 that all of the fast-talking consultants espoused during the many conferences you attended looking for the holy grail of profitability.

A New Pressure Point

Now, after a few good years, the cloud era is upon us and providing yet another pressure point on your overall blended gross margin. The deals seep away to new players or legacy competitors who’ve beat you to the subscription-based services punch. Why you should be attacking the cloud and monthly recurring revenue space—we’ll leave that for another day.

Shoot, even your services gross margins are under attack. The margin compression is most likely being brought about from two 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 organization’s 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.

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 siren’s 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 did I 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 rework that must be completed prior to project or un-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 years ago. That’s a damn shame, and directly attributed to not automating the simple error-prone activities that they are mired in daily.

Ergo, we’re still slave to the artists and gurus instead of operationalizing our culture—which is where untapped profits live.

The Doorstep of Digitization

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. Then, 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 automating 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 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.

 

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George Mellor
George Mellor is the Founder & CEO of KloudReadiness, LLC. Prior to founding KloudReadiness, George co-founded VARcompliance (acquired by Netformx). George has spent his adult life working within the value added reseller and solution provider marketplace driving innovative approaches that positively affected the growth and profitability of several businesses. He’s held senior leadership roles at several solution providers including CBE Technologies, Netivity Solutions (now NWN Corporation) and Charter Systems.