The Gross Profit Challenge

What obstacles do value-added resellers, IT solution providers and managed service providers face?

The old profit pools are shrinking, and if you’re a leading channel company you are under pressure to sustain your blended gross margin objectives. Over the years, you’ve become very adept at holding your operating expenses (OPEX) in check. There’s not much room left in the budget to cut. So, now what?

Well, product margins are slim, and even the deftest account manager is incapable of making up for the margins lost from product business over the past several years.

Long ago, you concluded that you needed other profit pools. That’s what lead you into professional services and eventually into managed services. You will achieve thicker gross margins after making the investments, laying the framework and acquiring the right talent.

Most of you reading this piece have never seen those over 50% gross margins that consultants talked about during the many conferences about profitability that you attended.

A New Pressure Point

The cloud era is upon us, and providing 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. (A good reason to approach the cloud and monthly recurring revenue space)

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, the 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. This is because they can be consumed and paid for monthly.

The external pressure is real and growing, however. The second pressure point suppressing profitability is internal forces. Placing more emphasis on the internal forces vs. the external forces effecting profitability is quite straightforward.

Typically, most leaders feel they have more control over their organization’s actions than the marketplace.. Plus, most channel partners will take 12 to 18 months to become truly recurring-revenue adept.

So, how can you begin increasing your gross margins based on your current business mix and run-rate?

It All Comes Down to Automation

Automating pieces of your world can 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 too purchased Salesforce, a PSA, and one heck of a remote management & monitoring system (RMM). But my blended gross margin needle did not move much. I could say I had the tools, but did I really leverage them? Not so much.

The lack of productivity and gross margin gains had nothing to do with the tools but an inability to embrace automation. We never committed to automating out repetitive tasks that were driving down our profitability.

Do your managed services resources manage and monitor any more devices or users today than they did two years ago? Are you automating the simple error-prone talks that you do daily? We’re still beholden to outside consultants instead of operationalizing our culture, where untapped profits live.

The Doorstep of Digitization

The digitization era is here, and your customers are going to be coming to you for direction. It begins with understanding the business processes at hand, identifying pieces that can be automated, and then measuring and reporting on their impact.

The key will be to approach 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. It means committing to automating your business, helping your clients do the same, and reaping the gross margin benefits associated.

Put simply, if you can consistently get a sustainable 5-five to 10% average increase in engineer utilization, you can keep your headcount the same.

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. In the end, automating processes such as large deployments and migrations will help you create a company culture that is both operational and automated.

About the author

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.

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