Service Leadership
Total Profit Solutions for IT Companies®
Service Leadership Index®
- Product GM% - BIC Profitability SPs: Q1-11 25.5% Q2-11 25.3% Q3-11 26.6% Q4-11 27.2%
- Product GM% - Median Profitability SPs: Q1-11 20.5% Q2-11 20.5% Q3-11 19.2% Q4-11 19.7%
- Product GM% - Bottom 1/4 Profitability SPs: Q1-11 19.9% Q2-11 20.5% Q3-11 18.5% Q4-11 14.8%
- Services GM% - BIC Profitability SPs: Q1-11 53.4% Q2-11 54.9% Q3-11 52.2% Q4-11 52.8%
- Services GM% - Median Profitability SPs: Q1-11 51.0% Q2-11 50.1% Q3-11 48.1% Q4-11 46.4%
- Services GM% - Bottom 1/4 Profitability SPs: Q1-11 36.1% Q2-11 41.0% Q3-11 42.9% Q4-11 38.8%
- SG&A% - BIC Profitability SPs: Q1-11 26.0% Q2-11 26.2% Q3-11 26.1% Q4-11 27.6%
- SG&A% - Median Profitability SPs: Q1-11 32.2% Q2-11 31.9% Q3-11 30.3% Q4-11 29.8%
- SG&A% - Bottom 1/4 Profitability SPs: Q1-11 35.7% Q2-11 34.6% Q3-11 36.9% Q4-11 35.4%
- EBITDA% - BIC Profitability SPs: Q1-11 19.2% Q2-11 19.2% Q3-11 17.8% Q4-11 17.7%
- EBITDA% - Median Profitability SPs: Q1-11 7.3% Q2-11 7.3% Q3-11 6.8% Q4-11 5.9%
- EBITDA% - Bottom 1/4 Profitability SPs: Q1-11 −2.4% Q2-11 −1.1% Q3-11 −2.7% Q4-11 −5.6%
Quarterly Solution Provider Performance
Making Benchmarks Useful and Ensuring Best Practices Work
The Service Leadership Index™
The Service Leadership Index™ is the leading source for a recognized, standard method of measuring and comparing Solution Provider/MSP profitability, growth and operating ratios, across a broad range of populations and MSP/SP business models.
The components of the Service Leadership Index™, described below, provide a standard methodology for determining a given Solution Provider’s predominant business model, a critical factor in ensuring the best practices are actually applicable to that company’s needs and capabilities.
In addition, they provide a detailed framework for the Solution Provider to perform internal financial reporting that – unlike the financials often used by Solution Providers – measures the revenue and cost activity within the company in a way that managers can more readily use to monitor and improve the business.
Lastly, they then enable consistent, comparable and actionable benchmarking and across the range of Solution Provider business models. This provides the basis for diagnosing their business challenges and prescribing best practices to overcome them, as well as for measuring whether the implementation of those best practices are indeed creating the desired improvements.
Comparing Apples to Apples
Clearly, a best-in-class Solution Provider with 80% of its revenue coming from product resale will have different operating ratios from a best-in-class SP with 80% services revenue.
Comparing the two would be largely meaningless, and the best practices for optimizing one would be largely inapplicable to the other.
For example:
- The methods of optimizing infrastructure project services profitability within an SP that is 80% product resale are different than optimizing the same services within an SP that is 80% services.
- This is because the predominant business model (product vs. service in this case) determines the overall context in which each practice must operate, and that context includes the skills of the people, their compensation incentives, their business culture, their customer value proposition, marketing and lead generation, the nature of their vendor relationships, and so on.
As a result, little diagnosis and prescription can be provided to a Solution Provider based on a benchmark that does not recognize the difference between the various Solution Provider business models.
Only Solution Providers with the same predominant business model can be meaningfully compared and best practices derived or applied.
Why Solution Providers Sometimes Pay Attention to Best Practices and Sometimes Don’t
Solution Provider owners and executives know this instinctively, and quickly consider or reject advice based on their assessment of how closely it applies to their predominant business model.
Making Useful Comparisons Possible
Until the Service Leadership Index™ however, there was no standard method of determining Solution Provider predominant business models, much less best-in-class performance within them and developing the best practices applicable to them.
The Service Leadership Index™ provides the components necessary for a meaningfully objective analysis of the Solution Provider’s performance.
Component #1: The Predominant Business Models Defined
The first component the Service Leadership Index™ provides is a clear definition of ten primary business models into which all Solution Providers fall.
Top financial performance is based on the Solution Provider’s ability to recognize and optimize the particular needs of each major practice area. These are a result of the different billable utilization patterns and skill sets needed for each major type of service practice. For example:
- The techniques for optimizing the profitability and growth of a project services team are inherently different than those needed to optimize a Managed Services team.
- Likewise, these techniques are also inherently different between a project team that implements applications and one that implements infrastructure.
This is because each has a different pattern of billable utilization and/or skill set, as shown in the chart on the below.
By recognizing these "genetic" differences between services practices – called Predominant Business Models© – the Service Leadership Index™ provides a framework for providers of best practices to develop the most effective solutions.
Without this, a wonderful best practice suitable for one Predominant Business Model© may unknowingly be applied to another, with unexpectedly poor results.
Providing a way to validate the best practices, the Predominant Business Model© structure also enables the Service Leadership Index™ to be precise enough to measure whether those best practices were actually effective in improving results.
The ten Predominant Business Models© and some of their unique business culture characteristics are shown below.
Now, having defined the Predominant Business Models©, how do you determine into which one a given Solution Provider fits?
Component #2: Identifying a Given Solution Provider’s Predominant Business Model
The second component of the Service leadership Index™ is a standardized way to determine a Solution Provider’s predominant business model.
As it turns out, Solution Providers rarely are exclusively only one practice; most have multiple practices each with an associated revenue stream.
However, within a given Solution Provider, the practice which delivers the preponderance of revenue –if it is enough larger than its other practices – will determine its predominant business model.
As a result, the Service Leadership Index™ includes our proven algorithm for determining a given Solution Provider’s predominant business model, based on an analysis of the Solution provider’s component revenue streams. Its business logic is shown in the chart below:
The Predominant Business Model© algorithm is available at no cost from Service Leadership in three useful formats:
- An Excel Add-In function: =predominantbusinessmodel(), suitable for using in your Excel spreadsheets when analyzing Solution Provider performance characteristics or segmenting them into meaningful groups by business model.
- A graphical Flash model suitable for distribution via your website.
- An interactive PowerPoint slide suitable for use in live presentations.
Please go here to download these tools under a no-cost, unrestricted use license: www.service-leadership.com/predominantbusinessmodels.asp.
Component #3: Identifying Revenue Streams That Make Up Predominant Business Models
In order to enable Solution Providers across the industry to segment their revenue into the proper Predominant Business Model categories, the services represented by each category must be defined in a bit more detail.
While we are doing aligning revenue with the Predominant Business Model categories, it would be just as well to align Cost of Goods Sold (COGS) and indeed to propose a complete, standard Chart of Accounts for Solution Providers which enables them to manage their business most effectively.
Since we initially defined the Predominant Business Model categories based on the differing management techniques needed to optimize each line of business, aligning the Chart of Accounts, and hence all the financial reporting in the company, to these, makes perfect sense.
Not only is this new Chart of Accounts, in and of itself, an excellent way to help a Solution Provider improve the management of the business, but it then creates a beneficial chain of accountability for those who promote best practices. This is shown in the chart below.
The new Chart of Accounts, which we call the Normalized Solution Provider Chart of Accounts© is thus both an effective way to enable a Solution Provider to identify its predominant business model for purposes of external comparison and procuring best practices, it is also an excellent way to set up the General Ledger to enable most effective management of the business.
The Normalized Solution Provider Chart of Accounts© is available under a no-cost license at www.service-leadership.com/nspcoa.asp.
In general terms, it enables the P&L (income statement) to provide actionable reporting on these major aspects of a Solution provider's business:
- Revenue from Product Resale
- Revenue from sales of Owned Software
- Revenue from Services
- Infrastructure Services (4 sub-categories or practices)
- Applications Services (3 sub-categories or practices)
It permits reporting of revenue, COGS and gross margin by each of these, enabling management to make more informed and effective decisions about each practice and in the context of its Predominant Business Model©.
In addition, the Normalized Solution Provider Chart of Accounts© also permits reporting of expenses:
- Sales and Marketing,
- General and Administrative (multiple categories).
This enables monitoring of the effectiveness of investment in sales and marketing, and leverage of other operating expenses.
As always, since we are business people and not CPAs, while we can recommend this Chart of Accounts from a business management point of view, we strongly recommend consulting with your CPA before making decisions about if and how to modify your own Chart of Accounts.
Summary
Together, the tools for determining Predominant Business Model© and the Normalized Solution Provider Chart of Accounts© provide the foundation for comparing results between Solution Providers in meaningful and actionable way, and for selecting (if you are a Solution Provider) or targeting (if you are a provider of best practices) best practices which are most likely to succeed in the given Predominant Business Model©.