Service Leadership
Total Profit Solutions for IT Companies™
Service Leadership Index™
- Q/Q Revenue Change - BIC Profitability SPs: Q1-09 16.1% Q2-09 168.3% Q3-09 -75.7% Q4-09 6.3%
- Q/Q Revenue Change - Median Profitability SPs: Q1-09 -38.4% Q2-09 15.4% Q3-09 32.3% Q4-09-22.9%
- Q/Q Revenue Change - Bottom 1/4 Profitability SPs: Q1-09 1.9% Q2-09 16.5% Q3-09 -42.5% Q4-09 20.7%
- Product GM% - BIC Profitability SPs: Q1-09 23.4% Q2-09 24.3% Q3-09 25.1% Q4-09 23.5%
- Product GM% - Median Profitability SPs: Q1-09 17.2% Q2-09 23.8% Q3-09 18.6% Q4-09 19.3%
- Product GM% - Bottom 1/4 Profitability SPs: Q1-09 25.1% Q2-09 27.9% Q3-09 15.5% Q4-09 10.8%
- Services GM% - BIC Profitability SPs: Q1-09 53.6% Q2-09 50.5% Q3-09 54.9% Q4-09 53.5%
- Services GM% - Median Profitability SPs: Q1-09 47.5% Q2-09 31.9% Q3-09 46.3% Q4-09 44.9%
- Services GM% - Bottom 1/4 Profitability SPs: Q1-09 41.6% Q2-09 38.7% Q3-09 44.1% Q4-09 36%
- SG&A% - BIC Profitability SPs: Q1-09 29.1% Q2-09 38.1% Q3-09 26.4% Q4-09 29.8%
- SG&A% - Median Profitability SPs: Q1-09 35.3% Q2-09 35% Q3-09 29.9% Q4-09 32.1%
- SG&A% - Bottom 1/4 Profitability SPs: Q1-09 42.8% Q2-09 35.7% Q3-09 39% Q4-09 46.3%
- EBITDA% - BIC Profitability SPs: Q1-09 17.7% Q2-09 13.6% Q3-09 21.9% Q4-09 16.5%
- EBITDA% - Median Profitability SPs: Q1-09 4.0% Q2-09 -1.8% Q3-09 6.9% Q4-09 4.2%
- EBITDA% - Bottom 1/4 Profitability SPs: Q1-09 -9.7% Q2-09 -14% Q3-09 -2.6% Q4-09 -16.6%
- Q/Q Headcount Change - BIC Profitability SPs: Q1-09 15% Q2-09 164.2% Q3-09 -71.4% Q4-09 0.9%
- Q/Q Headcount Change - Median Profitability SPs: Q1-09 -32.5% Q2-09 57% Q3-09 -41.9% Q4-09 -23.5%
- Q/Q Headcount Change - Bottom 1/4 Profitability SPs: Q1-09 12.2% Q2-09 62.3% Q3-09 -48.6% Q4-09 7.6%
Quarterly Solution Provider Performance
What is the Service Leadership Index™
The Service Leadership Index™ is the broadest and most detailed, ongoing financial and operational benchmark of Solution Providers, developed by 20+ year veterans of the industry and available to Solution Provider and channel executives.
The word "Index" is used deliberately — it is the SP industry's first detailed, normalized, ongoing measure of revenue, profit and value creation performance.
Why the Service Leadership Index™?
As compared to the 1980's and 1990's, the Solution Provider industry has decelerated in the 2000's as the IT industry has matured. As a result, value creation by Solution Provider owners and executives has decelerated from impressive levels to "mature industry" levels, resulting in a drop in interest among outside investors which might drive future industry expansion and provide attractive exit opportunities for current owners.
It does not have to be that way. The S-L Index™ clearly shows that the delta between best in class (top profit quartile) and median Solution Providers is about 4:1, meaning the typical best in class Solution Provider earns about four times the profit – adjusted for business model specifics and size – as the median company. This level of performance is compelling for owners and investors alike.
What Keeps Solution Providers from Attaining Top Profit Performance?
Several historical and cultural factors have resulted in low median profitability and growth for Solution Providers:
- Lack of margin in the product resale business
- Difficulty of transition to various richer-margin services business models and lack of resources to resolve the difficulties
- Lack of understanding among SP executives and channel executives as to what drives profitability in Solution Provider businesses
- Among all but the top tier vendors, a lack of clear understanding of how healthy partners make better business for the vendors and/or a lack of resources to do something about it
Before these can be addressed in a systematic and cost-efficient manner, however, certain foundations must be in place:
- A standard way of measuring profitability
- A standard way of categorizing Solution Providers into distinct business models which enable relevant company-to-company comparisons
Service Leadership has therefore developed both and provided them at no charge to the industry.
A Standard Way of Measuring SP Financial Performance
The first foundational piece is set in place by the Normalized Solution Provider Chart of Accounts©, a detailed structure for measuring revenue, cost and profitability which simultaneously:
- Provides SP executives with excellent day-to-day, actionable visibility into the true financial and operational drivers of their business, and
- Provides all stakeholders with a common method of measuring true SP profitability and growth.
(Click here to view and print the Normalized Solution Provider Chart of Accounts©.)
A Standard Way to Identify the SP's Specific Business Model
The second foundational piece is set in place by the Predominant Business Model© structure, which defines and describes the ten primary business models into which all Solution Providers usefully fit.
A key obstacle in the path to better Solution Provider performance has been the lack of understanding that not all Solution Providers are the same, and what are the types of Solution Provider business models.
In developing and implementing SP best practices, these factors are critical to success and to avoiding mis-application:
- What is the SP's current business model?
- Do they desire to "simply" improve within their current business model, or also/instead, change business models?
- If they desire to change, which business model is their goal?
Without these answers, any attempt to improve the SP's performance or transition their model, will result in one of the following outcomes:
- Lack of interest on the part of the SP in the best practices being provided (because it is not clear whether the best practices are appropriate for their business model)
- Interest in the best practices on the part of the SP but either:
- Inability to implement them because they are inappropriate to their business model and goals, or
- They implement the best practices but perform worse because the best practices are not appropriate to their business model or goals, but they did not realize it.
These pitfalls exist because – prior to S-L's Predominant Business Model© construct – there has not been a definition of Solution Provider business models useful to the owner/executive. Terms such as "VAR", "reseller", "integrator" and "ISV" describe the SP's role within the channel ecology, but are not detailed enough to provide categorization of SP business models useful to allow creation of suitable and actionable best practices and comparisons of performance.
The above terms are no more granular than "mammal", "reptile", "bird" and "fish". No one would propose that the optimum health needs of any two mammals, such as a giraffe and a polar bear, are the same. Likewise, no one should propose that the optimum health needs of an Infrastructure Project-centric SP are the same as an Infrastructure Managed Services-centric SP.
Additionally, the "evolutionary" path to transition to an Infrastructure Managed Services-centric business model are different if the SP is starting from an Infrastructure Project-centric business model than if they are starting from a Product-centric business model or an Infrastructure Technical (T&M) Services business model.
Just as all species of mammals have broadly the same health needs – sufficient nutrition, protection and socialization – the specifics needed for each different species differ widely, and disregard for them results in lackluster growth, sickness or even death.
Likewise, each of the SP business models has distinct health needs to attain optimum financial performance and to understand their most likely successful transition path to another business model.
To solve this, S-L has developed the Predominant Business Model© construct, which objectively categorizes each SP into one of ten useful business model definitions, against which accurate comparisons of financial performance can be made, and suitable best practices be developed and applied.
The Predominant Business Model© construct is available from S-L at no cost to the industry here.