Growth best practices and key performance indicators for IT solution providers
Business consultant Larry Schulze outlines key performance indicators for IT solution providers, including optimal cost and profitability percentages.
The key performance indicators (KPIs) of a partner's business have a direct correlation to the success of that business, so knowing what the top business KPIs are is critical to profitability and growth. In a webinar presented this week by professional services automation vendor Autotask Corp., Larry Schulze, co-founder and principal consultant of The Taylor Business Group Inc., outlined seven best practices for growth as well as seven key performance indicators for IT solution providers to fuel that growth.
Companies that implement best practices to maximize growth opportunity are growth-style businesses, according to Schulze. Whether an IT solution provider wants a higher growth rate or they're looking for continued success, channel companies should adhere to the following seven best practices:
- Vision. Top-level leaders who can articulate their vision and mission help employees implement the objectives of the business.
- Entrepreneurialism. Solution providers should take calculated risks on investing for the future -- on new product sets or creating new sales engines, for example.
- Business planning. Leaders should have effective plans for, for example, sales and marketing, finance and budgeting, and compensation.
- Sales engine. Companies must put together the sales processes and people to move the business forward.
- Investments. Leaders must invest in their company as well as their people.
- Management style. Leaders should manage through people and not to people. That means being able to depend on other people to get strategies implemented.
- Metrics. Managers must know the benchmarks to gauge their business' bottom line.
The core of Schulze's presentation revolved around the following top seven benchmark metrics -- or numbers -- that IT solution providers need to focus on to grow their businesses:
- Sales expenses. According to Schulze, sales expenses shouldn't exceed 10% of total revenue. Sales expenses include sales salaries, sales commissions and bonuses, marketing and advertising, sales training, and all other sales-related expenses.
- Administrative expenses. These costs -- which include office and building expenses, benefits, payroll taxes, internal IT expenses, and administrative salaries -- need to be kept to no more than 20% of total revenue. Schulze broke down administrative expenses further into strategic and nonstrategic costs. Strategic costs are associated with generating revenue, whereas nonstrategic costs don't generate revenue. The goal, he said, should be to eliminate or minimize all nonstrategic costs.
- Service utilization. This metric measures how well a company utilizes its service inventory, or the time that is billable per technician. Schulze recommended a benchmark of 75% billable utilization, or six hours per day on average. The remaining 25% of time should be allocated on nonbillable hours, such as vacation time, sick time, personal leave, bench/administrative time and training. Schulze said technicians should submit daily time sheets, and service managers should review the time sheets the following morning for accuracy.
- Managed service agreement profit. Managed services agreements should have a gross profit margin of at least 65%. "Anything less means pricing is too low [or] the company has inefficient processes and procedures or an incapable services team," Schulze said.
- Services salaries. According to Schulze, this figure shouldn't exceed 33% of all services revenue and pertains to all service-related employees, such as service managers, engineers, technicians and coordinators; help desk; and network operations center (NOC) engineers and technicians. Solution providers also need to have a well-defined service organizational structure that includes job descriptions and compensation plans as well as career planning. He also advised: "Hire at the bottom and promote from within."
- Service department profitability. Service departments should have a gross profit margin of at least 55%; that means pricing right and keeping expenses in line.
- Net operating income. This figure -- which refers to earnings before interest, taxes, depreciation and amortization -- should be at least 10%. "This is the money made off of operations," Schulze said, adding that it needs to be at a minimum of 10% to enable reinvestment into the business.