Guest Column | June 14, 2018

How Operational Efficiencies Improve Channel Profit

By Carolyn April, CompTIA

‘Value-Based’ Contracts Will Hurt Profits

Your sales reps are killing it and revenue is rolling in. Just one problem: Profit margins are not even close to where you expect them to be. Why? Take a look internally.

Disappointing results that can’t be blamed on external factors such as poor sales most likely stem from inefficient business and technical processes that can drag down an organization and thwart profitability.

It’s a problem that dogs many channel companies today, one that will only grow more pronounced as firms move into new business models. And considering the number of channel firms undergoing a high degree of business transformation nearly doubled between 2013 and 2017, it’s time to take a hard look at operational efficiency to best maximize profits and take full advantage of the emerging digital economy.

Recent findings from CompTIA’s recent research, Operational Efficiency in the Channel, provide some insights. The study of 400 IT channel firms sheds light on how they are operating their business today, where they are functioning well, where they are not, and what steps need to be taken to optimize their shops for maximum profit.

Consider a few data points from the study:

  • Three of the five reasons cited for not fully maximizing profits related to process: ineffective service delivery operations, ineffective sales processes, and ineffective financial performance tracking.
  • Just two in 10 respondents assessed their current state of operations as very efficient. Most (three-quarters) either claim to be mostly efficient or doing well in some areas, not so well in others. Six percent admitted being inefficient to varying degrees.
  • Forty-five percent of channel firms say operational complexity in their business has increased from two years ago, while 43 percent say it’s stayed the same. Just 11 percent say complexity has decreased in that timeframe.
  • The main reasons cited for increased operational complexity today include more streams of data to manage and analyze; growing pains from the expansion into new business lines and models; the introduction of emerging technologies; and more challenging customer engagements.
  • Of various operational functions, respondents gave themselves the highest marks for efficiency in inventory management, and the lowest grade to their sales and business development process.

How strategic should operational efficiency efforts be to an organization? Very, if you want to boost profit and move successfully into new business models or skills areas. The research found how operations and processes are prioritized acts as a key differentiator among firms. Six in 10 respondents, for example, described their approach to internal operations as proactive and structured, while 36 percent said they operated in ad hoc or reactive mode. The former group is preventing fires; the latter is putting them out. And not surprisingly, the companies that reported experiencing a high degree of business transformation were most likely to assess their operational efficiency efforts in the superlative. They’ve prioritized it as part of their overall reinvention journey.

But rather than wing it, there are concrete steps and best practices a company can put in place to streamline operations and avoid repeated margin leaks. For example, two-thirds of companies said they have enacted annual goals and incentives to get their staff to boost productivity through process efficiencies they achieve themselves. Roughly another third of firms rely on formalized metrics and practices to keep on track such as KPIs, scorecard-like SWOT analysis, and project management frameworks such as ITIL.

Other best practices considered critical? Nine in 10 respondents said calculating ROI and time to profitability was a crucial task, especially before launching any new initiative or direction for the business. And among firms that take that proactive approach to operational efficiency, 63 percent deemed ROI and profitability calculation as one of the most important best practice.

Other priorities include calculating customer acquisition costs (CAC) which is often an overlooked activity, particularly among MSPs. Larger firms (55 percent) and those with a high degree of business transformation (66 percent) believe understanding CAC is a very important best practice to bake into strategic operations. Likewise, calculating customer lifetime value (CLV) was also most prized among larger firms and those with a high degree of business transformation. Formalizing recruiting, hiring, and onboarding are considered as another priority across the breadth of respondent profiles.

For many companies, the starting point is the present; in other words, assessing how operations are running today. Companies should take the time to identify process inefficiencies or areas of their business where process is lacking altogether. And then they should get to work shoring up the weak spots. This can be painful, but it’s critical to fix existing problems before moving onto new endeavors. Business transformation from a legacy transactional model to a recurring revenue model is difficult enough; starting from a position of inefficiency only makes it tougher.

It’s not a sexy concept, but running a tight ship is a key ingredient to fully maximizing profit and boosting the bottom line. And it could be the difference between single- and double-digit profit margins. And that’s nothing to sniff at.