Can your business be truly successful if revenue remains steady — or even suffers a slight decline? Can your company be in top form when you haven’t hired a new employee in years? Achievement is best judged by those whose blood, sweat and tears went into building the organization, plus of course the stakeholders who’ve helped support the operation along the way. As any business owner knows, revenue declines coupled with cost reduction might actually lead to profit, so if clients, employees and management are all happy with the direction of the company, even a slow sales year could still be considered a win.
Success can only be adequately evaluated by those who set the bar, but profitability remains a top standard for measuring a business’s long-term sustainability. Unless the organization is a 401(c) or a tax shelter for a billionaire, stakeholders tend to like a return on their investments and will strive to keep their expenses in check. Profit goals can be a challenge, but with continually increasing competition and rapidly rising operational costs, those targets are getting harder to hit with each passing year.
As more disruptive technologies hit the market, many IT service providers are working overtime to protect their margins. While cloud and managed services bring new recurring revenue opportunities, they’re also lowering the demand for formerly lucrative activities, such as server and software installation. On one hand, the increase in monthly income can work wonders for your business’ value, but it may take months — or even years — to restore cash flow after converting from a traditional reseller model. The higher an organization’s project revenue, the harder that transition may be.
Whether making that leap in IT services or maintaining the status quo, streamlining operations and cutting costs are worthy endeavors for any tech organization. To maintain a healthy profit margin, solution providers have to focus more time and energy on developing effective expense strategies and tracking everything that impacts on their bottom line. Most entrepreneurs understand the real value of those processes, but business activities, indecision or other reasons prevent their completion.
Overcoming those obstacles isn’t easy, but it’s doable. That’s a message Len DiCostanzo delivered during the CompTIA IT Services and Support community virtual meeting. In his presentation, “Four Tips to Improve IT Services Profitability,” Autotask’s senior vice president of community and business development walked through several best practices to help solution providers determine the true cost of their business. Rather than using the dartboard method of tracking expenses and setting pricing, DiCostanzo recommends taking a more comprehensive approach:
- Determine total hours for the billable staff. Are you properly tracking them all?
- Calculate utilization rates. Are techs and support staff adequately employed? Providers must set attainable targets, track execution and manage exceptions.
- Determine overhead costs. Include basically everything that can’t be billed to clients, including indirect labor (i.e. management, sales and marketing), fringe benefits and general office/support expenses. While costs can vary based on a variety of factors, like geography, DiCostanzo’s presentation tabulated the burden at about 30 percent.
- Consider markup. What’s a fair increase over salary that will allow the company to remain competitive? For instance, if you hire someone at a $75,000 salary, it may require an additional $125,000 in revenue.
- Determine costs and profit targets for cloud and managed services. Be sure to include integration and support requirements.
- Apply pricing methodologies. Does it work for the company and its clients? If not a win-win, you should reevaluate all expenses as well as the portfolio of services.
Though one of the most important aspects of an IT business, profitability is often not given the attention it truly deserves. As DiCostanzo said, without a proper plan in place, the costs incurred and discounts provided to land new accounts and increase revenue could easily damage the bottom line. IT service providers who put cost controls and effective pricing strategies in place are simply more likely to succeed. While those activities may not be rocket science, it takes focus and a top-down commitment to ensure they’re completed and repeated on a frequent basis.
Could you or your business partners use some guidance in calculating profitability or finding other best practices? Contact Cathy Alper to find out more about the IT Services and Support community, as well as some of the tools and programs they’ve created to help solution providers thrive.
Brian Sherman is founder of Tech Success Communications, specializing in editorial content and consulting for the IT channel. His previous roles include chief editor at Business Solutions magazine and senior director of industry alliances with Autotask. Contact Brian at [email protected].
