Keep Tabs On Your Profitability

There's a powerful yet simple television announcement popularized in the '70s that implores parents to keep close tabs on their kids by using the line, "It's 10 o'clock. Do you know where your children are?" It's a great line and is hopefully effective at motivating parents to keep closer tabs on their children. Well, I would like to modify that statement for the channel right now: "It's June, do you know where your profitability is coming from?"

I am not trying to trivialize your role as the top executive of a solution provider nor minimize how focused you are on the bottom line, but after previewing our most recent profitability study, there may be some things you are missing.

So let's start with a question, then look at some of the key findings. What do you think is the single most profitable endeavor a VAR can undertake? Well, in terms of pure profit, nothing comes close to the profits driven from developing custom applications. It topped the charts of the most profitable practices of nearly 300 solution providers we surveyed about all aspects of their profitability. Such software work produced the highest gross profit margin of any activity by a wide margin, generating, on average, a 25 percent return.

Second to that was Web management services, followed by selling and supporting enterprise business software suites. So I think you get the picture. If you want to travel in the mile-high profit club, you need to focus on software. While those were the three highest practices in terms of generating profit, they were followed closely by business intelligence software and communications services.

Although the communications space is certainly crowded, business intelligence still remains a wide-open market for VARs willing to invest the time and resources to train or certify tech people and salespeople. Our study also found that when it comes to selling business intelligence software--such as, products from Cognos, now part of IBM, or Business Objects, now part of SAP AG--the sales cycle is one of the longest, making for long-term customer engagements and the highest ratios of product-to-services revenue. By the way, the average deal in this space is among the highest in the 20 or so technology practices we studied, coming in at nearly $50,000 an engagement.

For the most part, if you are selling business intelligence software you are doing heavy consulting work. What we discovered about such models is they annually produce the highest profit of any model in the business. Our Institute For Partner Education & Development (IPED) consulting and research organization found that if you want to be among the best-in-class in the channel then 53 percent of your revenue should come from consulting, which is about 13 percent higher than the industry average.

If you're already a consultant or own a mattress filled with money, then you don't have to worry. But if you're still looking to bolster your profits then consider these other findings. Solution providers who focus on vertical markets and derive more than one-third of their revenue from specialized solutions are also considered best-in-class and drive higher-than-average profit margins. Competition is most fierce in horizontal solutions so it does pay to specialize, we found.

It's been stated in this space many times over. Now I have the definitive data to back up my criticism of VARs who do not spend time and money on marketing activities. IPED found that the most profitable solution providers are those who spent an average of 11 percent of business expenditures on marketing. But let's face it, you can't spend that kind of coin unless you are producing the kind of profits that best-in-class VARs churn out. What I have said thus far is only the tip of the iceberg. We will have many more tips, techniques and research findings to improve your profitability and to understand the traits of VARs who post enviable bottom-line results in next month's issue of VARBusiness and on Channelweb.com. You can also visit our IPED organization online.

It's June. Let me know where your profitability is.

Robert C. DeMarzo (rdemarzo@everythingchannel.com) is Senior Vice President/Editorial Director of Everything Channel.