Operational efficiency
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This document summarizes a presentation by Frank Coker on improving operational efficiency for IT solution providers. It discusses how margins have declined due to factors like commoditization and pricing pressures. It provides four steps to improve efficiency: 1) control controllable processes and metrics, 2) target principal margin leaks, 3) keep score on performance metrics, and 4) apply metrics to evaluate business functions. Maintaining operational efficiency is key to stabilizing margins and driving business growth. The presentation provides references for additional resources on financial management best practices.
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Operational efficiency
- 1. Presented by: Frank Coker CompTIA Faculty CEO, CoreConnex comptia.org Quick Start to Operational Efficiency frank@corelytics.com 425-454-5006 2/14/2014 1
- 2. CompTIA Channel Training About this Education The content and materials featured in this presentation are the result of a collaborative, CompTIA community-led development effort. An advisory group comprised of channel leaders and technical experts identified training goals and objectives, while education specialists carried out development work based on the insights and information provided by the advisory group and other subject matter experts. About CompTIA CompTIA is the voice of the world's information technology industry. As a non-profit trade association advancing the global interests of IT professionals and companies, we focus our programs on four main areas: education, certification, advocacy and philanthropy. 2/14/2014 2
- 3. “Evolution is not mandatory; but then again, neither is survival.” 3
- 4. Your Business’ Survival: The Song That Never Ends Stabilize/ Optimize Drive growth Strategically Transform 4
- 5. The Art of Business Management • Profitability and revenue are changing from transactional product sales to a mix of IT services • CompTIA Research shows average margin levels for solution providers have declined by a factor of four in every tech category • Stopping margin decline requires a strong handle on operational and process efficiencies 2/14/2014 5
- 6. Margin = Sum of the Parts Deal / Earn Op Efficiency Today’s Focus Pricing 2/14/2014 6
- 7. Today’s Questions Why are margins declining for IT solution providers? How can IT solution providers improve margin results? What can you do? 2/14/2014 7
- 8. Negative Margin Drivers • • • • • Commoditization Pricing pressures Inefficient sales processes Inefficient service operations Ineffective management control 8
- 9. Positive Margin Drivers • Integrated solution sales • Professional management of business functions • Repeatable processes • Active participation in vendor channel programs • Institutional control of the financial model • Solutions matched to business model • “Professional” sales resources 9
- 10. Four Steps to Improving Operational Efficiency 10
- 11. ① Control the “Controllable” • Identify defined processes • Assess functional capabilities • Watch core metrics 11
- 12. ② Target Principal Margin Leaks • • • • • • Product Discount/Price Control Solution Urgency/Distinctiveness Rebate/Incentive Programs Service Operations Marketing/Sales Operations Back Office/Financial Management 12
- 13. ③ Keep Score on Performance • Gross Margin on Product Sales • Gross Margin on Service Sales • Selling Expense as a %age of Gross Margin • Percentage Mix of Revenue from Products and Services • G&A as a %age of Revenue • Back-End Rebate Income as a %age of Revenue 13
- 14. ④ Apply Metrics • Inventory operating processes – What is your level of expertise in a specific business function? – What is your ability to execute a business function the same way time after time? – How much do you pay to complete a particular function…how much value does the task create? 14
- 15. Score Sheet Rank your: • Competency • Repeatability • Leverage Evaluate your score 15
- 16. References and Additional Materials • CompTIA website (www.comptia.org) – Member Resource Center – under Business Management Finance • Corelytics – www.corelytics.com for overview • Sign-up – CompTIA.Corelytics.com • Questions – frank@corelytics.com 16
- 17. VMware and CompTIA Offer: Free Financial Forecast See your trends, financial strength and future forecast How? • Email: support@corelytics.com • Subject: VMWare Report • Text: Your contact information 17
- 18. Q/A 18
Editor's Notes
- Today’s presentation was developed as part of CompTIA’s Channel Training program, which offers a broad range of education to the IT channel on topics such as cloud computing, healthcare IT, security, and managed services, unified communications.CompTIA is the trade association advancing the global IT industry, with more than 2,000 member companies that include solution providers, vendors, and distributors.
- Today’s session is not about driving growth or strategic transformation. Today’s session is about stabilizing and optimizing your current operations to be as efficient and profitable as they can be.
- Profitability and revenue are changing from transactional product sales to a mix of IT services and are influenced by new trends like Cloud for example. Customers have more options than ever – so how do you differentiate yourself? You have to continue to transform your business. As you continue to find news of doing business, don’t lose sight of where you are right now. . New ways of doing business won’t be successful if you are not operating efficiently in your current model.
- Question: is it better to increase price by 5% or improve Operating Efficiency by 5%?
- • Why are margins declining for IT solution providers?• What specific steps can IT solution providers take toimprove margin results?And then:• How do youassesscurrentoperationalprocessesinsideyourbusiness?• Where do yourank in process performance levelsinsideyourcompany and againstyourcompetition?
- All roads lead to ineffective management and/or measurement. Can anyone think of any other negative drivers? And which of these have affected your business directly?
- All roads lead to effective management and measurement. These are not theoretical drivers, they are very real and proven. Can you think of any others? Does anyone have any experience with these drivers and their impact?
- Just stop and remember: why are we all in business in the first place anyway? To keep busy? No. To make money. Why does operational efficiency matter? Because it leads to making more money. Duh.Another critical thought as we get started with our four steps: ultimately, every thing you do in business represents cost, cost that can be controlled. If you actively control it. Control the controllableTarget margin leaksKeep score Apply metrics/compare
- Consider detailed descriptions of exactly how you do things – from sales process to accounts receivable to payroll process. Every cost can be controlled. Begin with the most important first. Even small changes in critical activities can return large gains in margin returns.Ask whether or not your people are in the right jobs. Do they have the right skills to perform their tasks effectively? Are people covering multiple roles? Do they get the proper training? Are the right people in the “important roles?”Track the results of your most important business operations. Make a list of a few top things (such as healthcare expenses, payroll, etc.) and tie your metrics to those.
- Discount: who authorizes discounts? How much discount is acceptable? And why is a discount warranted? Urgency: define standards for what to sell, not just how to sell it or how much to sell. Compensate to emphasize high value products/solutionsIncentives: do vendor programs make money or cost money? Establish clear procedures for vendor incentives and ensure it’s a worthwhile activityService Ops: as we discussed w metrics, utilization is critical here. Low utilization for salaried staff is the single biggest factor for diminished margins. Also, are services priced according to their value and the resources required to deliver them? Marketing/Sales: establish a rate of return for marketing campaigns and sales efforts as a multiple of investment. Control costs, incentivize lower sales costs and faster closes, capture vendor mdfs etc. Back office: receivables. Slow receivables essentially put you in the banking business. Your cost of money goes up with your “days sales out” rate and you then need to finance your operations with expensive loans. Same goes in the opposite direction with payables. Taken together, these items represent big holes in the bottom of your boat. But they’re all fixable. Every one.
- Product GM: direct measurement of ability to sell on value without discounting. But be careful to define – are presales costs included in product margins, or are they accounted for in the cost of sales? Service margins: should be tracked by type of service etc. separately in chart of accounts. But measures the ability to sell and operate service deliverables efficiently. Selling Expense: how much does it cost you to generate those margins on sales? Do sales people close effectively and use resources efficiently to do it?% mix of products and services: ability to attach services engagements to product sales. Your mix of services should accurately reflect your target audience’s actual behavior, or you’re setting yourself up for a failure. G&A as % of revenue: how efficiently your back office expenses are managed. Where are you spending too much? Back end rebates as % of revenue: this percentage must be tracked separately from product margins or any additional margin is likely to be lost in the selling process.
- Core competency: this can be absolute AND relative. Needs to be both. It’s possible to be good at something yet still be very much less capable than competitorRepeatability: do it the same way every time. the root of efficiency and scalabilityFinancial leverage: how much does it cost, and how much value do I derive from it? The key is to ensure that your resources are focused on things that matter and recover costs from low value activities.
- Walk attendees through Reference Score Sheet - PAGE 7 OF QUICK START GUIDE