Threat Level RED

Threat Level RED

Risk Advisory

If the economic uncertainty were not enough, VAR business owners should be advised of the competitive threat and disruptive impact on sales caused by new entrants in the marketplace. Your sales force should be your first line of defense in positioning your business against this threat. In order to justify your prices and preserve margin, your sales force must understand their competition and possess the ability to clearly articulate your firm’s value proposition.

Background

The well known phrase “Necessity is the Mother of all invention” partially describes one of the more significant dilemmas which confronts VARs today. While business leaders are focused primarily on reducing their IT costs, many are also investigating the practicality of Business Process Outsourcing (BPO) and Managed Service Providers as means to achieve such reductions.

Our financial management workshop outlines the five distinct stages of growth in a typical IT services business as set forth in the following illustration

The typical entrepreneurial VAR Business Owner has worked for only one or two other employers before establishing their business. In most instances they simply lack a successful services career experience and “Do not know what they do not know”. Most VARs start their services practice as a “Cost Recovery” model and progress through a natural evolutionary period of learning (aka “School of Hard Knocks”) and are just now enlightened enough to “Know what they Do not Know”. See Knowledge Quadrants diagram below. Approximately 75% to 85 % of VARs operate in a Cost Recovery or Emerging stage and have yet to master the sales skills necessary to consistently sell highly profitable IT service engagements.

Knowledge Quadrants

Welcome the New Kid on the Block

Few companies have been immune to the market’s unprecedented volatility, uncertainty and economic fallout. As the credit markets have dried up with little relief in sight, companies have been forced to preserve cash and what’s left in open lines of credit. The resultant effect of this phenomenon has been a significant rise in unemployment over the past twelve months, with more joining the ranks of the unemployed with each passing day. Faced with a soft job market many are choosing to hang up a shingle, calling themselves consultants, rather than seeking new employment. During downturns it is common to hear things such as “Hey, after all, how much could it cost”, and “I’ll be damned if I’ll be in this position again”.

The corollary of the phrase “Necessity is the mother of all invention” is that job security in today’s market resembles a necessity more than a want. In the past four weeks, I have spoken with three individuals who have emphatically echoed a variation of the above comment. The “New Kids” on the block do not know that starting a business is tough and have yet to realize when starting out “All Opportunities appear to be Real Opportunities”. As I counsel with these newly minted consultants it becomes apparent that they simply “do not know what they do not know”, and as a result tend to price their services without a sense of realistic and practical methodology.

Conclusion

As long as the economic cloud of uncertainty prevails there can be no eminent forecast for this risk to subside. Vigilant watch over your marketplace competition coupled with reinforcement of your sales force understanding of your firm’s value is recommended.

About the Author: Warren R. Turner is the Managing Partner of Cardinal Points Group. He coauthored and teaches “Dancing with the Elephant, Managing a Profitable Services Practice”. The course has been delivered to over 4,000 VAR and SP business owners in 25 different countries. He may be reached via email at wturner@cardinalpointsgroup.com or by telephone at 770-913-0048

Six Steps to Combat Eroding Margins

It's worth repeating especially in a down economy....

Six Steps To Combat Eroding Margins

1. Analyze the lifetime value of each potential customer. Look at overall impact of making particular types of sales, and invest sales resources in only those that have the best chance of driving profit in the long term. In our experience, those customers most likely to be won over by price concessions rather than other factors tend to have the least long term value. The desire for rock bottom pricing doesn’t go away (so follow-up contracts don’t recoup upfront investment in winning this customer), and their focus on price is an indicator that they discount the unique value your firm can offer. It is your return on customer acquisition costs that matter, not the total number of customers. If the return for each customer is positive vs. the investment required to get them, your business will thrive.
2. Differentiate based on added value, not lower prices. Winning customer through deep discounts kills the customer’s value to you forever. Your customers expect you to be able to articulate your unique value.
3. Sell solutions to specific business problems, not technology. Selling solutions to business problems makes it easier to price by the business value of the solution, rather than the cost of the technological components that are part of the solution.
4. Provide discounting guidelines. Discounting works in the long term only when discounts are tied to corresponding changes in value delivered or costs. If a customer pushed for a discount, consider changing the offering so that it costs less to deliver, by taking out something that a customer doesn’t value. For example, delaying service delivery several weeks to better manage your capacity may lower your effective cost, justifying the discount.
5. Align sales incentives. In the end, a salesperson’s performance will follow their incentive structure, so make sure their bonus structure reinforces the above strategy. Consider a rolling 90-day sales view, rather than quarter to quarter. By constantly looking at the last 90 days, you can see performance trends. The end of a quarter becomes less ‘make or break’ for your salespeople, and there are fewer transactions in the short term that can hurt the long term.
6. Invest in sales training. To deploy this approach, salespeople must be taught to articulate the value of your company’s offering, and differentiate it from competition. The better the sales force can do this, the higher the win rate against competitors competing based on price. Most importantly, teach salespeople to respond to customer’s requests for price reductions by rearticulating value.

All of this is easy to say, but can be hard to do. Behaviors are deeply entrenched, and in a competitive bid situation it is hard to get past the mentality of winning the business regardless of long term cost. The steps above reduce the discounting-first mentality, and can lead to a more profitable customer base.