There is one thing that every CEO wants to know the answer to: How is my company performing compared to others?
This question does not stem from insecurity, but rather from the desire to gain insight, to achieve great results, and to generate maximum returns. “Am I charging enough for my services?”, “Are my costs of sales higher or lower than others?”, “What are my competitors doing that I can learn from so I can increase my operating income and my valuation?” For publicly traded companies, some high-level information is readily available, but specific margin attainment and productivity metrics are not typically reported yet are highly coveted.
Cisco’s Partner Consulting and Innovation (PC&I) team offers confidential financial benchmarking analysis for partners’ complete business operation. Most recently, we completed an aggregate study of our findings and explored what separates the most profitable partners, the 20% of partners with the highest EBITDA, from the rest. Our most profitable partners enjoy EBITDA of 13.1% versus the average attainment of 4.9% – there are many factors that contribute to this impressive 2.7x performance.
Let’s look at a few:
1. Selling More Partner-Branded Services
Traditionally, services were a capability that partners would attach to an infrastructure deal: “I will sell you the network infrastructure and attach my implementation services”. This service-attach behavior served well for those partners wishing to achieve 10-15% of their revenue via their brand of service. However, most partners strive to offer consulting, architecture, design, and day-2 service capabilities to their customers. We’ve seen a steady increase over time in that business model. In fact, on average, the Cisco partners we have analyzed generated 21.6% of their revenue from their brand of service, while the most profitable generate 27%.
The most profitable partners do not view services as an ‘attach’ play, but rather as a comprehensive and differentiated margin-rich capability that facilitates their customer engagement lifecycle and stickiness. These partners embrace the entire Cisco portfolio of capabilities as a platform which enables them to position their services in a manner that delivers an integrated technology solution to address a business need. Doing so enables them to command higher margin, attain greater project control, and increase customer intimacy.
2. Recurring Revenue and Managed Services
It is no secret that transactional and project-based business is somewhat unpredictable. Our partners have been on a long and challenging journey to increase the recurring revenue components of their business and many have built Managed Services and Cloud capabilities along the way. On average, partners generate 37.5% Gross-Margin on their MS/Cloud business, but the most profitable partners enjoy average margins of 46.2%. These healthy margins are extremely attractive, and they are rather sustainable, but still represent a small percentage of a partner’s overall business at just 7%. What separates the most profitable from the rest is their ability to generate a larger percentage of revenue from their recurring business and provide advanced capabilities to their customers. These partners offer Managed Services that consist of data-driven, proactive capabilities addressed to support the customer’s business needs and not just reactive infrastructure monitoring. The most profitable partners have specific and intentional sales motions with unique & qualified skillsets to sell Managed Services with an emphasis on solving a business needs, addressing different economic buyers, and focusing on the user experience across the full lifecycle.
3. Account Managers (AM) and Systems Engineers (SE) Ratios
The most profitable partners invest in more pre-sales SEs. Over time, the role of the pre-sales SE has evolved from a technical subject-matter expert who addresses features and functionality into a Solutions Architect that bridges the technical and business divide. These resources are focused on ensuring that technology solutions are defined to address a business need, adding significant value to customer alignment and architectural roadmap clarity. The most profitable partners invest in a Systems Engineer for every 1.8 Account Managers, while the rest deploy a Systems Engineer for every 2.9 Account Managers. The impact made through investing in these resources is clear when we look at the sales productivity metrics for the most profitable partners who typically see 10% higher revenue and 16% higher Gross-Profit per sales resource.
Gaining a glimpse into how competitors are defining and achieving success is a valuable lesson in realizing what is possible and paves the way on the journey to excel. The secret for optimal performance and profitability is multi-faceted and requires excellence across all the business functions operating in unison.
By knowing how one compares to the competition, one gains visibility into the possibilities.