Doubling Profitability at an Inc. 5000 IT Services Firm

The results of KGK’s work with an IT Reseller and Services company generating $45M in revenue per year.

Client Situation

Over a 15-year period, the company’s two owners grew the business from a small white-label PC builder into a considerable IT enterprise with 3 business units and $45M in annual sales.  While the company’s growth was consistently impressive, and even recognized on the “Inc. 5000” on 3 occasions, profitability lagged far behind revenue growth.

During a Complimentary Action Session, we questioned whether the breadth of their product and service offerings were at the root of the company’s disappointing profit.  In short, while new offerings may have delivered new revenue, we suspected it required them to work much harder for incremental new profit.  To their credit, the owners were transparent and candid about their flagging earnings.

After multiple discussions on the strategic, operational and cultural motivations behind their varied products and services, the owners engaged KGK to conduct an end-to-end business review aimed at pinpointing their opportunities to increase profitability. Their prime objective was to reach $5M or 8-12% in net profit, up from their current $1.5M or 3-4% profit.  Their secondary objective was to select investments that better prepared the business for an exit within a 3-5 year horizon.

Their prime objective was to reach $5M or 8-12% in net profit, up from their current $1.5M or 3-4% profit.

Findings

Over a 2-month period, we used the company’s data and interviews of their management team to conduct an end-to-end review of their business.  We examined their strategic decisions and assumptions, competencies and capabilities, market and competitive position, the effectiveness of their sales and marketing efforts, pricing and commercial policies, profitability across types of customer and sales, their overall approach to performance management, the level of standardization within their operations, and their use of IT systems and data.

In total, we evaluated over 100 potential revenue and profit leaks, ultimately focusing on 5 high-value opportunities, 3 of which were quantifiable and forecasted to produce an additional $2M in profits each year:

  • Broadly defined pricing guidelines cannot adequately direct highly situational pricing circumstances. While the company had pre-approved pricing levels, its enforcement was limited and our interviews uncovered little common understanding of when to discount and by how much.  Defining how to price, and why, was calculated to deliver an additional 1% or $500k in annual net profit.

  • Serving all customers in the same manner severely restricts the sales team’s capacity to generate revenue and profit. Except for the smallest of customers, field sales reps handled all customers and quotes.  Unfortunately, over 1/3 of all customers accounted for less than 1% of revenue while at the same time sales reported insufficient time to cultivate customers with significant potential.  Establishing account tiering and redirecting sales capacity to more productive accounts was calculated to deliver an additional $1.2M in gross profit.

  • Despite the company’s breadth of products and services, cross-selling was limited, leaving significant revenue on the table. With fewer than half of their customers purchasing more than 1 product or service, the modest goal of cross-selling 1 more item to just 10% of their accounts would generate $350k in new gross profit per year.

  • Strong execution without strategic clarity had yielded growth but in unsustainable fragments. The company’s business plans centered around the company’s sales goals, leading to haphazard market focus, ad-hoc addition of products and customers, lots of data but few KPIs, and limited concrete information about customers and competitors.

  • A strong culture is not a substitute for training or policies. Every employee in the company rallied around the owners.  Despite their loyalty and good intent, much of their management had been promoted into roles for which they lacked adequate experience and training.  This resulted in key policies such as territory assignments being established through trial-and-error rather than through analysis of the connected business implications.

In total, we evaluated over 100 potential revenue and profit leaks, ultimately focusing on 5 high-value opportunities, 3 of which were quantifiable and forecasted to produce an additional $2M in profits each year.

Recommendations

While some findings confirmed the client’s own suspicions, they agreed that eliminating alternate theories and determining the size of verified opportunities was valuable new information that clarified where to focus their attention.  After gaining management team acceptance of our findings, we developed a plan that accounted for interdependencies and their operating model.

The plan detailed 4 workstreams where each project was accompanied by metrics to measure the corresponding financial and operational benefits.

  1. Strategic Planning – Enhance competitive and market intelligence, develop a strategic plan that identifies business development focus areas and a stronger “why” for buying from them.
  2. Sales effectiveness – Develop account tiers and a corresponding sales model; Develop and roll-out a pricing policy; Develop and rollout an account-based sales model.
  3. Sales operations – Develop a quote process that overcomes data capture issues, implement analytics to enable further gross profit analysis, and a vendor scorecard to guide partnerships with the most attractive vendors.
  4. Talent management – Establish an organizational design with job descriptions and skill requirements; define organizational KPIs; establish a goal and performance review process.

While some findings confirmed the client’s own suspicions, they agreed that eliminating alternate theories and determining the size of verified opportunities was valuable new information that clarified where to focus their attention. 

Results

While PRISMTM made it relatively easy to uncover their profit opportunities, implementing solutions required changes across the company.  Six months after project completion, the entire company exhibited greater focus and a profound uptick in their results:

  1. $2M increase in net profit run rate, reflecting the cumulative benefit of all improvements.
  2. 7% increase in gross profit, mostly attributed to sales’ ability to price in a more calculated way. A related benefit was that sales found it faster to quote and were more comfortable justifying their prices.
  3. 11% increase in average revenue per account, reflecting the combined effects of account development efforts, cross-selling more, and increased pricing.
  4. 75% of field sales’ effort was reallocated to high-potential accounts, increasing the company’s sales pipeline by 30% over the prior year.

Most importantly was that the owners gained confidence they could step back from day-to-day decisions and rely on well-trained managers and focused KPIs to guide the business.  Furthermore, it put the business on track to generate $5M in annual EBITDA and gain the interest of strategic buyers offering higher multiples.

$2M

Increase in net profit run rate

7%

Increase in gross profit

11%

Increase in revenue per account

75%

rep time redirected to large accounts

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Doubling Profitability at an Inc. 5000 IT Services Firm