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Positive and Negative Margin Drivers in the Channel 

Posted July 29, 2015by Stephanie Moncayo

The current business environment for managed service providers (MSPs) is extremely competitive, forcing solution providers to find a way to stand out from the crowd. In Operational Efficiency: A Practical Guide for Solution Providers, CompTIA examines challenges and opportunities within the IT industry and how they affect MSPs' bottom lines.

Introducing new business solutions isn't "likely to be successful if a company is not operating effectively in its current model, for its current customer, on its current solutions." The first step to achieving operational efficiency is to identify the negative and positive margin drivers in the channel to secure a revenue stream. Here's a breakdown of these drivers for you to apply to your business. 

Negative Margin Drivers

Although the combination and difficulty of margin varies among solution providers there are some clear and consistent factors that threaten profitability. 

  • The "commoditization" of IT functionality: This problem has been caused by "improvements in vendor offerings, over-distribution and easy access to product information."
  • Pricing: Customers have stronger negotiating power due to expanded alternatives. Economic challenges force customers to look for the most affordable solution, driving prices down and forcing solution providers to surrender pricing control. 
  • Inefficient sales process: This problem drives costs up! These costs include, "complexity of configuring solutions, getting pre-sales support from vendors, navigating vendor channel program requirements, gaining access to financial decision makers, and advancing opportunities toward a successful close." 
  • Inefficient service delivery: This is due to a couple factors like "inaccurate scoping of product delivery requirements, unscheduled time for billable resources, project management, high levels of labor processes, and lack of repeatable processes."
  • Ineffective management control: This problem pertains primarily to financial performance and a lack of meaningful metrics and accurate data. It also ties into "infrequent changes to operating process, and low levels of organizational control across critical business functions."

Positive Margin Drivers 

You can already see room for improvement and a way to save money by addressing some of these negative margin drivers. For instance, you could optimize service delivery and scale your business by extending your IT team with a Network Operations Center (NOC). On the other hand, there are also positive margin drivers that you can leverage to improve performance. The following conditions have allowed MSPs to see positive results when their competition, operating under the same conditions, selling similar products, and targeting similar customers, suffer consistent declines. Take notes!

  • Strong management: This team/individual should be responsible for discrete business functions and access to performance data. This data should be analyzed at regular intervals and directly influence business activities. 
  • Defined processes: These processes should be specific, documented and repeatable across multiple business functions that can be used for particular operations depending on the size and complexity of the partner and the availability of particular resources. 
  • Aligned compensation packages: Ensuring appropriate revenue, incentives, and rebates motivate sales teams and company objectives.
  • Proper mix of products: Each of your products should meet a set of needs for your target market and should be based on the structure and capabilities of your business mode.

 

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Stephanie Moncayo is a graduate of Northeastern University, and is passionate about dancing and traveling, as well as studying market trends and behavior.

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