Cloud computing and managed services are compelling resellers to change their models to meet the emerging demands of the marketplace and offset dwindling profits from legacy on-premise hardware and software products. The challenge for many providers is the economics of the services model, which is almost entirely dependent on recurring revenues and ever-increasing sales activities.
Successful providers will not just adopt services as part of their go-to-market portfolio but also new business practices that ensure revenue stability, cost control and continual growth. Driving that transformation and sustained services success is a focus on business execution measured through key performance indicators (KPIs).
The following are, I think, 10 essential KPIs that every services provider should incorporate into their business management and strategic planning routine. While every business is unique and will have different ways of looking at KPIs, these common measures offer VARs tremendous insight into their performance, financial viability and value.
1. Recurring revenue rate
The services model is predicated on recurring revenue. Recurring revenue rate (R3) is the amount of money taken in on a monthly, quarterly and annual basis. What makes services so lucrative is that each contract will add to the R3 tally. Having recurring revenue isn't enough; you also need to track the rate of increase and ensure revenue is always greater than rate of expense increase.
2. Cost of goods and services
COGS is a measure every business should follow closely, especially in a services model. This is the cumulative total of how much it costs to deliver services, inclusive of infrastructure build-out and maintenance, network operations systems staffing and professional services expenses. In the product-based model, COGS was about the components. In the services model, COGS can include travel, training and software expenses.
3. Gross profitability
In this simple measure, you take the recurring revenue rate (R3) and subtract the cost of goods and services (COGS) for a given period. The difference is the business' profitability before accounting for general overhead, administration and taxes. It's vitally important in the services business that R3 always exceed COGS. The industry gross profit target for a services business is 60 per cent.
4. Average revenue per user
In the telecoms industry and consumer subscription businesses, the average revenue per user (ARPU) provides a key indication of how much money you're making in the aggregate, reflecting price integrity and the effectiveness of horizontal sales (selling more services into existing accounts). You can look at average revenue from a user, device and account basis; the final analysis is essentially the same.
5. Infrastructure capacity utilisation
For solution providers that offer hosted applications and services, measuring and tracking utilisation rates is vital. Services providers must balance the cost of expensive infrastructure and support against maintaining nonproductive capacity. There will always be nonproductive infrastructure - you always have to keep some capacity in reserve for growth and peaks. Many service providers tell us the utilisation target is 60 per cent of total capacity; when average utilisation exceeds 60 per cent, it's time to add new capacity.
6. Availability rates
Availability rates apply to everything from datacentre and hosted infrastructure to applications and help desks. Measuring availability is often a contractual matter where you guarantee your clients and subscribers access to resources and support through service level agreements (SLAs). Beyond SLA requirements, services providers can use availability rates as a measure of internal operational efficiency and effectiveness. On average, hosted services will experience up to one day of unscheduled downtime per year, according to a Google study.
7. Sales activity
Profitability in a services business is predicated on the continual and increasing flow of revenue, which only comes from new sales. Providers should track the number of sales leads, meetings and closings per month and quarter. Measuring sales activity will provide tremendous intelligence on future performance trends. Low sales contact and closing rates are leading indicators that a services business is struggling and will eventually run into expense-to-revenue challenges.
8. Customer satisfaction and retention rates
If you're not asking customers how well you're serving them, start. In addition to adding new accounts, services businesses are predicated on the uninterrupted stream of recurring revenue from existing accounts. The only way recurring revenue keeps flowing in a positive direction is through the management of account attrition volume. By measuring customer satisfaction, you gain insights into how customers perceive your business, make adjustments and retain accounts. A high attrition rate is bad for a services business, as customer defections dampen recurring revenue and often slow new sales.
9. Return on new investments
The technology industry is replete with references to RoI. In the services business, RoI is best used in the context of "return on new investments", as successful providers are always adding new services and capabilities to their portfolio. Through the addition of new services, resellers have the opportunity to engage in horizontal selling, which increases revenue through existing accounts -- increasing ARPU. Not every new service will be a hit, though, which makes it important to measure the net result of new service investments.
The exit strategy for many VARs that are turning to services is acquisition by a larger company. Providers note the wave of consolidation washing over the channel - merger and acquisition activity remains seemingly rampant. The perception is that businesses are valued on their top-line revenue; increasingly, though, they're evaluated on their earnings before interest, taxes, depreciation and amortisation. EBITDA provides a much deeper measure of financial health and revenue performance. Providers should work with their accountants and financial advisors to calculate and track EBITDA.
Larry Walsh is president and chief executive of Channelnomics
As part of our special editorial partnership, CRN is republishing this article from Channelnomics
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