Monday, January 23, 2017

The middle age spread

This is part nine of my presentation “Making money from the cloud”. You can find the full slides at:

https://doc.co/LyrxvF/qcihGm

and the previous parts are at:

We live in exponential times

Consider the following

Major Trends

Macro Trends

Software will eat the world

The phone is the desktop

Build a tailored service

Focus on adding value

image

The reality of many IT service businesses today is a model that looks like the above graphic I believe. To my mind, it illustrates that the majority of resources inside an IT services business are spent on managing and maintaining human capital. Now that human capital could be people management (i.e. employees) or it could be knowledge management (i.e. keeping up to date), but is most likely a combination of both. No matter what the components that constitute it, it is by far the largest drain on the business and is something that affects both IT resellers, both large and small.

In this old model, the human capital resource has to be the widest component to cater for all eventualities and is the base on which everything else sits. Most IT providers need people and knowledge to cover the huge variety of products and services they sell and the systems they utilise to support these. Some of these may only be required occasionally but there is too much risk involved in not having them covered. So the base of the structure traditionally needs to be the widest to support those layered on top of it.

This traditional model for revenue growth for IT providers has been to add more products and customers constantly. Adding more product generally also means introducing additional vendors. For example, ‘we hear there is good money in VoIP phone systems, let’s do that’ and off the business goes, charging down the path of adding more products that require additional resources for ill defined or unknown returns. Likewise, many IT providers have traditionally taken on any client they come across because their focus is on revenue rather than profit. If duly examined, many IT resellers would find that probably 20% of their customers are providing 80% or more of the profit in their business, yet the amount of resources dedicated to the most profitable customers is probably quite low. That is simply an indication that the IT reseller has lost business focus and is merely fighting fires. In short, they are letting the business control them.

Much of the diversity of products that resellers have to support comes from the variety of customers they also elect to support. Many customers has little in common with other customers, so each becomes a unique instance to accommodate. This requires unique knowledge and lots of time spent doing things that can’t be applied elsewhere or are worthwhile automating. The greater the variety of customers on board the exponentially worse this all becomes.

With a huge variety of both customers and products to support, you end up having far more resources than you need, ‘just in case’. This means an ever decreasing width as you move towards the top of the structure shown above, because the lower level must be larger than the upper one ‘just in case’. Unfortunately, at the top of this model sits the smallest component of all, profit. That has been eaten away by all the supporting structure underneath. Thus, the business now has the ‘middle age spread’ as I like to call it, far bigger in the bottom than the top. Which is not what you want it to be like if we are honest right?

You’ll also notice that I have included an unnamed mystery box floating over the whole structure. This is something that nearly every IT reseller I know of does not do or even take seriously, yet is one of the most factors in the success of a business. Any ideas on what it could be? Stay tuned.

The question is, what can be done to fix the situation? The next article sill start delving into the solutions in more detail.