Towards a Billing Machine
Ask any business solution reseller what business they’re in, and the answer will probably be, the software business.
Unfortunately, that’s at most ½ right. And highly problematic.
The fact is that the average business software reseller derives anywhere between 50% to 75% of their revenue not from software, but from services. Selling, installing, and supporting business solutions is therefore more a services business than anything else.
Here’s the problem – failing to understand this will almost always mean lower profitability. Or worse, no profitability at all.
Why? Simply because while software margins are largely “stable”, services margins are anything but. In our experience, they can vary from as low as 15% (effectively a “slow death” scenario), to as high as 60% (which generally produces solid profitability and growth).
The plain fact is, to succeed in a services business, you need to build a Billing Machine. Or hope for accidental profitability. And that choice is pretty clear.
The first step on the path to building a Billing Machine is to leave behind the notion that you’re in the software business. Your business wouldn’t exist without software, it’s true, and it’s a key component of what you sell, but it’s not fundamentally the business you’re in.
In a services business such as yours, the primary inventory is time and expertise. Effectively, you sell expertise by the hour. That expertise produces a certain business result for the customer, which determines in the end the price you can charge for the time you sell.
Obviously, you want to sell as much time as possible, at as high a rate as possible. And have the cost of that time be as low as possible.
Therein lies the first rub on the path to a Billing Machine.
Take a salaried consultant, for instance. They are effectively the repository of the billable time and expertise which is your main inventory. Their salary is a fixed cost, but the actual cost of a billable hour to you, depends on how many hours of their time you sell each year. The more billable hours you sell, the lower the cost of each hour becomes. And correspondingly, the higher the margin.
We often hear it said that one of the main issues a software reseller faces today is a shortage of good resources. Usually, this belief is both false and dangerous. The real issue is how well their existing resources’ time is utilized. Most resellers have significant excess capacity already tied up in their current resource pool. Adding to that resource pool often actually decreases profitability. Realizing that unused capacity, on the other hand, increases both productivity and profitability simultaneously. That’s the path towards a Billing Machine.
The second main challenge on the road to a Billing Machine is the actual rate structure of your billable time. But that story is for another day …
– Software Delivered as Promised. No Surprises.