Usually a Vendor’s primary focus is revenue growth. Channel partners however tend to be primarily focused on measures such as profit and cash flow. These differences are important considerations for vendors and partners alike when considering a partnership strategy.
While all businesses are looking to ensure they are profitable, this simple “rule of thumb” business check can be used to assess the potential impact of any change in strategy on the business. Traditional financial tools such as NPV can provide go or no go investment decisions, but this tool looks beyond profitability at some of the other related measures that should be considered as part of the decision making mix.
Firstly, a reminder of what defines profit.
Profit = Sales – (Fixed Costs + Variable Costs)
It is easy to focus on increasing sales but unless there is an equal focus on maintaining the correct control of costs, especially fixed costs, increasing profit will be a challenge by sales focus alone. A question for contemplation is what additional costs (especially fixed costs such as increased wages) will every extra dollar of revenue create, and is this new mix sustainable?
Equally important is what affect any changes in strategy are having on the customer’s expectations or satisfaction, as without customers there definitely can be no profit! Therefore, the service element of this tool adds another dimension beyond a pure financial tool.
We use this tool as part of the business planning or strategy sessions we conduct for partners to better understand if the partner has the right mix and balance of real world operating metrics, and in doing so pass the business PYSCO test.
Take the PSYCO test by asking the following five questions.
- Product – Do you have a quality product priced correctly for the target market?
- Service – Can you back the product with the delivery & service the customer expects?
- Yield – Do you have right balance between competition, price, margin and volume?
- Costs – What cost control measures are in place & how do they relate (ratio) to sales?
- Optimum volume – What is the point you will fully utilise existing resources i.e. no new costs
When we are researching partners on behalf of vendors looking to validate a growth strategy, we have often found that while vendors are usually looking for more growth from their key partners, but often their key partners are not looking for additional growth, especially “net new logos”. Chasing net new logos can come at a substantial cost of sale, just to land the customer, and then of course there are the incremental costs of onboarding and ongoing costs of service delivery under a managed services contract. The question we ask partners with a MSP focus is of course what their professional services and service desk utilisation rate is and how much head room they have should a customer event or disaster such as COVID hit that could stretch their resources to breaking point, and inevitably drop service levels.
As we have stated earlier increased revenue does not necessarily equal increased profit. Our research has also indicated many partners do not actively think PSYCO, but intuitively feel comfortable at a certain size or volume of business for a wide range of reasons such as management skills, system capabilities, vendor support or even lifestyle.
Bottom line is that some partners do not want to aggressively grow. While revenue growth is usually the primary driver for the vendor and therefore often linked to key partner incentives, it may be of little interest to the partner as they know that additional growth often comes at a cost that will impact their profits. Therefore, when doing business planning with partners, understand what the partners’ business goals are upfront.
To achieve a successful, sustainable and profitable business all of these factors should be considered as a balanced mix. This will mean that compromises may have to be made in one or more areas until the PSYCO balance is regained. Finally, as market conditions and internal capabilities are constantly changing this PSYCO review process should be ongoing as part of the annual planning process. Before making any assumptions on growth, check to see if your partner’s business is already PSYCO.