The Invisible Elephant

When it comes to Business Central, I believe there is an elephant in the room. An invisible one. Potentially, a deadly one.

That elephant is inadequate capitalization of the Partner community at large.

Here’s why I believe this:

In the past, all a publisher like Microsoft really had to do to capitalize a channel was provide favorable payment terms for perpetual licenses. A VAR or ISV paid in say 120 days and collected from the customer sooner. That generated the working capital needed to run and grow the business. A competent entrepreneur could bootstrap their way to success with this support alone. And so, a channel formed.

But  it doesn’t work that way in a Cloud-first world, because:

  1. Subscription revenue gets collected over time, not upfront. Even collecting say a year’s license subscription from the customer in advance and paying the publisher monthly falls well short of providing the working capital needed for business model transition. The cash flow trough begins.
  2. Customer acquisition costs are upfront, but revenue is not. This deepens the cash flow shortfall. Especially, if marketing expenditures rise, which they inevitably need to do to get any sort of customer add momentum.
  3. Upfront project fees go into freefall because the customer expects to pay a “sensible” multiple of their (far lower) license subscription for services. The cash flow trough deepens even further.
  4. The customer demands “productized” add-ons rather than high fees for customizations, which the VAR or ISV must either build or re-configure, resulting in further upfront costs not offset by immediate revenue. The cash flow deficit hits the red zone.

Partner owners, for their part, respond with some combination of the following:

  1. Stubbornly believe that they control the customer and can therefore override subscription demand and avoid the whole cloud thing altogether.
  2. Attempt to “sweat” their customer base and new prospects with the traditional perpetual model that has high upfront revenue, while the undertow of subscription demand flows in the opposite direction and pulls them underwater.
  3. Personally fund the cash flow trough in the mistaken belief (hope) that it will be short-lived and magically self-correct.

None of this is effective, of course. At some point, the Partner simply runs out of cash. 

What happens then?

The publisher fails to achieve their growth and market share ambitions because the channel they rely on to deliver it is undercapitalized, and VAR/ISV owners preside over the slow death of their (traditional) businesses. End of digital transformation story.

The only mathematical way out of this is for everyone to first acknowledge the elephant exists. Then, Partners must build realistic budgets/forecasts that identify the funding needed for their own digital transformation. Finally, that funding must be secured.

As the end of 2018 approaches, and everyone reflects on what they want 2019 to hold, I believe we all need to have a candid conversation about capitalization, and deal with it as a top priority.

My opinion …

What’s yours?

Dynamics 365 Business Central Survey results available …

Survey findings are now available for the latest CloudSpeed survey, with over 100 Partners sharing their anticipated sales, traditional seat migrations, workload attach rates, and resourcing requirements to name a few.

I believe you will find the results of this survey both interesting and helpful in making the most of the Business Central opportunity. If you have already participated, you should have received the results. If not, let me know.

If you would like to receive the results, please contribute your perspectives here and I will send you the survey findings.

Dynamics 365 Business Central Survey

How prepared are Microsoft Partners to fully capitalize on the fundamental market changes that are driving demand for Dynamics 365 Business Central? What key business levers are the most important to achieve sustained profitability? What lessons can be learned from other Partners in the field today? How can the entire ecosystem fully exploit this market opportunity?

To answer these questions, CloudSpeed is conducting a survey among Partners interested in Dynamics 365 Business Central. By participating in this survey, you can be among the first to receive the findings, plan your next moves, and drive your business forward.

All individual responses are confidential and there is no cost to participate.

I invite you to complete the online survey now. It takes under 10 minutes, and your participation will help ensure everyone makes the most of the Business Central opportunity.

dana

IT Services – Time for Change

In this digital age, the IT services market is not working effectively for any stakeholder group – Customers, IT Professionals, IT Resellers, IT Vendors, and Distributors alike. Each remain exposed to critical risks and fail to realize the full promise of digital transformation.

Moreover, the risks and economic rewards are likely unbalanced in the face of this market shift. Customers need more predictable outcomes and tangible business value from their technology investments. The IT Professionals and IT Resellers who deliver them deserve to reap superior economic rewards. IT Vendors and Distributors need to preferentially support those who best advance everyone’s interests, including their own.

In short, all industry players need to better serve customers, while helping themselves achieve superior business outcomes. Lessons from digital frontrunners in other industries strongly suggest that increased transparency and visibility is a vital requirement, and overdue.

Download the CloudSpeed Whitepaper here.

Long Road Behind, Long Road Ahead

The results of the CloudSpeed Capital Adequacy Study are now in, and the bottom line is that although most Microsoft Partners have made strong progress in adapting their business models for success in a Cloud-first world, many also have a significant portion of the journey left, and may experience difficulty funding it. If you want a copy of the full findings, complete the survey hereIf you have already participated in the survey and not received the findings, let me know

Dynamics 365 Business Central – Choices and Consequences

Having worked with Dynamics Partners for a decade now, I believe this is a pivotal time for the channel.

As I see it, there are 2 choices a Partner can make, with very different consequences:

  1. Continue selling as many perpetual deals as possible, until there is no longer any real demand. Simultaneously squeeze out as much profit as possible, by cutting costs to the bone. Then close up shop, because there will likely be no buyers for what’s left.
  2. Aggressively pivot the business to the Cloud, make the investments needed to develop some IP and acquire Cloud users, and ride out the cash flow trough until recurring revenue builds to a point that restores profitability. Collect “rent” on Cloud users well into the future, or sell the business.

I believe this is a pivotal time to make that choice because of the convergence of strong Cloud demand, product readiness, and a favorable margin structure. I also believe that because of this, the gap between the economic winners and losers will greatly widen from here out.

Just my opinion …

Is Red the new Black?

Does a focus on profitability destroy shareholder value? In the Cloud, it certainly seems that way.

For many owners I know, this sounds like crazy talk. Who in their right mind wants an unprofitable business? In times of fundamental business model disruption, however, the main goal is to position yourself for the future, not cling to the past. The biggest risk you face is not evolving fast enough.

The fact is, those who are achieving the highest growth in shareholder value are very often the least profitable, because they are aggressively investing in building compelling Cloud offerings, putting the needed support infrastructure in place, and expanding their customer base before the competition beats them to it. Call it short term pain for long term gain.

Where do you stand? Is your business worth more because of the Cloud, or is it rapidly shedding shareholder value?

The real answer lies not in your current profitability, but how your revenue composition and margin structure are shifting, and whether your customer base is growing or shrinking.

Want to get a handle on where you’re really at in this Cloud-first world? I’ve developed a proprietary business valuation model that gives you a concrete sense of what your business is worth today. Ask me for it. It’s free.

Caught in the P&L Trap?

Revenue drops as customers resist large upfront costs for IT projects, opting for pay-as-you-go Cloud solutions instead. Margins shrink as you re-purpose the resources needed to deliver these solutions. Welcome to the P&L trap. What to do?

Immediate response – sell more. Except that requires both a different sales approach, and an online lead generation engine, neither of which you have. And even if you did, the Cloud customer wants a different offering entirely. All of which require material investment to develop. At a time of falling profits. The P&L trap grips you tighter. No matter what you do, it seems restoring profitability gets harder at every turn.

In my experience working with Partners, the first step in freeing yourself from the P&L trap is to recognize that it’s not your biggest problem. As worrisome as your P&L trajectory might be, your business valuation is taking a much bigger hit. That’s the biggest problem you face.

To solve that problem, you first need to take a step back. Valuation in a Cloud-first world is fundamentally a function of revenue composition and margin durability. Without understanding where you really are at today, relative to others in your peer group, you really can’t take the steps you need both to increase profitability and the value of your business.

I have recently completed an independent Valuation Study of leading Microsoft Partners. It tells an intriguing story about where the money really is in the Cloud. In exchange for your data, I’ll send you the Study results. Contact me here to participate.

CloudSpeed Business Valuation Study Results

The results are in – and they tell an intriguing story about where the money really is in the Cloud.

Curious about how you stack up? Do you possess the optimal revenue composition? What is each revenue stream worth? How are your margins, relative to other Partners? Where does your growth rank? Bottom line, how much is your business likely worth today?

If you want answers to any of these questions, contact me here. In exchange for your data, I’ll send you the Study results.