What’s your Business Really Worth?

valuationAlmost every owner I work with these days has one burning question on their mind – what is my business really worth in this Cloud-first world we now live in?

The urgency of this question really hit home for me at WPC, delivering presentations on this topic at the MPN booth. It seems enquiring minds want to know. Evidently, there are a lot of you.

2016-07-26 (6)

Based on my work over the last several years, I have developed the CloudSpeed Business Valuation Model. It’s a simple tool you can use to give you an estimated valuation range.

Contact me for your free copy.

Ready to Kill your Category?

Category_Killer

Let’s face it, differentiation has long been a struggle for us. And in the Cloud, it’s probably key to survival.

I spent the first half of my career in financial services. We had the same struggle. While we liked to think ourselves better than our competition, the stark reality was that there was little difference between us. Customers chose who to do business with on the basis of price and location. And we hung on like mad to razor-thin margins.

Until the rise of the “category killer”. Companies like MBNA changed the game by picking a niche focus (affinity credit cards), doing it better than all of us “generalists”, winning market share, and earning far better margins. I vividly remember Michael Porter (Harvard strategy guru) delivering a keynote and telling a North American gathering of bankers that none of us had anything approaching a strategy, and that this was a disaster for both ourselves and our customers. I could see the blood drain from my CEO’s face. He wasn’t alone.

I’m reminded of that moment as I observe the Cloud obliterating traditional Partner categories. No business model or traditional customer base in our ecosystem is protected. The Cloud has leveled the playing field because the customer is looking for real choices. They want someone who specializes in their “category”, whatever that happens to be.

And for clarity, categories are not necessarily always vertical in nature, although they often happen to be. The good news is that the Cloud enables entirely new categories. Creativity is rewarded, if it resonates with a particular customer segment and is well executed.

Our core differentiation challenge, I believe, is to define and then “kill” a category.

Are you ready for that?

What’s your Cloud Plan?

Got a Cloud Plan_By now there can be no debate – we live in a Cloud-first world.

And as I pointed out in the last blog, the Cloud business model is all about the long game.

Now to truly win at the long game, a Partner will need to aggressively build market share before it’s lost to competitors.

Which requires capital. In many cases, an outside capital injection.

Raising the question of what is needed to acquire it. What does a potential investor need to see in order to provide capital?

In short, 2 things:

  1. A credible and complete Business Plan
  2. A management team capable of executing it

The Business Plan itself must indicate:

  • What markets you will pursue
  • Who you will compete with
  • How you will differentiate yourself
  • What your offering set will be
  • How you will market, sell, and deliver your offering set
  • What the economics will look like, and what shareholder value you will create
  • What capital you will require, and why
  • What business risks you will face, and how will you mitigate them

Pulling all this together may sound daunting, but the good news is that there’s help. Check out the Cloud Videos tab for guidance on each of the Business Plan elements above.

I’ve also developed a Cloud Business Plan Template, based on work I’ve completed with early movers in the Microsoft ecosystem.

The Cloud Business Plan Template is free for Microsoft Partners, and can greatly increase your odds of success in the Cloud, as well as reduce your risk.

Contact me for your free copy today, and use it to capitalize on the Cloud in 2016.

My firm belief is, there’s no time to lose.

The Long Game

The Long Game

One of the things that can fairly be said of many Partners in the Microsoft ecosystem is that there is an almost instinctive focus on short term business impacts.

That’s quite natural, because in the past, success in any given year was more or less the sum of the successes of each deal you did. You lived and died based on short-term project performance.

But the Cloud is different.

The Cloud business model is all about the long game.

Here’s why …

Certain investments must be made upfront, like an ante. Buying behavior has radically changed and so different marketing and sales infrastructure are needed, for starters. Customers want integrated, industry-specific solutions and so offerings must be far more “productized”. These all represent very real, and largely fixed, costs.

Revenue, however, is mostly annuitized; it comes in over time in the form of subscriptions for both products and services. The customer expects lower upfront costs, and so is reluctant to fund the large projects they once did.

This has 2 main effects:

  1. Operating cash flow, in the short term, is often negative.
  2. This deficit must be funded.

Compounding this is the fact that market share must be gained quickly. The logic here is to put a fence around as big a customer base as possible, before someone else does. Inertia more or less does the rest in terms of generating long-term profitability, as long as “core” gross margin levels are healthy.

This is why company valuations are highest for those who are posting strong recurring revenue growth, even if short term profitability is negative. In effect, technology is becoming a “utility”, and the market is rewarding those who carve out a meaningful niche for themselves as an ongoing product or service provider, rather than simple one-time project services vendors.

So in the Cloud, a focus on short term business impacts risks resulting in long-term failure.

But it is equally true that to win the long game, you must have a plan. A plan to build a solid, sustainable, defensible market position, before someone beats you to it. As part of that plan, you may also need to raise outside capital, to achieve a suitable economic outcome.

More on that in the next blog …

Windows of Opportunity

Windows of Opportnity

Among many Partners, I sense a growing urgency to capitalize on the Cloud opportunity; a sense that there is now no time to lose.

And indeed, even as you read this, key strategic positions are being occupied in the Cloud which will be easier to defend than later take. Your future business prosperity, if not survival, rests on not coming late to the Cloud party.

In short, the Cloud window of opportunity is open, but indications are it is closing fast.

Coupled with this sense of urgency, Partners feel anxiety around all the implications of the different business model required for success in the Cloud. Get a critical element wrong, and the enterprise could be at risk.

Fortunately, there is a blueprint for Cloud success developing, based on the experience of early movers. In my work, I’ve found the key elements of this blueprint are:

  1. Identify your addressable market. Focus in the Cloud is crucial, as customers demand integrated, industry-specific solutions. Leveraging your historical base is important, but for most Partners, a greater level of industry or functional concentration will be needed. One that, obviously, will be profitable.
  2. Know who you’ll compete with. And what makes you unique. No worthwhile market will remain uncontested for long. To win a solid market share, and keep it, you must be able to differentiate yourself.
  3. Build a compelling offering. Typically, this will involve multiple elements. Project services will remain important, but to build vital recurring revenue streams you’ll also need ongoing support offerings, as well as in many cases, your own intellectual property.
  4. Build strong and effective marketing muscle. In the digital age, you must be found online to even be considered by a prospect. Not all prospects will buy immediately, of course, so you also need to be able to cost-effectively nurture them.
  5. Adopt a Cloud-specific sales motion. Today’s buyer is well-informed, and wants to be in control. This demands a different approach, different compensation structures, and often different salespeople. And depending on deal size, much or all of selling will be remote.
  6. Dial in your delivery equation. Repeatability, predictability, and cost-efficiency are the new watchwords. Whether for initial implementations, or ongoing support.
  7. Possess a financial plan that creates shareholder value. Valuation metrics have changed significantly since the advent of the Cloud. Traditional businesses are dropping in value, as those comprised of high-margin recurring revenue streams are rising. In the short term, some P&L degradation is to be expected as you transition your business model. But you must have a clear picture of how you will create shareholder value, for yourself but also for those who may provide the capital you need to fully exploit the Cloud opportunity.
  8. Manage the journey. It’s said that if strategy is king, execution is god. A solid management team with Cloud-specific dashboards are always needed to drive the desired results.

There can be no more debate about it – the Cloud opportunity is here and the time for focussed action is now.

To win, following the above blueprint will be required, for sure. But I believe it’s also important to play “the long game”.

More on that in the next blog …

What’s Your Cloud Number?

questionAnd by that I mean, what do want your business to be worth in the Cloud era?

Over the last 10 weeks, I have spoken or met with several dozen Microsoft Partner owners, from all parts of the globe. I’ve asked certain core strategic and economic questions of them all. We’ve done their Cloud math, together. And I’ve learned, everyone has a different number.

Now for starters, we’re all in agreement that the Cloud is a disruptive event. Which makes it both an opportunity and a threat. And it’s upon us, now. So owners have a burning need to identify what their business will be worth in a Cloud-first world.

But among the owners I’ve worked with, the Cloud Number Range is wide. Surprisingly wide, in my opinion.

In my travels, I’ve found certain key things tend to drive what your Cloud number ends up being:

  • The market segment you pursue. Or put another way, the demand wave you chose to ride. Each segment will tend to have its own inherent potential.
  • How crisply you can define your offering, and why customers would buy it. Specifically, what quantifiable business risk are they avoiding by using your offering, or what economic advantage will they achieve?
  • How aggressively you are prepared to pursue your chosen market segment. Put simply, the more customers you capture before someone else does, the more your business will be worth. If your Cloud revenue is not growing by at least 20% per annum, you’re in effect losing share to someone else. Never a cause for happiness.
  • Your ability to raise the capital needed to aggressively grow your customer base. Unlike the traditional business model, the strong evidence is that you cannot effectively “bootstrap” a high-value Cloud business.
  • The degree to which you can wrap managed services or “subscribeable” IP around Microsoft offerings. Because they are both recurring revenue streams, and generally deliver higher margins than one-time project services, the valuation multiples you achieve are correspondingly higher.

Want to do your own specific Cloud math? Want to identify your Cloud number?

Let me know …

Seeking a Cure for Shrinking Margins?

Shrinking MarginsNo matter where in the worldwide Microsoft ecosystem I go, I find that Partner businesses are experiencing at least some measure of financial pressure. Having benchmarked now nearly 100 such businesses (VAR’s, ISV’s, SI’s, MSP’s) over the last 7 years or so, I have also noticed a fairly steady decline in overall profitability.

For the most part, this is caused by shrinking margins.

What I’ve also noted is that although different Partner businesses will have different revenue stream compositions, not all margin is created equal. In fact, there is a “hierarchy” to margin potential, depending on the revenue stream one is talking about. This is represented in the following graphic.

Margin Heirarchy 4Starting at the bottom of the margin ladder, hardware at best delivers 20% gross margins. In many cases, it can be half that. 3rd Party Software tops out at around 35%, and that almost always requires the sale of business applications software such as ERP. Other software carries generally lower margins. Project Services comes next, in some cases driving 45% gross margins, although this requires careful management attention to achieve. In essence, you are selling labor and there are inherent limits to how much margin you can drive. Managed Services can deliver as much as 55% in gross margins, because it is a form of “insurance” that customers buy, should they need it. They tend to overestimate the support they will require, and under-consume. So you earn a higher margin than is possible for project services. And finally, Intellectual Property can deliver as much as 75% gross margins, because it is a product that is “manufactured” once and sold multiple times.

It is also important to note that the only revenue stream that is not under pressure these days is Intellectual Property. This is largely a supply-and-demand phenomenon. Intellectual Property has high perceived value to the customer, so it can be premium-priced. There are also fewer entities producing it, so there is little competition to drive prices down. Consequently, margins remain high.

So the cure for shrinking margins, quite simply, is to shift your revenue composition in favor of higher margin activities such as Managed Services and Intellectual Property. Not only do they drive higher gross margins, but they are things a Partner can control.

Tap into the clear demand for Cloud solutions, and you will have a double-win – your margins will increase, as well as your company’s valuation.

Are you Creating or Destroying Shareholder Value?

???????????????????????????????????????????????????????????????????In my travels across the Microsoft Partner ecosystem these days, I sense a growing anxiety among owners, globally.

Many are working harder now than they have in years. And not making the money they once did. They do not find this encouraging, obviously.

There’s also a sense that, when the time comes to liquidate their interest in a business they have spent years building, they may well be disappointed by what potential buyers will be willing to pay. And that indeed buyers will be in short supply, relative to sellers.

Unfortunately, I believe these concerns are largely justified.

At the core, the problem is that the Cloud-first world we now live in has disrupted the traditional Partner business model. Such periodic disruptions, we know, are central to our industry and indeed capitalism itself. And by definition, they are outside our control. All we can do is respond and adapt.

So what can an owner do?

While there are never simple answers to complex problems, those who are building rather than destroying shareholder value tend to be doing the following:

  1. Understanding what can be leveraged, and what cannot. If only by accident, all Partners will have evolved a certain market focus, and means of differentiation. Success in a Cloud-first world requires first identifying what an owner has built that will be relevant going forward.
  2. Identifying sound market opportunities, given the above. And what the requisite investments and likely payoffs will be. Not all opportunities are created equal, and only one or two can be realistically pursued.
  3. Freeing up needed investment capital. This is done through benchmarking, which establishes where operational and financial performance can be improved, such that additional operating margin is generated.
  4. Determining the Cloud-first value proposition and appropriate messaging. If you’re not visibly (and compellingly) promoting the Cloud, you’re not considered by potential prospects to even be in the game. Unfortunately, many Partners are trapped here.
  5. Crystalizing the Cloud-first offering. Specifically, what products and services will be sold? Intellectual property identification is also key here; it often underpins greatly the viability of the business case, because it has the best possible margin structure.
  6. Building marketing muscle. Digital demand generation is critical in a Cloud-first world, and something few Partners are today good at. Absent an adequate online marketing engine, sufficient revenue generation is impossible.
  7. Building a Cloud sales capability. Buying behavior has changed, and a Cloud-first world demands a different sales methodology, staffing, and compensation structures.
  8. Building a Cloud-first delivery and support capability. Implementing and supporting solutions in the Cloud also requires a new delivery configuration, to keep churn low and cross-sell rates high.
  9. Formulation of go-to-market approach. This brings it all together and crystallizes the Cloud Business Plan. There will be investments required, and unless the owners/board can see a greater business valuation at the end, they just won’t sustain a real drive to the Cloud.

Leaving, really, one key question remaining – what is the payoff for all this work?

Just as the Cloud is making traditional business models worth considerably less, it is making others worth considerably more. In some cases, 2-4 times more, or better. The reason an owner invests in transitioning to a Cloud-first business is simply to create shareholder value rather than destroy it by inaction.

It’s a harsh choice, perhaps, but an inescapable one.

And the time for action is now.