Solution Provider Growth -- It's Up To You

And those can be tough decisions to make, said Jeannine Edwards, engagement manager for CMP Channel's Institute for Partner Education and Development (IPED), during her Sunday presentation at the Xchange Tech Innovators conference, held this week in Miami.

Tough, because over half of solution providers operate with a net income of 5 percent or less, according to IPED surveys, while multiple surveys from a variety of sources state that less than 10 percent of all companies can maintain above-market growth rates for more than five years, Edwards said.

Solution providers can achieve both profits and growth, but only if they do three things, said Edwards. "First, you have to know your business model," she said. "Next, you have to get your business model right. Then you grow your business. And it's important to take them in that order."

Solution providers typically fall into one of three growth styles, Edwards said. The first are the lifestyle companies, those which are satisfied with where they currently are, and which may be on the brink of higher growth. "This is not a bad thing," she said. "It is just a conscientious decision not to grow."

The second are moderate growth companies which expect to grow between 5 percent and 15 percent in the next year by focusing on becoming specialists in certain markets.

The third, Edwards said, are hyper growth companies looking to grow over 15 percent in the next year by adding new practices and vendors in order to capture new customers.

The most profitable solution providers are likely to be service-centric companies who are getting 25 percent of their revenue from solutions that were not in their portfolios two years ago, Edwards said. Thirty percent of revenue for such companies is likely to come from complex, customizable solutions, while 50 percent of these companies will have a managed services or consulting practice, she said.

And 40 percent of them look to specific customer requirements, and not their own business model, for the solutions they offer customers, Edwards said. "They aren't focused on their vendors or their brand names, but on what technologies will solve customer requirements," she said.

In a March survey of solution providers, IPED found that the critical factors to business success included the usual top four factors at the top, including finding new businesses, customer service, changing technologies, and marketing. However, Edwards said, the fifth factor, just as important as the other four, is managing cash flow. Also high up at number 10 is overall financial management.

Top of the list of obstacles to solution provider growth is cash flow challenges, followed at number two by resource conflicts, Edwards said. "If you have cash flow challenges, you can't add resources," she said. "So they go hand-in-hand as obstacles for growth."

For solution providers looking to grow, enterprise storage solutions is by far the top technology on which to focus over the next couple of years, followed by enterprise business software suites, data management software, and VoIP, Edwards said.

To reach that new business, there are three different strategies solution providers can take, Edwards said.

The first is to self-finance, which gives the solution provider focus and autonomy, but typically leads to limited organic growth and limited resources with which to grow.

The second is capital infusion via equity partnering. This gives solution providers immediate access to cash with which to grow, as well as the resources needed to do acquisitions, but at the price of loss of ownership and the risks of carrying debt.

The third is funding through distributors or vendors which helps bring focus and improved access to external expertise, but which can add too many external priorities.

Of the three, equity partnering can be the quickest way to grow when managed well, Edwards said. "But if it's not managed well, it can be the fastest way for a healthy company to go out of business," she said.

Greg Knieriemen, vice president of marketing at Chi, a Cleveland, Ohio-based storage solution provider, said his company's business fits closely the profile of a company looking for moderate growth by using its own financial resources.

"We're a zero-debt company," Knieriemen said. "It gives us the flexibility to allocate and bring in resources as needed."

Chi seeks growth in two ways: adding new vendors to bring in new customers, and adding new value to existing customers, Knieriemen said. "We will bring on new product lines if it helps attract new customers and add value to existing customers at the same time," he said. "Our first priority is to add value to existing and new customers. That's where our growth is."

Knieriemen acknowledged that being a debt-free, self-funded company can restrict growth, but said that Chi's CEO manages cash flow very, very carefully. "We are conservative," he said. "We don't add on an army of engineers overnight. We add resources as required, as opposed to adding in the hope of generating new business."