Brent is the Director, Partner Profitability & Compete, Microsoft Worldwide Partner Group.
What"s your background, and how did you get started in IT?
I started out of college working for a number of Dynamics partners in sales and marketing, selling CRM and ERP systems to companies of all sizes. I then took a hiatus from the channel, and went to AT&T Wireless, where I drove a large portion of their existing customer marketing, essentially their CRM program.
Following this, I was recruited to the U.S. Microsoft Dynamics team to work on existing customer marketing and the ERP business. I was fortunate to have a mentor with the Dynamics Product Group that recruited me to develop our partner profitability story for CRM Online I then joined our Worldwide SMB team, during which time I developed the Partner Channel Development Manager role, which was the 200-plus member community that would lead the SMB journey into the cloud, coaching distributors, resellers, and MSPs on how to build their business. After three years, and with an experience base in partner profitability, this new role came along, which consists of four elements of partner business;
Profitability, Competitive Recruitment, the Cloud Solution Provider Program,
and the Azure Business Development Managers Community around the world that helps partners develop their Azure practices.
What do you see as the top three to five issues that Microsoft partners face going forward?
I think the biggest challenge is performing while you transform. We all have a revenue obligation to meet, the need to make payroll, pay our bills, generate profit, etc. At the same time we have to understand how the cloud is transforming businesses, and how partners can continue to meet customer needs and maintain their role as trusted advisor. For some partners, part of that transformation requires new investments in staffing, training, marketing, etc., so they need to generate enough operating income to invest in this new paradigm.
Another issue is how you go about protecting your relevance and your revenue from becoming commoditized by the tens of thousands of partners transacting in the cloud. How do you separate yourself from the herd? This is why having a verticalization strategy is important, and with it having proprietary IP. Lastly, in what is becoming a hyper-competitive market, it's important partners have a mindset that challenges the status quo, and that they're consistently thinking differently about things. Something that is a competitive advantage today, may not be six months or a year from now. A healthy level of paranoia will serve a CEO well.
How can IT service companies position their company for growth?
In the IT services business there are four lines of revenue. They are product or license revenue, project services, managed services, and packaged IP. I think what's important to maximize profitability and create a healthy, vibrant company is to understand that these revenue streams are not created equal.
If you look at the gross margin of a license or product sale, it's tied to the channel incentives of the vendor, which is the maximum margin you'll ever get out of this revenue line. With project services, most partners are realizing 35-45 points of gross margin. Where the real profit comes from is those last two lines. Managed service providers typically generate 45-55 points of margin, and it's not uncommon for those in packaged IP to see in excess of 65 points within that revenue source. Understanding the revenue mix with an emphasis on the latter two, and building an annuity stream that is their own, and not based just on a vendor's product, is going to be critical.
Additionally, one of the things I spend a great deal of time coaching partners on is relinquishing control.
When I sit down with a CEO, I often notice that they're the company's primary sales person, they're conducting the hiring and dealing with payroll issues, and they're engaged in virtually every customer project. The simple truth is that this level of involvement doesn't scale, and places an artificial ceiling on the business. So they've got to learn how to implement people and processes that will enable them to take their business beyond the plateau of where they've probably been for the last three to five and maybe even more years.
Where do you see M&A activity going over the next couple of years?
I think it's ramping up, and for a number of reasons. For one, partners that have been in the business for 20 or more years and who have built a great company are now contemplating whether they want to navigate the requisite change needed to adapt to an industry that seems to be evolving at an ever-accelerating pace, or if now is the right time to consider an exit.
We're also seeing a new wave of savvy entrepreneurs come into the space who realize that eventually supply and demand will take hold, and that it's the early adopters who stand to benefit the most—and for them, the race is on with transactions already in place.
Looking more at the merger route rather than acquisition, we've seen some successes with companies that came together to broaden the value of what they provide to the market. They did so because they believed the power of what they can provide as a combined entity far exceeds what they can do alone, and more importantly, what their peers can do.
From Microsoft's perspective, we certainly value having strong, thriving partners. Our channel is our competitive advantage, and we want to ensure that what we're creating across our products and programs enables partners to maximize profitability and shareholder value.
What advice would you offer a partner considering a buy-side M&A?
First, you need to understand how M&A fits into your long term strategy. Too many times executives buy for the sake of buying. Essentially they are buying revenue, as opposed to understanding the gap that exists in the company and how the acquisition fits the long-term strategic objectives. You need to figure out how the acquisition gives you competitive advantage over your peers and in your space, and then how this new offering creates differentiation in the market.
Second, if you haven't had a history of doing an M&A, you need a shepherd to help you through the process. M&A is a complex undertaking and there are lots of mechanics to consider, and lots of companies to review. You want to make sure you're very diligent throughout a long process that may start with well over 100 companies before you'll ever find a few you want to get an LOI in front of, and from that, it's an even smaller pipeline to close.
You can contact Brent at bcombest@microsoft.com and @BrentCombest. |
