By Larry Walsh
Few businesses say they don’t want to grow. All solution providers, to some degree, want to have some level of expansion in product, services, revenue and, of course, profitability. For some solution providers, particularly small companies servicing the SMB market, the desire to grow is often overwhelmed by the owner’s self-interest.
Let’s call this the “paycheck conundrum,” or the unwillingness to take a risk in business development out of fear that it could negatively impact your take-home pay or net worth.
A more formal way of expressing this is through the acronym “MIFROG,” or maximum internally funded rate of growth. It means the same thing, as it expresses that some companies will invest just enough in their businesses to maintain pace with the market around them.
The industry has a name for solution providers that fall victim to the paycheck conundrum: lifestyle VARs. This label is pejorative, as it means low-growth partners have little desire to contribute to the success of the IT value chain—namely, the revenue and profitability of vendors, distributors and partners that take products to market.
Ingram Micro and 2112 have partnered to form a VAR-incubator program to support business development among SMB and midmarket solution providers. With these VARs, as with the channel population in general, the barrier posed by the paycheck conundrum, or MIFROG, is evident. Roughly four in 10 solution providers evaluated in the program say an acceptable rate of growth is less than 10%. While 10% growth may seem good to many businesses, it often represents little more than standing still when including inflationary factors and costs of goods, services and operations.
The reason many businesses don’t step up is because of the risk involved. Over the years, solution providers have told 2112 they don’t invest more in their businesses and don’t take risks that could result in high growth and high returns because of their need for money. Yes, that may sound contradictory, because it is, in a way. Owner-operators of solution providers need money, so they’re reluctant to invest more of it in their businesses.
Case in point: A small SMB solution provider doing about $2 million a year in top-line revenue asked 2112 for help in growing its sales. He rejected all of our recommendations because they would require cash investment in advance of new revenue. It seems logical that investment is required, as it takes money to make money. This owner-operator didn’t want to make the investment because the money he made today went toward paying his mortgage, funding nice vacations and underwriting his children’s education. Diverting funds would put his lifestyle (hence the label above) in jeopardy.
The focus on lifestyle is often the reason behind low investment among solution providers. The average Ingram Micro SMB solution provider is investing less than 10% of its net revenue (earnings after expenses and taxes) in its businesses. That means there’s little money dedicated to developing new technical capabilities, expanding sales, entering new markets or crafting services.
Any business is risky, as there are no guarantees for success. Staying relevant to the market requires taking some risks, and that usually requires investments. Solution providers need to extend themselves through calculated risk, making strategic investments in acquiring new skills, expanding sales capacity and reach, and marketing brand and capabilities to target customers.
How do you determine what an acceptable calculated risk is?
- Invest, but don’t overinvest. Put money into your business to fuel growth, but not so much that you can’t cover expenses ahead of new revenue.
- Stick to what you know. Invest in products and services that build upon your existing competencies and skills; investing in the unknown is always more costly.
- Understand your market potential; don’t enter into new ventures that don’t have an apparent potential return on investment.
- Focus on marketing and sales; technology is great, but no technology moves unless you have people who can explain its value and sell products.
- Maintain good records, as your data can tell you if your investments are producing a return and how much more you can afford to invest.
Too often, solution providers avoid taking risks because they base their decisions on maintaining their current compensation. Good businesspeople never make decisions based on their paychecks and recognize they can increase their returns by making strategic and calculated investments.
Larry Walsh is the CEO and chief analyst of The 2112 Group. The 2112 Group is partnered with Ingram Micro on the development and maturation of its SMB and MTV partners through a unique Incubator program designed to provide strategic growth, sales and operational guidance for performance improvement. To learn more, contact us or your Ingram Micro representative.