Tuesday, May 30, 2023

Does Your Vendor Have a Sustainable Business Model?

Think for a minute: Who are your three largest vendors? In other words, for your company, who are the three other companies that get the largest monthly payment from you? Now consider, what would you do if they disappeared tomorrow? Or shut you out? Or simply stopped communicating?

Let me skip to the bottom line: You need to ask your vendors to demonstrate that they have a long-term, successful, and sustainable business model. YOU and your business are in grave danger if your key vendors disappear tomorrow, stop fulfilling their promises, or become overwhelmed because they cannot deliver on their promises.

You need to develop a measure of sustainability that makes sense to you and determine where your vendors are on this scale. This discussion is not casual or a mental exercise. This discussion is existential - It could literally affect the chances that your company will survive in a crisis.

Now the wind-up.


All businesses have to do a few things to survive. They need good stuff to sell (products and services); they need clients to buy what they sell; and they need employees to deliver what they sell. There are many other elements of a successful business. Perhaps the most important is a sustainable business model.

Unfortunately, most businesses never think about the sustainability of their company. They don't build a real business plan. They don't write down their mission, vision, and values. They just go to work every day, doing whatever it takes to survive.

If they're lucky, they last a year, or five, or ten. But the statistics on survival are well-known. About 50% of all new businesses will fail within five years (see https://www.entrepreneur.com/starting-a-business/the-true-failure-rate-of-small-businesses/361350). AND there's not much of a learning curve. So 50% of the survivors disappear in the next five years, and the next, and the next.

That's why I always tell people: If you've been in business for ten or fifteen years, you're in the thin air, at the top of the mountain.

Businesses that last have one of two things: Either they have a sustainable business model, OR they have a continuing source of money. Like it or not, many businesses live off of cash flow with no real profit. They are constantly borrowing money and bragging about their "top line" revenue. These companies don't tend to brag about their "bottom line" profit. 

In a perfect world, all companies would have a sustainable, long-term business model. When you think about getting back to basics, you find yourself once again talking about mission, vision, values, and the ultimate secret sauce of repeatable, reproducible success. (I won't go down the rabbit hole of processes, but that repeatable, reproducible success comes from great processes.)

Here's a rule to live by: Businesses that produce their own cash have better business models than businesses that use others' cash. This is true for a very simple reason. You will protect and conserve your own money better than you will protect and conserve someone else's money.

I learned this lesson way back in the 1990s, during the original "dot com" boom and bust. I saw dozens and dozens of companies that took investor money and gave themselves huge salaries, invested in company boats, bought downtown buildings in San Francisco, filled their lobby with video games and big-screen TVs, and gave away sports cars to employees at Christmas.

In other words: They wasted most of the money that was given to them. They did whatever they needed to do to survive every day. And they did not invest in a good, long-term, sustainable business model.

... Skip ahead a bit ...

Private Equity in the SMB IT Ecosystem

A very common model has evolved for some vendors in the IT space. Investors pool their money to create a fund with millions (or billions) of dollars to invest. They find vendors who have a good product, a good market, and generally good employees. In a perfect world, the company will have a strong business model, happy clients, and prospects for great growth and great profit. But none of these last items are actually required. The promise of future business models, happy clients, and profit may be enough.

The PE (private equity) company then buys this vendor, and a number of new rules fall into place. Depending on the size of the fund and the number of investors, most PE companies will want to get their money back in 3-5 years. In that time, they will do whatever it takes to double or triple their investment. On some occasions, they want to quadruple their investment in that time.

As a result, PE companies seek an internal investment rate of about 20%-30%. (For a math-filled primer on IRR, see https://www.investopedia.com/terms/i/irr.asp.) Your key take-away is: They absolutely must make their twenty or thirty percent each year. 

One of the few areas where PE is likely to increase funding is the vendor's Sales Department. They will sell and sell and sell . . . until they can no longer deliver. And, in most cases, they will sell well beyond their ability to deliver. They will spend almost any amount of money to gobble up their competition and grab market share.

As a rule, sales are good. But when sales outstrips the ability to deliver, either you need to slow down your sales or increase your service capacity. The first is unacceptable when you're under the gun to increase sales by twenty or thirty percent. The second is a hard sell when every department is asked to cut expenses to the minimum.

Unfortunately, there are almost no motivations to slow down, take reasonable actions, and build a long-term model for success. Those things don't bring in the quarterly returns that lead to 20%-30% growth.

Very often, the following actions take place after private equity is involved. First, the key personnel are promised lots of money IF the business continues to bring in enough cash. That means these often long-time employees need to do whatever it takes to maintain revenue, retention, and growth.

That "whatever it takes" is often not good for personal relationships. And it it antithetical to a good business model. It certainly does not contribute to long-term sustainability. Here are some common actions you may have noticed. With each of these, ask yourself, "Is this a long-term, sustainable activity?" If not, your vendor's long-term prospects may not be good.

  • Cut employees to create a one-time boost in profitability. Of course this is literally like cutting off a hand to lose weight: It causes more difficulty than it solves. But it always increases short-term profit.
  • Stop (or greatly reduce) spending on new developments, updates, and fixes. Basically, "freeze" the product or service development. Just until the next payment is made, I promise.
  • Consolidate services. If a PE company already has billing, legal, customer service, shipping, and even developers in house, there are pressures to save money by combining these. Of course, the probability that the old standard operating procedures are identical to the new ones is approximately zero. So, billing gets messed up or delayed until the transition period is over. Legal is similarly messed up, as are customer service, shipping, and whatever else is being combined in order to save money.
  • Outsource employees and services. We're all in the outsourcing business. It can be done well or poorly. The important thing is to save money. The disruptive period of transitional (low level) service should only last a few months. 
  • Cut back on training. Maybe don't revert to "sink or swim," but rely on a handful to dedicated long-term employees to do most of the work and train the new people. Certainly, reduce training on customer service, executive coaching, or just about anything else that doesn't make money today.
  • Reduce the average cost per employee so it's in line with the PE objective. Some salaries need to be cut. That's often too distasteful. So, it's often easier to fire people and then replace them with cheaper alternatives. But cost per employee can also mean eliminating performance bonuses and cutting benefits for some or all of the state. The obvious result is to destroy employee morale - and save a lot of money.
  • Raise prices. This is fairly obvious. Even if the primary price is not raised, lots of related prices are increased as well as junk fees. Pretty much anything that is not limited by your contract is fair game. 
  • Sell real estate investments. This might mean combining offices, closing offices, selling off buildings, or moving employees to home offices or co-working spaces. Having employees work from a coffee shop while sitting at picnic tables may not sound like a great work environment, but it saves money.
  • Reduce quality. This is fairly each with hardware. With software, it rarely makes sense. But with services, this can lead to huge savings. A vendor might go from "all inclusive" to nickel-and-diming you. Or they might simply change service hours or options. If you can lay off a hundred people and replace them with a nine-to-five chat bot, you can save a lot of money!
Note: Many of these have dramatic negative effects on customer (that's you in this scenario) satisfaction, loyalty, and the long-term reputation of the vendor. But those things are no longer part of the equation.
  • Delay maintenance. We mentioned postponing development above. But money can also be saved by not updating equipment or facilities. Depending on the nature of the business, these could increase delivery times as well as down-time for the company. But they save money in the short term.
  • Create complicated policies. Hide legal agreements and simply create "rules" that channel reps have to enforce. Make the rules difficult to find, document, understand, or follow. Good examples are requiring excessive paperwork, or hiding requirements and deadlines. All of these are great for increasing partner frustration, but sometimes partners just can't imaging changing to another vendor. So, they might not like the vendor, but they don't feel like they can go anywhere else.

The Irony In Plain Sight: These Companies are Unsustainable by Design

Companies that take these kinds of drastic actions once, in an emergency, may survive. Consider Facebook's recent turn-around. They said this would be their year of austerity and it was. But they started out with $37 Billion on hand. In other words, they were making wise decisions because it was their money at stake. 

When big companies with lots of cash on hand make decisions, they can make those decisions consistent with a longer-term vision. They don't have to make stupid decisions in order to reap short-term rewards. Companies with lots of cash include Apple ($55 B), Alphabet/Google ($115 B), Microsoft ($104 B), and Amazon ($64 B). 

Note: Those cash-rich companies also strive for 20% or more in real growth. But they do so within a strategic, sustainable business model.

According to one source, private equity-backed companies account for more than 27% of all business bankruptcies filed in the U.S. And this is not a new trend. The three-year average is 27.5% of all bankruptcies. The most likely causes for this high rate are excessive debt, aggressive cost-cutting, and poor management. See https://www.thedeal.com/restructuring/pe-backed-bankruptcies-rise/.

Please Note: I've said it before, but these things tend to get lost in the discussion. Private Equity does not have to be greedy or short-sighted by design. It can be reasonable. It can encourage strong values, a focus on people, missions, visions, and values. All of those things would result in stronger long-term investments. All of those things would result in good channel programs with strong relationships. 

But when the one and only goal is to hit a 30% margin payment, all the things that make a good, long-term, sustainable business model just have to wait for "some day" to come.

How do your key vendors score when it comes to a sustainable business model?

Comments welcome.


Earlier articles on this topic:

Is Private Equity Good or Bad?
May 1, 2023 Newsletter commentary

Private Equity Doesn't Have to Ruin Our Industry
Blog post May 02, 2023

Additional reading. For a great little primer on private equity, see https://www.streetofwalls.com/finance-training-courses/private-equity-training/private-equity-industry-overview/.


Wednesday, May 17, 2023

Join Me at Channel Pro in San Jose June7-8 - FREE

I got a note from my good friend Michael at Channel Pro. The big ChannelPro SMB Forum hits San Jose in a three weeks. I'm attending . . . to represent the National Society of IT Service Providers.

And I would love to see you there! Please join me. Michael also sent me a code so you can skip the deposit and register right now for FREE.

You're invited to attend the June 7th & 8th San Jose ChannelPro SMB Forum.

You can attend for free when you register with promo code ITMSP.

Here is a quick summary with some valuable information for you...

The event is June 7th and 8th at the Holiday Inn San Jose Silicon Valley Hotel. It will be a full day of food, powerful sessions, networking time, and, of course, cash and tech giveaways.

Guaranteed ROI! As a token of ChannelPro's appreciation for you spending the day with us, ChannelPro is offering you a virtual gift bag worth more than $1,400 loaded with deals, discounts, and other surprises. You will also be in the drawing for $1,000 in prizes from sponsors.

Many ChannelPro SMB Forum attendees find the time with sponsors to be the best part of the event! See the roster of vendors who will be at the San Jose event here.

Every guest you bring (they must be an IT pro) also learns and earns for the day, plus you get a $50 gift card just for bringing them along.

We are thrilled to be part of ChannelPro's legendary SMB Forum this year. The ChannelPro Events team promises you a fast-paced, jam-packed day and a half of best practices and advice guaranteed to help you grow your IT services business.

If you would like to attend the event (and we hope you do), simply register here for FREE with promo code ITMSP.

Please Join Me! I'll be at the NSITSP booth.


Tuesday, May 16, 2023

Business Strategy Made Easy: Your Ultimate Success Hack - Class Starts May 30th!

IT Service Provider University is proud to bring you the newly-revised 5W21 course:

Business Strategy Made Easy: Your Ultimate Success Hack

Five Tuesdays
May 30 - June 27
9:00 AM

Register Now at ITSPU.com.

Learn the steps an entrepreneur or business owner should follow to design (or re-design) their ideal business from the top down. And then learn how to build (or re-build) that ideal business from the bottom up.

The easiest way to gain a competitive advantage is simply to have a specific plan – because most of your competition doesn’t! 

They’re running week-to-week trying to strike it rich with the next big fad tactic they’ve discovered. And to have a significant competitive advantage all you need to is have a specific strategy for systematically executing your plan.

This course will break down the step an entrepreneur or business owner should follow to designing (or re-designing) their ideal business, from the top down, and then it will show them how to build (or re-build) that ideal business from the bottom up. It will show you how to share your strategy with stakeholders, leadership and the team in a way that everyone can understand and easily help execute on.

With continuous discussion on identifying significant competitive advantage, the concepts, materials, and coursework presented are all based on the instructor’s book Getting To The Next Level: A Blueprint for Taking You and Your Business to the Top. A complete copy of the book is included in the course materials for reference. These are the same time-proven methods employed by your instructor Manuel in his international coaching programs.

This course is intended for every entrepreneur, from those starting up a new endeavor to those seasoned business owners. Every business strategy can benefit from this course. The concepts and tools employed in this course are universal in their application regardless of the business maturity.

Only $399

Five Hours of Great Training

With the completion of this course, the entrepreneur should have:

  • Clear picture of the Business Strategy Lifecycle and its four primary components
  • Solid understanding of the framework used to define a complete business – The Pyramid of Purpose and Value
  • Familiarity with a variety of tools required for breaking down and analyzing the current or desired business – Business Value Aspects, The SWOT, GAP, and More
  • Basic comprehension of business strategy, how it should relate to the business vision, and how it can be developed and tracked using a simple balanced scorecard
  • Follow through example of basic business strategy development for an IT company using the concepts, tools, and methods from the book
  • Functional understanding of Business Agile Strategy Execution, the most powerful method for developing and executing on business strategy.

Topics to be presented include (but not limited to):

  • Learning to Paint an Enticing Picture and Compelling Story
  • The Business Strategy Lifecycle
  • The Pyramid of Purpose and Value
  • Business Culture
  • Business Compass
  • Business Roadmap and Strategy
  • Competitive Advantage and Competitive Strategy
  • The Market and Going Vertical
  • Business Analysis Tools and How to Use Them
  • Measuring Progress and Success
  • The Balanced Scorecard and its Perspectives (Finance / Customer / Internal Process / Learning and Growth)
  • Generic Business Strategies
  • Sell More
  • Spend Less
  • Tying Strategy to the Company Culture
  • Agile Methodologies – They’re Not Just for Software Development
  • Agile Applied to Business Strategy


Unit 1 The “Why” – Tools Rundown – The Pyramid Framework

Unit 2 Culture – SWOT – GAP – Organizing the Laundry List

Unit 3 Compass – Balanced Scorecard – Strategy Maps

Unit 4 Blueprint for Success – Example Strategy Development

Unit 5 Business Strategy Meets Agile Execution

Instructor: Manuel Palachuk, Entrepreneur, Coach, Author

Manuel believes that small business is the backbone of the world and the service industry in particular is the heart! Manuel has 30 years of business, management, and training experience in the computer and electronics industries.

Your satisfaction is guaranteed, or your money back!


Thursday, May 04, 2023

Free Webinar: Becoming an MSP - Whether You're a New Consultant or Making the Move to Managed Service

Join me for this free and very informative webinar!

Tuesday, May 23rd

11:00 AM Pacific/2:00 PM Eastern

Register now!


Making the move from “break/fix” support to a recurring revenue model is the best way to build a great consulting business that will weather any storm. I can't tell you how many people have told me that their company survived and thrived in tough times because they made the move to managed services. 

As I say in Managed Services in a Month, this simply IS the business model of the future.

Who should attend?

  1. Seasoned professionals who haven't fully committed to the managed service business model. 
  2. New IT consultants who are just getting established and a "starter kit" for running good, sustainable business.
  3. Managed service providers who are looking for a few gold nuggets to fine-tune their operations.

I'll kick off the webinar and then interview Brenton Twite of Digital Bay about how they made the switch to becoming an MSP. We'll learn about their journey into managed services and the key elements of their transition.

And, of course, this sponsored by Zyxel's Nebula Cloud Management Solution, so we'll talk to Shawn Rogers, Sales Operations & Product Development Manager. Shawn will discuss how MSPs increase profits by leveraging Zyxel's Nebula Cloud Management.

SPECIAL Deal: All attendees will receive a free copy of my book, Managed Services in a Month as well as a new condensed 10-page guide. PLUS, You will also have two chances of winning $25 Amazon gift cards

May 23rd

11:00 AM Pacific



Tuesday, May 02, 2023

Private Equity Doesn't Have to Ruin Our Industry

In my weekly newsletter, I wrote a commentary on the evils of Private Equity in the MSP/SMB IT market. You can view it here - https://conta.cc/3LFAu19 - and subscribe, too!

Basically, I believe a great deal of harm is being done to our industry by private equity investors. They are gobbling up vendors who used to be good companies, run by good people, focused on good products and services, and generally providing good customer service. 

But then the problems start. These good companies are then decimated by greed and a need to pay investors massive profits. Of course, personnel are cut. New investments stop. Development freezes. Customer service is expensive, so it has to go. And the people you used to have great relationships with are now in horribly stressful jobs where they have to treat you badly because their job depends on it.

Note: I am not opposed to private equity generally. But the way it's being used in our industry (and many others) is literally the worst case scenario.

Think of all the great business books you've read about good management, governance, having a clear mission, vision, and a set of values that will drive your company forward. What we're seeing is the opposite of that.

Good investors want to build "forever" companies, not temporary vehicles for generating maximum income in the short term and horrible businesses in the long term.

And the problem isn't about making money, or even making massive amounts of money. It's about being too greedy to build a business with long-term value that delivers a great pay-out over time, and potentially forever.

As we've seen in our industry, the goal of today's private equity investors is to make a huge profit really fast. So all that talk about values and ethics, customer service, and treating people well is irrelevant. These investors don't care about any of the humans involved in any of this. They don't care about anyone in the channel.

That means:

  • The end user is irrelevant except that they buy "X" widgets
  • You, the IT professional, are irrelevant except that you buy and resell widgets
  • Your employees are certainly irrelevant
  • The vendor's employees are irrelevant
  • The vendor's management is irrelevant

Nothing and no one matters except a great return on investment. Economy's bad? Tough: Give us our 20%. Interest rates are up? No one cares: Give us our payment. The competition has better products, better service, and lets partners make more money. Too bad: Make your payment.

None of the elements that make a company great, stable, long-lasting, or good to work with are part of this equation. But it doesn't have to be that way!

There are older, more established companies that buy up small companies and make them even better. Examples include Apple, Microsoft, GE, and Salesforce. They're not perfect, but they don't act like leaches that suck the life force out of the companies they buy and then walk away.

But MSPs (and all ITSPs) are not powerless. Let me propose something that will piss off a lot of people.

Our industry needs to start requiring data portability. 

Vendors hate this. They want to make it as difficult as possible for you to retrieve your data in a usable format. It makes them "sticky" because you can't imagine the pain of losing all of your historical data.

But imagine if you could export your data from one PSA and easily import it into another PSA. Then, if a private equity company buys your PSA company and starts destroying everything you love about it, you DO have an option to move to another PSA.

If this were universal across all products and services, the IT service provider could then use customer service, ease of dealing with, and even business values as criteria for choosing vendors. 

We'd still have private equity investors, but they would feel pressure to treat human beings like human beings. They've have to consider values and ethics, and stable long-term business practices. Instead of focusing only on how much they can suck out of a company today, they will have to have a legitimate plan to survive in the long run.

Nothing about this is easy, or fast. But it's worth thinking about. Data portability.

You can literally start today. Add the question, "How portable is my data?" to your decision-making process. Ask it of prospective vendors.

Feedback and comments welcome.