Software partner veteran Terry Petrzelka, now a valued advisor and consultant to vendors and resellers discusses the top concerns for accounting technology consultants in this monthly Q&A series.
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This month, Terry focuses on the oft avoided issue of succession planning, how firms should be measuring themselves and what exactly is going on with cloud ERP, or the comparative lack thereof.
What should most firms be doing now, in terms of succession planning?
Petrzelka: As many owners/principals of channel partners businesses, private professional services firms, CPA firms, etc. approach retirement age this elephant in the room needs to be addressed. I know I have been there and done that, a couple of times in fact. One pretty successfully and the other, well the jury is still out.
The one thing for sure that owners, partners, etc. need to do when they seriously address this topic is to realize that they will need to be of the mindset that they will have to step totally away from the business; from a control perspective and the ‘day-to-day’ operational perspective. They have to come to state of mind that they are letting go all together. If they cannot come to this mindset they cannot successfully think clearly about a succession plan because, deep down, they are not truly committing themselves to not only stepping down, but stepping out.
Once they get this clear in their mind, then the options available to them become more apparent on what path to take. To me, the most successful path of the two that I have taken is to share the ownership of the company they own today with the people who are making their business what it is today -- their employees and team members.
An owner needs to talk to their financial advisor to help them decide on which path is the best. The sharing of the business with those that are making it happen today not only gives each team member a stake in what is being built, but more importantly, it places a lot more responsibility on each team member to take more personal ownership on daily building value for the business. It puts in each team member a clear perspective of their role in keeping clients satisfied; in constantly adding value to the business with their knowledge and service experience; in knowing that they are part of something bigger; and in knowing each team member is depending on each other for the current and future success of the business.
The other approach of succession planning that I have experienced is full of pitfalls because it is focusing on the wrong thing. It is focused on trying to create a value of some sort that has a multiplier to calculate what the business is ultimately worth. With the world changing so drastically since the 2008-2010 global financial crisis, that thing called ‘created value’ has changed from multiples of revenue, to multiples of EBITDA, to multiples of Operating Income to multiples of Annuity streams. To me, this approach is way too risky because the buyer of your business will see the value through a totally different set of eyes. The buyer will immediately start to factor down the value of the business due to real the risks they will experience in the areas of employee departures, client departures, etc. which naturally happen in a merger or purchase. There is always, always fall out – therefore there will be devaluation of the ‘value’ of the business.
If an owner takes the path of selling/merging, then this path deserves more time and thought than any other plan. If you do choose this path, there needs to be put in place an 18-36 month plan to position the company to maximize the value a buyer might be willing to pay for the business.
Why do you suppose there is comparatively little in the way of midmarket cloud ERP offerings?
Petrzelka: The investment that it takes to start a new ERP line is tremendous and current publishers have their hands full/checkbooks committed to invest in their current ERP solutions that they are currently selling, and more tragically currently having to support for outdated products. So how can they invest in another cloud ERP solution unless it is a natural evolution of their current ERP offerings? To me, that is why the big boys have not come out with a new line – and – most of them have committed themselves to the continuous evolution of their current platforms with the intent of being aiming to have that platform be available to clients as either on-premises or cloud-based sometime in the promised future.
Just take a look at the plans of Oracle and Microsoft, and a little bit in Infor. And as we all know, SAP tried to be the early one here with their cloud ERP solutions that date back several years, and they honestly failed because they tried to force a cloud approach to an existing ERP product line instead of starting anew with a new architecture or allowing their product lines to naturally evolve. So, that is my thought on the big boys, so far…
So what does that mean for companies like Intacct, Acumatica, NetSuite, Workday, etc.? I believe only one of these will survive as its own platform company in the next three to five years. I believe the big boys or one of the other established ERP publishers will find a way to acquire the others fit them into their product lines offered as part of their portfolio.
At most, only one of the current cloud ERP publishers will join the ranks of established ERP with those that are in the business today – that being Oracle, SAP, Microsoft, Epicor, Infor, Sage, Deltek, etc. If one steps back and thinks about it, quite honestly these ERP publishers have to be concerned themselves about continuing to add clients and adding annuity revenue to their business. So, there will be some natural acts of merging and some unnatural acts of merging of the current cloud ERP publishers over the next three to five years. It will be interesting to see which of today’s cloud publishers are still on their own during this time frame; my bet at most, only one!
Businesses of all sizes are all about measurement and data use, but how and what should consultants be measuring these days in terms of their own business?
Petrzelka: Well, to me there are only four key metrics to manage a channel partner’s business: service margins, sales and marketing expenses, operating expenses and annuity revenue growth. Of these, three are associated with costs versus revenue, while one is focused on revenue growth.
So, where do these need to be? Service Margins is an interesting concept because of what channel partners put into the cost base to calculate service margin. About 95 percent of partners only put in the cost of consultants and independent contractors that deliver their services. The reality is that all costs associated with the delivery of services needs to be included in service margin calculations; this includes the overhead of managers who manage the consulting services, non-reimbursed travel expenses, etc.
When one does this, then the health of the service business can be truly assessed. For a marginal service segment of the business, service margin should be in the 25-30 percent range, an average service business needs to be in the range of 31-35 percent and an excellent service business needs to be in excess of 36 percent and approaching 40 percent.
Sales and marketing expenses should be in the range of 14-18 percent of revenue and total operating expense, which includes G&A, plus sales and marketing expenses should be in the range of 23-27 percent and if the business is in a strong growth mode – at an extreme of up to 28-30 percent.
Of these three metrics, the biggest issue that a channel partner faces is the ability to run their business with a service margin in excess of 32 percent. Those who have mastered that in my mind would be considered to be a well-run business.
The other key metric that I added to be considered a key measure is the growth in annuity revenue. This has to be measured for one cannot depend on competing and winning a significant number of deals to keep the business moving forward year after year after year, but what can be depended on is continued growth of revenue coming from existing clients from current services and/or new offerings to your existing base, which will drive more annuity services revenue to your business.
What do I consider annuity revenue? It is subscription renewals, maintenance renewals, support contracts, service revenue from existing clients, revenue from takeover clients. To be a healthy business a business needs to have at least a 10-15 percent growth in their annuity business as a measure and excellent businesses will be in excess of 20 percent.
Got a question or concern Terry can address? Send it to email@example.com