Planning for Growth Means Planning for Shrinkage
Growth planning is about more than just selling more.
By Larry Walsh
Solution providers aren’t very good at planning for growth. Most think of growth as selling more. And, for many, materialized growth is selling one more product, signing one more customer or making one more dollar. Anything above the previous year’s high-water mark is considered growth, and even marginal growth is considered good enough.
In 2013, the average rate of growth for solution providers was between 11 percent and 15 percent, weighted to the lower end of the scale. Forty nine percent of solution providers grew less than 10 percent, and 27 percent either grew less than 5 percent or shrank.
While the vast majority (81 percent) of channel companies believe they should have a formal growth strategy, only 53 percent actually have such a plan. Closer inspection reveals most of those growth strategies aren’t that formal or complete; they lack tangible goals or details on growth mechanisms.
The lack of planning isn’t the only problem: Solution providers need to think about overall revenue in a way that reflects the value of products and services. Over time, all products and services decline in value – typically through commoditization. As the value declines, prices fall and margins compress. Eventually, they become more costly to support (sales, marketing, technical) than what the make.
What solution providers fail to account for is replacement revenue needs, which evaporate due to product commoditization or discontinued support. At the beginning of each fiscal year, businesses don’t start from the end of the previous year. They restart the revenue engine from zero. Managers typically count on at least 50 percent to 80 percent of the previous year’s revenue being repeated, and long-term service and recurring fee contracts provide a known quantity of forward revenue. But not every dollar from the prior year will be replicated.
Look at it this way: A $1 million solution provider wants to grow its business by 25 percent, which means it has to sell another $250,000 in goods and services over the next fiscal year. While 25 percent is the growth goal, solution providers also need to inventory what products are going to sell for less and what products they’re going to stop selling. In this scenario, let’s assume that $200,000 is going away under the pressure of these two forces. Between the growth goal and the replacement revenue, the actual dollar figure they have to hit is $450,000.
Unfortunately, solution providers don’t think about discontinuing the sale of low-performing and -value products and services. Commoditized products are often kept in a portfolio because of their utility in completing a solution set, but solution providers will carry nonperforming technologies, believing they cannot afford to lose the little revenue they deliver. This is a mistake. Growth planning should include controlled shrinkage to divest of underperforming businesses, which frees resources for development activities.
Growth planning is more than just thinking about selling more. It’s about recalibrating product and revenue mixes, making adjustments and moving the business higher. In this equation, identifying and replacing lost revenue is just as important as building new revenue.