O p t i m i z i n g C h a n n e l P a r t n e r s h i p s

Channel Elite Express Webinar SeriesSeptember, 2008

“Financing Growth in Challenging Times”

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Channel Consulting, Education and Market Intelligence• Over 50 years of

collective experience in the channel

• Thousands of partner profiles in every geography

• More than 90,000 interviews with Channel Partners and their customers annually

From CMP to… Everything Channel

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The Challenges to Managing Growth

Financing Strategies

Making the Right Choice

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Agenda

Access to Qualified Human Resources• How do you find, hire, and retain sales and technical staff?

Lack of Systems / Processes to Scale Capacity

• How do you manage more clients, more projects, more details?

Need for Marketing to Drive Higher Demand

• How do you create and connect with a higher volume of opportunities?

Financial Resources Required to Fund Growth

• How do you pay for more people, more resources, more deals, etc.?

Challenges to Solution Provider Growth

• Research shows…– Profit: 53% of Solution Providers Operate At or Below 5%

Net Income• IPED Solution Provider Competency & Profitability Benchmark

Study– Growth: Less than 10% of All Companies Can Maintain

Above-Market Growth Rates for Longer than 5 Years• Multiple Academic / Economic Studies (i.e. McKinsey 2006, etc.)

– Lifespan: Average Age of a Systems Integrator Company is 7.4 Years … and Lower Each Year• VARBusiness State of the Market Research

The Facts of Business Life

• Get Your Business Model Right• Define Growth Goals• Develop Business G-T-M Strategy• Assess Risk/Willingness

Prerequisites to Financing Decisions

The Solution Provider Balancing Act

• Critical Success Factors

Capacity

Process

People

Opportunity

Systems

Margins & Profits

The Toughest Business Question

“Do I really need the money?”

• The right “engine” may not be monetary at all• What are the downstream implications?

The Growth Profiles of Solution Providers

• Lifestyle Business• Solution Providers who claim they are either a.) not focused on growth or b.) are focused

on simply keeping pace with the market due to:• Desire to live a certain lifestyle• Personal customer service• Company in transition, internally focused on business models as a preface to growth

mode

• Moderate Growth• Solution Providers who expect to grow 4-15% over the next year based on:

• A desire to target new markets• Primarily driven by taking existing solutions and adding expertise which make them

specialists in a given category

• Hyper Growth• Solution Providers who expect to grow business more than 15% over the next year by:

• Adding practice areas/new product lines to capture greater number of customers and greater amount of customer share

• Most expect to accomplish this through M&A

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Growth: Not a Function of Size

25% 40% 35%

31% 31% 37%

38% 31% 32%

LifestyleModerateHyper

Small

Medium

Large

Business’ Ability To Succeed: Critical Factors

4%10%

14%17%17%

18%18%

22%22%

30%31%32%

34%37%38%

46%54%55%

56%56%Finding New Business

Customer ServiceChanging Techs

Marketing Your BusinessManaging Cash Flow

Finding/Recruiting Tech/ConsTech Training

Finding/Recruiting SalesMeasurable/Actionable Goals

Overall Financial MgmtManaging Vendor Relationships

Finding the Next “Killer App”Sales Training

Managing Disti RelationshipsUnderstanding Peer BP’s

Adding New VendorsContingency Planning

Finding ManagementOutsourcing

Divesture

Challenges to Managing Growth

Financing Strategies

Making the Right Choice

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Agenda

7.8%4.3%

4.9%10.9%

9.7%6.5%

8.7%10.9%

9.7%15.2%

15.5%4.3%

10.7%15.2%

20.4%6.5%

21.4%13.0%

24.3%37.0%

50.5%41.3%

52.4%47.8%

58.3%45.7%Self Financed

Financed Through Cash Flow

Financed Through Bus. Profits

Bank Financial Services

Business Credit Cards

Personal Loan

Venture Capital

Personal Credit Cards

Vendor Financing

Angel Investors

Distributor Financing

Government Support/Grants

Joint Venture

Small SPs Medium SPs

Financing Business Growth

Different Sources for Different Phases of Growth

Start-up• Personal• “Angel”• Minority Equity

Growth• Banks• VCs• Individuals

• Credit Line

Maturity

• Internal• External• Go Public• Vendor

Exit

• Internal• Vendor

Expand• VC• Go Public• Joint Venture

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Three Fundamental Financing Strategies

• SELF-FINANCING– Cash Flow Financing– Personal Credit– Re-financing Assets

• BANK FINANCING / CAPITAL INFUSION– Line of Credit– Equity-based Loans– Private Equity (Ownership, Investment Strategy)

• VENDOR / DISTRIBUTOR PROGRAMS– Extended Terms (60 / 90 Days)– Employee / Resource Funding– MDF / Co-op / Initiative Funding or Incentives

Self Financing: The Pro’s & Con’s

• The essential core of self-financing strategies is an independent, entrepreneurial spirit that drives home-grown opportunity … OR a fear of debt that limits growth and prevents certain opportunities that would otherwise make sense for the business

– PROS of Self Financing• Control• Ownership• Autonomy• Focus

– CONS of Self Financing• Organic Growth = Slow Growth (Most often)• Risk• One Point of View• Limited Resources

Bank Financing/Capital Infusion: The Pro’s & Con’s • When private equity is managed well, it can be the fuel for fast growth and

access to opportunities an entrepreneur couldn’t access alone … BUT when it’s not managed well, it’s the fastest way to cause an otherwise healthy business to go out of business

– PROS of Capital Infusion• Large Resource Pool• Immediate Access to Cash• Opportunities to Grow through Acquisition• Risk Management through Diversified Ownership

– CONS of Self Financing• Loss of Ownership• External Priorities Imposed Upon the Business• Risk Increase through Debt Service Requirements• Expense of Carrying Debt

Capital Infusion: Are You Prepared?

• What Makes a Solution Provider Attractive To Private Equity?

Unique Offering / Opportunity

Existing Customer Base … Diversified, Loyal, Sustainable

Stable, Talented Management Team

Talented, Stable, Improving Employee Base

Formalized Systems and Processes for Repeatable Outcomes

Revenue Predictability (i.e. Contracts, Recurring Revenue)

Solid, Articulated Strategy for Growth

*NOTE: These are the VERY SAME criteria that make your business healthy overall, so …

Capital Infusion – Are You Prepared?

• Questions to Ask Yourself (and Answer!) Before Seeking Outside Financing– What are your financial goals … personally and organizationally?– What is the current state of your business finances?– What is your tolerance of debt and risk?– Do you have the ability – and the commitment – to measure

financial performance beyond the top line … especially at Net Income?

– What is your strategy for growth … and does that strategy require outside capital, or could you grow on your own funding?

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Vendor / Distributor Funding: The Pro’s & Con’s • Most solution providers see vendors or distributors as product sources or

potential partners … but rarely as a source of investment resources. The simple truth is that’s funded by another partner that would otherwise cost money is an investment … and should be managed that way

– PROS of Vendor / Distributor Funding• Alignment• Investment = Priority = Access to More Resources• Access to Expertise• Offset Fixed Costs / Improve Cash Flow

– CONS of Vendor / Distributor Funding• Brand Confusion• External Priorities• Limited Resources … Many Competitors• Management Requirements

Financing Principles

Solution Provider Profiles

Making the Right Choice

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Agenda

• The IPED BIC Methodology

STEP 6: Balance Your Performance, Adapt, and Repeat

STEP 5: Grow Your Business (Capacity + Opportunity)

STEP 4: Get Your Business Model Right

STEP 3: Learn The Key Performance Indicators … Measure Gaps

STEP 2: Set The Bar for Best In Class Performance

STEP 1: Understand Your Business CONTEXT

Becoming Best In Class

Managing Growth: The Balancing Game

– “GROWTH” is the Product of Two Basic Business Principles• CAPACITY … i.e. the resources, processes, and management acumen to

deliver more output and create more value from your organization• OPPORTUNITY … i.e. access to more customers who need and are

willing to pay for more of your resources and the value they create

– Many Businesses Fail to Grow because They Put Too Little Emphasis on One Factor or the Other• Too Much Capacity / Too Little Opportunity = Low Margins, High Fixed

Costs, Pending Layoffs, Need Better Sales / Marketing Effectiveness• Too Much Opportunity / Too Little Capacity = Low Customer

Satisfaction, High Employee Burnout, Pending Customer Defection, Need HR for Recruiting and Operations for Process

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In the End…

• Leadership in Theory– Set the Direction for the Business– Own and Actively Administer the Culture– Inspire and Motivate through Vision and Action– Have a Plan, Work the Plan, Demonstrate Accountability

• Leadership in Practice– Manage “Capacity and Opportunity”– Determine investment strategy for growth– Relentlessly oversee day-to-day financials– Track and understand business drivers that impact financial– Implement financial management systems and processes– Optimize your “Profitability Model”

“It’s management’s role and responsibility to manage the financial engine to drive business growth.”