What Does “Best-in-Class-Profitability” Look Like?

02 Feb What Does “Best-in-Class-Profitability” Look Like?

Recently this blog explored the concept of OML, or “Operational Maturity Level”, a classification system developed by Service Leadership Inc. (SLI) with a set of benchmarks to determine where a business finds itself in a standard growth cycle.

One way to answer the question posed in this blog title, is to note that one becomes “best in class” by raising one’s OML. This is a very precise and measurable way of saying, “up your game and you are worth more.” In fact, the main mission of Service Leadership Inc. is to help the MSP and other channel organizations prepare for the highest value possible on exit.

SLI defines “best” as having an EBITDA percentage in the top 25th percentile of similar companies. EBITDA is, of course, “earnings before interest, taxes, depreciation and amortization;” essentially this is what a company has left after it takes in revenue and pays all costs of production and sales. If an EBITDA percentage is high, it means that company is efficient, squeezing more margin from its revenue. This usually entails a certain amount of growth and size to generate economies of scale, but size without managerial efficiency, resulting in low EBITDA, will not change a company’s class but will leave it below the 25th percentile, less than the best.

What managerial efficiency will look like in any given situation (the how-to of high EBITDA) will depend upon a company’s class. So, what do we mean by “class?”

Service leadership breaks “class” down into ten Predominant Business Models, grouped in three main categories: Product Centric, (which is mostly high volume, low margin individual unit sales). Infrastructure and Applications, which both involve various types of services (including managed services) and generate different types of revenue (including recurring revenue) and EBITDA. The details would take us too deep in the weeds here, but any business in the IT Channel, with an eye to its own real market value, would do well to ponder the Service Leadership business benchmarking process in depth.

When we put “best profitability” together with “in class” we get: companies with the highest EBITDA percentage measured against similar companies with the same Predominant Business Model.

Some businesses are admixtures of business model types, and that’s where things get tricky, for the channel is nothing if not lots of “creative” ad hoc admixtures. Some work. Some are toxic. Often, achieving a higher OML level involves refining them to identify an organization’s “class” more clearly to itself. Without that clarity, flawed strategies are common. In any event, Service Leadership Inc. has formulas to help clarify common issues that arise in mixing different business models.

One thing is clear: there are a lot of channel businesses out there holding vague unreal notions of their own market value. Those who identify those parts of the company that yield the best revenue and margins, and embrace a conscious path to improved operational maturity, will exit with higher values.