Increasing Profit Margins of your ERP Business

Introduction to Increasing Profit Margin of Your ERP Business – In Slowing and Competitive Market

As an ERP vendor, do you find that your profit margin has been reducing over the years?  Worse still, do you find yourself in a stressful situation every month before the paydays?  Or, you puzzle that why when you are closing more deals, your profit is not increasing proportionally with the increase of your revenue?  In this article, we are not looking at increasing revenue or profit individually.  Rather, we will discuss how to increase the profit margin of your ERP business, and how to use your resources efficiently to maximize your return.

It is relatively easy to just focus on revenue generation alone.  By doing everything necessary to increase sales, some ERP vendors offer better discounts, increase marketing costs with aggressive marketing campaigns, and employ more salespersons.  However, that will also increase your costs rapidly.

On the other hand, to increase profit quickly for a short period of time, just cut costs drastically.  This works because the positive effects of these cuts will happen immediately but the negative effects on the future revenue generation will happen one year or more later. Therefore, this is unlikely to be sustainable.

At a time when recruitment of good resources and availability of capital assets are getting more expensive and scarce, the ability to maximize the use of resources and assets to increase the profit margin of your ERP business is crucial.  We will be looking into improving the ROI for your ERP business.

The Conventional Strategy

It is common for ERP vendors to adopt the conventional business strategy of:

1. Closing as many deals as possible at the attractive initial prices
2. Employing the cheapest resources possible
3. Generate as many customizations or task orders as possible during the project with high man-days
4. Lock down the customer with customizations so that it becomes challenging for them to switch vendors.  Then, milk them for longer-term

From my observation, this strategy usually works for a few years.  The downside of this is that it tends to create a higher percentage of unhappy customers, strained customer relationships, and a high volume of support backlogs.  Eventually, it becomes more and more difficult to obtain customer references.  After a while, some customers will eventually switch to other vendors.  Usually, this results in a few good years followed by challenges in the remaining years.

Furthermore, continuous increase of revenue is not sustainable as there is a limit to market size and market share with the same product.  This, of course, has a lesser impact in markets that are rapidly growing and without strong competition.  Thus, this conventional strategy may work in the growing market as new customers can replace customers lost.  But eventually, the growth will slow down and competition will increase when more competitors enter the market who can offer even cheaper prices.

The Ways to Increase Your ERP Profit Margin

So, what is the alternative? I will like to introduce a different way of increasing the profit margin of your ERP business which I had practiced and proven in a slow-growing and highly competitive market for many years.

Profit margin is derived from revenue and costs/expenses.  So, to increase the profit margin of your ERP business, there the two areas that you need to deal with:

1. Increase Revenue with efficient use of your Resources
2. Cut unnecessary costs or Costs that have a Low Effect on generating Profit

Sounds easy, isn’t it?  But the easiest things to do is not always that straightforward.  Let’s go further into details.

Close Deals with Higher Price

It is important to sell your deals at a higher value.  This will have a significant impact on increasing the profit margin of your ERP business.  But, many ERP vendors fear that by increasing the price, they will lose customers and deals.

Let me illustrate the importance of the ability to sell at a higher price.  If we assume that the gross profit margin of your deal is 50%, your ability to sell by increasing your price by 10% will effectively increase your gross profit by 20%.  On the reverse, if you discount your price by 10%, you effectively decrease your gross profit by 20%.

Hence, the ability to sell at a higher price or at least, be able not to give too much discount to close your deals is important in increasing the profit margin of your ERP business, especially in slowing and competitive markets.

Being able to sell at a higher price also means that you can achieve your profit target with fewer projects.  This will result in fewer project problems to deal with and a better focus on ensuring good delivery of your ERP projects.

Increasing your selling price, can be achieved in a few ways:

Increase Man-Day Rate

Simply increasing your man-day rate will have a direct impact on increasing the profit margin of your ERP business.  This will also allow you to employ better consultants who are usually more expensive.

The challenge is to be able to sell at a higher man-day rate with a competitive total project price.  To do this, you must be able to quote the project with fewer man-days and be able to deliver the project within the man-day quoted.

For this to work, your ability to efficiently deliver your services is crucial.  Better consultant, good project management, training, efficient implementation methodology, and effective project control structure will determine whether you will be able to increase your man-day rate, win deals and make more profit.

Reducing Discount

All customers want discounts.  Besides money saved, customers want the satisfaction that they have done a good job in securing the best price.

Negotiation is the key.  But, it is not often that ERP vendors train their salespeople in negotiation skills?

Negotiation skill is a big topic but I will highlight some key points to negotiation that I usually explained when conducting sales training.  It involves both mindset change and techniques.  Below are just some of the key points:

• Salespeople need to understand that when prospects ask for discounts before they will sign the deal, your deal is already as good as closed.  Therefore, it is not necessarily true that salespeople are in a weaker negotiating position in an ERP deal.
• The techniques that a salesperson needs to learn are how to structure the discount.  One of the ways is to offer alternatives to cash discounts.  Trade what is important to them with what is important to you.
• Yet, there are techniques and tactics to make your prospect feel that they have got the best deal and they have results to impress their management.  In turn, they will feel keener to support the ERP project.

Better Brand Image and Marketing

Having a superior branding image through effective marketing will allow you to command a higher price.  Some of the ways to add credibility to your brand image can be:

1. Customer References – Use successful customer success stories, demonstrate how you help your customers to better their business performance, and always have a few customers who are happy to talk to your prospects.
2. Awards – Having some relevant awards will not harm your brand image.
3. Niche – Develop your niche.  Have strong evidence that demonstrates your ability in certain niche industries.  For example, you can have many prominent and referrable customers in the F&B industries, etc.
4. Taking Up more Complex Projects – This can be a double-edged sword.  More often, I see vendors underquoted in complex projects due to their high desire to win the projects.  The other risk is that complex projects tend to require more resources and once at the end of the project, you may face redundant resources. Lastly, the demand for project management skills is higher in large and complex projects.  Consequently, you have to understand that you should not close a complex project if there are insufficient margins to cover these risks.  Likewise, you have to build up your skill in project cost estimation, project management, and managing alternative resources.  When you have these abilities, you can easily win complex projects at a higher profit margin which I had done multiple times in my career.

Reduce the Costs

Now, let’s look at the other end of reducing the costs of generating revenues: The Costs.

Efficient Selling and Marketing

Do you know your marketing and selling costs for each dollar of your revenue generated?  To increase the profit margin of your ERP business, you should look at generating more revenue with lesser resources.  These resources should include selling and marketing resources.

Your analysis should cover the sales cycle that includes Lead Generation, Qualification of Leads, and Closing of Leads.  Do you know how much it costs for you to generate a qualified lead?  Are your current marketing tools and campaign effective?  Are you sure that telemarketing is the best marketing method?

So, having a marketing strategy that focuses on your target market is crucial.

Minimize Bad Debt and Accelerate Collection

Bad debt will erode the profit margin of your ERP business.  Together with long AR aging, it is a formula to create desperation to close more deals even if they are of lower quality accounts. This, in turn, will create more problems.  Hence, the cycle of low-profit margin will continue.

I will prefer to be selective on customers and manage the project well so that there are fewer excuses for customers to refuse or delay payment.  At the very least, Enterprise Resource Planning (ERP) vendors need to periodically put attention to their AR collection.

Negotiate for Better Software Margin

This is useful if you are in strong bargaining power over your software principal.  However, you have to balance this so as not to be overly pressurized to take in too many low-quality projects just to meet the target set by your software principal.

Better Project Execution

Many of my points above can only be achieved with better project execution.  Do it right the first time and reduce Non-Billable Consulting and Development Works.

How often do consultants rush their work without sufficient third-party checking and later had to spend non-billable time to rectify the errors? Do the stories of the same support issues that kept recurring and need the effort to rectify them, again and again, sound familiar to you?  All the profit margin that you made initially can be compromised by these non-billable works, resulting in low-profit margins or something losses.

Strong project management, good project executive methodology, strong execution, and better support management and resolution ability will help you to reduce these non-billable works.

HR and Recruitment

No two consultants or developers are equal.  A higher remuneration does not necessarily enable you to get a better resource, but too low a remuneration will ensure that you will eventually lose good resources.

Do you know that turnover of staff has costs associated with it?  There will be additional recruitment costs, effort in handing and taking over tasks, mistakes due to poor taking over, communication breakdowns, and unhappy customers who lose confidence.  Furthermore, this will have negative morale problem for those who are working in your company.

Your Action Plan

The above points are not exhaustive to increasing the profit margin of your ERP business.  There are, of course, more other areas and details.  So, for a start, what actions can you take?

Know your Numbers

Without knowing your numbers and KPI (Key Performance Indicators), you will not know what to improve or whether your actions lead to improvement.

Some of these KPIs may include:

• Average Consulting Cost per Billable Man-day
• Resources Utilization Rate
• % of Non-Billable Work due to Errors
• Marketing Cost per Quality Lead
• Selling Cost per Revenue, and many more.

Better Recruitment

The key differentiating factor of ERP businesses is the people.  You need to be better at recruiting and selecting your people and create an environment that reduces the turnover of staff.

1. Look at how to have an effective recruitment and selection process.
2. Design a work environment that will retain good people.
3. Provide useful training so that your people can perform their work better to achieve job satisfaction.

Efficient Selling and Marketing

Brainstorm your marketing and business strategy.  Which market segment that you want to target?  Or do you want to target all of them?  There are at least 4 marketing strategies that you can consider:

1. Price Leadership – Go low and win more
2. Value for Money – The ROI champion
3. Premium Quality Delivery – Expensive and Good
4. Niche Marketing – Leader in your selected vertical segments.

Develop a Strong Delivery System

Periodically brainstorm areas for areas to improve in your project delivery.  Establish a good and effective project/support management and monitoring. And, put more attention on project management.  Project management itself is an art, I often observed that ERP vendors see project managers as more experienced consultants.  This is one of the roots of project challenges.

Your aim should be to do more projects with fewer resources in sustainable ways.  From my experience, reducing 20% of man-days from your existing project implementation methodology with better quality of delivery is a realistic target.

Training

In the ERP business, we train our customers daily and advise them on how to better their company performance by better usage of ERP (Enterprise Resource Planning) solutions.  But ironically, some of us neglected the need to train our staff and develop a management system to better our business performance.

Besides product training, some of the training that you should consider includes:

1. Sales Training
2. Negotiation Training
3. Project Management Training
4. Enterprise Resource Planning Concepts Training on Inventory Management and Manufacturing concepts

Good and periodic training will also have the effect of reducing staff turnover as highlighted by many studies.

Conclusion

In a market that will be getting more and more challenging, better management of your Enterprise Resource Planning (ERP) business will ensure your long-term success.  Your ability to increase the profit margin of your ERP business is the key.

There are many areas that you should look into besides those that I have mentioned above.

Learn More about the author, Raymond Yap, and how we can help you.

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