It’s said that with a lever long enough, you could move the world.

If you find a steady place to stand, of course.

Why Is The World Not Moving?

Unfortunately, for many Partners, their world is not moving. The reason? Their service delivery teams are bloated, to varying degrees, with layers of non-producing management.

It all happened innocently enough, of course. You started a business. You were successful. Your business grew. As it did, you added people. And eventually, managers. Who, unfortunately, stopped billing even though they earned more.

They were managers, after all.

But as they billed fewer and fewer hours, and their salaries increased, your service margins started dropping. And now, the bigger you get, the less profitable you become. This is obviously not a good thing.

Leverage Model View

What’s the solution? A sound leverage model.

Consider the following example:

Your business is something of a pyramid. Management is needed, of course, to keep everything on track. But in order for you to grow, it must also be affordable. Every management layer must contribute to your bottom line.

At the base of your pyramid, your producers must generate the strongest financial performance. As a rule of thumb, every dollar in cost must produce at least $2.50 in revenue. In other words, they must deliver a billable markup rate (BMUR) of 2.5, or more.

Moving up, managers must also generate billings, although not to the same degree. Their cost will be higher, and they will bill fewer hours, so their chargeout rates must also be higher. But, however you slice it, they should still provide you with a BMUR approaching 2.

Everyone MUST Pull Their Weight

Span of control is an important part of the equation, too. If the first layer of management is responsible for too small a team, your margins will drop. Unless they bill more, to compensate. Everyone must pull their weight.

As you progress, higher levels of management will have a smaller span of control and the number of hours they bill will also drop. But not by too much, or you will find yourself with a leverage model that cannot scale.

In the end, the fact is that you must maintain an overall services margin north of 50%, to have any reasonable prospect of growth.

That’s a BMUR of at least 2, all management layers included. And the more layers you add, the stronger the performance of layers below it must be. This requires continuously raising the bar.

Where’s your leverage?

If your leverage model doesn’t do this for you, it is only a matter of time before you hit the wall.

And then, your world stops moving.

So ask yourself, where’s my leverage?

Like the gangly teenager that transitions from childhood to adulthood, the growing Microsoft Dynamics Partner often faces difficult but necessary growing pains.

As partners approach 30 to 40 employees ($6.0m – $8.0m in revenues), there is a tendency for owners to add a layer of mid-level management to control functional groups like sales, marketing, delivery, lines of business or even separate offices.

Often these managers come up through the ranks or are part of the ownership team that are empowered to manage a small group to reduce the reporting impact on the President or CEO, as well as to provide focused leadership to improve performance.

While there are viable operational reasons behind this, caution must be taken to keep an eye on key profitability metrics to avoid costly mistakes during this time of transition.

Sustainable Profitability

To determine whether your growth spurt is on a profitable track, consider the following:

A. Look at your organization chart and identify how many managers are listed.  They may have different titles, but fundamentally they are responsible for a functional group.

B. Determine which of these managers have a personal revenue target included as part of their job function.  These targets typically take the form of sales quotas or chargeable hours.

If you have employees listed in A. and they do not have a measurable target in B. you may be setting yourself up for a costly transition.  The real signs of distress will start to show up in two key dials on your management dashboard:

1. Revenue per Employee – it declines significantly below the average of $200,000 to $220,000 (depending upon the current economy).
2. EBITDA – it will start falling; generally well below the 10% mark.

Managers vs. Team Leaders

The vast majority of Dynamics Partners aren’t large enough to absorb the amounts of overhead that non-chargeable, mid-level managers represent. So, how do you provide the leadership to a growing team, yet stay profitable through to your next growth hurdle?

Consider these steps:

1. Team Leaders
Your company employs team leaders not managers.  This sets a revenue generation tone for everyone and keeps the leadership team focused on productivity.

2. Define Their Roles
Be very prescriptive when it comes to defining what you expect your team leaders to do.  Left to their own devices they will chew up valuable time managing their teams with unnecessary initiatives, systems and meetings.

3. Set Targets
Team leaders should all have sales quotas or billable hour targets depending on their role.

4. Higher Rates
Chargeable team leaders should have significantly higher charge-out rates and should therefore be providing higher value services to clients. Their billable-mark-up-rates (BMUR) should be 1.0 or greater. When combined with realized billable hours, the resulting revenue drops directly to your bottom line.

5. Limit Office Expansion
Resist the temptation to open up a new geographic office until it can profitably sustain 10 employees or more on their own.

6. Performance Dashboards
All team leaders must have their own performance dashboard where their team’s success is constantly evaluated.  It may be as simple as billable hours or utilization percentage by team member.  Without the metrics it’s hard to adjust behaviors.

7. Leadership Training
Provide your team leaders with some form of leadership training.  Most good sales and consulting staff need this help has they grow.

Reaching the Next Level

If profitable growth is your end game, then transitioning your leadership team is a key piece of the puzzle.  Keep them chargeable, focused and motivated – then you’re on the way to the next level of performance.