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  • Writer's pictureDiversicom

How do you know you made a profit if you don't know the cost?

by Scott Beene, C.E.O. of Diversicom

A favorite mantra I live by: "You can't determine value, if you don't know the costs."

Every Successful business owner diligently tracks and manages the costs of every operational aspect of their business enterprise. These business owners focus on cost controls because they know - both intuitively and from practical experience - that they have much more control over managing costs than they do over what market forces determine what to price their products and/or services.

The primary objective of every business, is to make a profit. Being a profitable business enterprise equates to excellent stewardship and responsible fiscal management. This stewardship is not borne out of selfishness, greed, or a callous disregard for employees, vendors, or their customers.

Excellent fiscal stewardship will result in a "Value Proposition" that all connected partners (owners, employees, vendors, customers) create of the business enterprise.

Therefore, an indispensable component of this "Value" of the business enterprise is directly attributed to the real "Cost" of doing business. This very simple formula is what business owners work so hard to maximize:

Revenue - Costs = Profit

Simple, Elegant, and Fundamental.

In fact, in the overwhelming majority of business enterprises, managing and understanding costs requires far more diligent effort than understanding the contributors of revenue. Successful business owners constantly refine this essential management skill and, therefore, make the majority of their critical business decisions based on their understanding of the "Cost of Doing Business" and its impact on Profit.

Controlling "Costs" are essential to "Financial Risk Management", and Risk Management is a component of an effective Technology Management Strategy for any growth-centric business enterprise. Given the priority that successful business owners place on "Cost Controls", I am amazed at the number of Technology Services Companies who have absolutely No Idea what the "Cost of Doing Business" is for their client's business operations. Successful business owners full acknowledge how "Mission Critical" fully functional Information Technology is to maximum profitability. Remember, Revenue - Costs = Profit.

Why Should Your Technology Services Provider Know our Business Costs?

The very simple answer to this question is this: If your Technology Services Provider does not know what it costs to run your business enterprise, then how can they possibly know how to manage your technology investment to be a Positive Contributor to your firm's NET Profit? As a comparison, every successful business enterprise has a highly effective Sales & Marketing System in place that is generating a steady flow of sales with healthy profit margins. Without exception, this Sales & Marketing System will be staffed with at least one highly proficient Sales Professional - whose compensation represents a very high "Cost" to the business enterprise. Even though this Sales Professional's compensation is high, the representative "Cost" of that compensation - to the business enterprise - is a small multiple of the "Revenue" generated. Even though the "Cost" of this compensation is accounted for in the company's "Profit & Loss" statement, the business owner will still create a "Value Proposition" for that sales professional based on a modification of the simple formula we have discussed before, which is: Revenue (Sales) - Costs (Compensation) = Profit.

For an effective Technology Management Strategy to be as efficient as possible, the Managed Services Provider (MSP) must know a relevant "Cost" to properly assess the effectiveness of any Technology Management Strategy. The most meaningful "Cost" that an MSP should know would be the client's "Cost of Doing Business Per Hour". This cost is very easily calculated by asking the client for the TOTAL Expenses - listed on the firm's P&L - for the previous 12 calendar months, and then dividing that number by 2080 (the number of productive work hours in a calendar year for a business whose hours are Monday - Friday, 8am - 5pm), which is: Total Costs / 2080 = Business Cost Per Hour (BCPR)

No successful business owner will spend money indiscriminately; but a successful business owner will spend money on products or services that promote higher NET profits in the business enterprise. Now, more than ever, successful business owners are looking for real value that is derived from every expenditure incurred.

In fact, more and more successful business owners are utilizing affordable Business Productivity Management Tools to better track costs. Armed with this information, today's successful business owners are able to operate businesses at some of the "Highest" levels of productivity that have ever been recorded. Armed with this information, these same successful business owners are now able to make more informed decisions in evaluating which "Costs" are positively impacting their firm's NET Profit. For this very reason, Technology Services Providers MUST be very cognizant of core operational costs - of their client's businesses - to ensure that their services, as well as, the current Technology Management Strategy are providing Real Value, as opposed to, an Arbitrary cost that has no connection, whatsoever, to the NET Profit for their client's business.

Successful Business Owners know that they have to delegate the management of mission critical business assets to those who possess the most competence, in order to maximize the Return on Investment (ROI) of those assets.

This delegation requires "Trust". On way to verify that "Trust" is to ensure that the selected Technology Services firm is delivering maximum ROI. The legacy Technology Services delivery model - known as "Break Fix" - placed NO emphasis whatsoever on ROI, thus did not care what their client's "Costs" were. The "Break-Fix" service delivery model depended entirely on a "Reactive" approach to providing services. Essentially, the "Break-Fix" IT Services company just waited for their client's infrastructure to "Break", and then the client would call and request that the broken asset/system be "Fixed".

A Technology Services firm delivering their services utilizing as an MSP business model operates in a "Proactive" mode, constantly engaged in their client's business enterprise, and thus, has every reason to not only Know their client's BCPR, but work hand-in-hand with the business owner to find every possible way to squeeze as much ROI from the Technology Investment as possible. Without knowing their client's "Costs", it would be impossible for the MSP to consistently implement a Technology Management Strategy that is positively impacting their client's NET Profit.

The Diversicom Team is constantly reviewing the ROI of the Technology Management Strategy deployed for each client. We are constantly researching, evaluating, and testing technologies to ensure that a healthy measurable balance exists between "Costs" and "Performance". The good news is that the real "Value" is constantly increasing. We earn your trust every day!

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