Partner Profitability Study 2019

In the fall of 2019, Partner Economics conducted research into the financial performance of the Microsoft Partner ecosystem. The intent of the study was to assess the impact that SaaS demand and Cloud migrations have had on Partner profitability since the last detailed study in 2012. This was an independent study – no external funding was solicited or received by Partner Economics.

In total, a “deep dive” financial analysis was conducted on Partners with combined annual turnover of approximately US$500m. These Partners were almost equally split between Europe and North America. Individual Partner turnover ranged from US$1.3m to US$72.6m annually. The median annual Partner turnover was US$6.5m.

Revenue Breakdown

The following is a breakdown of overall study revenue composition.

More specifically, the following are key revenue category weightings:

  • Professional services = 57.2%
  • BREP = 15.7%
  • Cloud Subscriptions = 10.9%
  • Managed services = 8.9%
  • New perpetual licenses = 7.3%

Notable Changes Since 2012

  • Cumulative inflation was 11.8%1
  • Median revenue increased by 32.8%, driven by consolidation and the participation of generally larger Partners in the study
  • Median % of revenue recurring rose to 34.3%
  • Median % of revenue SaaS-based was 10.3%, compared to virtually nil in 2012
  • Median EBITDA rose from 6.0% to 7.5%, largely driven by a concentration of larger Partners in the study
  • Median software gross margins fell by 3.9%
  • Median billable markup rates fell by 1.2%
  • Median billable hours/resource fell marginally, by .5%
  • Real median chargeout rates rose by 2.8%
  • Median average deal size fell by 25.0%
1 Source is US Consumer Price Index data

Overall Profitability

Profitability levels varied widely among study participants, per the following graph.

Median EBITA

  • Top Profitability Quartile
  • Middle Profitability Half
  • Bottom Profitability Quartile
28.3%
9.1%
1.8%

As a rule, the most significant determinants of profitability were Partner size, service leverage model efficiency, and operating expense levels. Median annual turnover for the top profitability quartile was just over US$20m, compared to under US$5m for the bottom profitability quartile. Partner services leverage models with optimal billable markup rates and utilization levels contributed significantly to top quartile partners regardless of size. Operating expenses (sales, marketing, research and development, and general administrative costs) were 18.6% of turnover for the top profitability quartile, compared to 39.4% for the bottom profitability quartile.

There were some exceptions to these general patterns, however. For instance, the highest EBITDA recorded was 33.9%, by a Partner with annual turnover under US$20m. Their superior financial performance was driven by strong utilization and own IP monetization levels.

Services:Software Ratios

Overall, the most profitable Partners monetized more services,
and as just discussed generally had median annual turnover in excess of US$20m.

Median Services:Software Ratios

  • Top Profitability Quartile
  • Middle Profitability Half
  • Bottom Profitability Quartile
2.9
2.0
1.0

However, own IP monetization drove superior profitability for some if substituted for services, and conversely low utilization or chargeout rates depressed profitability for some with high services:software ratios. For example, the highest services:software ratio recorded was 5.3, but low utilization levels resulted in bottom quartile profitability for one Partner.

Services Margins

Unsurprisingly, a strong services delivery discipline remains key to profitability,
particularly for those with higher services:software ratios.

Median Gross Margins

  • Top Profitability Quartile
  • Middle Profitability Half
  • Bottom Profitability Quartile
50.5%
40.3%
38.3%

The key drivers of services margins remain annual billable hours per resource, and billable markup rates. Top profitability quartile Partners realize a median 1,029 annual hours billed per resource, while bottom profitability quartile Partners achieve only 754. Top quartile billable markup rates (the price of a consulting hour to the customer versus its cost to the Partner) are 2.0 versus 1.5 for the bottom profitability quartile.

SaaS-Based Revenue Levels

Interestingly, the most profitable Partners have generally shifted their overallrevenue composition
towards SaaS the least, while smaller Partners have tended to be more active in “future-proofing”
their businesses, as the following graph illustrates.

% Revenue SaaS-Based

  • Top Profitability Quartile
  • Middle Profitability Half
  • Bottom Profitability Quartile
8.1%
9.0%
9.7%

The key drivers of services margins remain annual billable hours per resource, and billable markup rates. Top profitability quartile Partners realize a median 1,029 annual hours billed per resource, while bottom profitability quartile Partners achieve only 754. Top quartile billable markup rates (the price of a consulting hour to the customer versus its cost to the Partner) are 2.0 versus 1.5 for the bottom profitability quartile.

Key Study Conclusions

The following are some key study findings:

  • Recurring revenue levels are generally improving (currently 34.3% of cumulative revenue), but the bulk is often still maintenance on perpetual software licenses, which depresses both software margins and EBITDA levels.
  • Successful Partners generally took one of two divergent paths to sustain profitability as they adapted to growing demand for cloud solutions. Some focussed on tightening their services delivery disciplines, while others focused more on packaging repeatable solutions that often contained their own IP.
  • SaaS-based revenue levels are lower than expected, indicating lost opportunity given the strong growth in demand for Cloud solutions.
  • Overall, utilization and billable markup rate levels are still below what is needed to drive strong EBITDA performance for many.
  • Partner valuation gains can most readily be generated from a focus on increasing recurring revenue and overall gross margin levels, through a focus on improving services delivery disciplines and increased own IP monetization

To Know More

The following are some key study findings:

If you are an organization interested in leveraging the results of this study, contact george@partnereconomics.com for further information.

If you are a software reseller interested in more fully understanding your relative financial performance, and how you can improve both profitability and shareholder value, contact dana@partnereconomics.com for a full benchmarking analysis and report.

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