Technology Solution Providers (TSPs), such as SMB-focused Managed Services Providers (MSPs) and mid-and-upper-market-focused Product-Centric firms (VARs), are increasingly opening offices in second, third, even fifth or tenth cities. This is true despite the broad-based shift to Work from Home induced by the COVID-19 pandemic. The lockdowns caused this geographic expansion trend to pause for a few quarters, but, in the first quarter of 2021, we saw the geographic expansion regaining momentum.
There are many valid reasons not to expand a TSP business beyond the city in which it was founded. Among them are:
You should consider these carefully in making your decision.
If you’re at Operational Maturity Level™ (OML™) 3.8 or higher and/or if your profitability and growth are near, at or above Best-in-Class (BIC) for your Predominant Business Model™ (PBM™), then adding a new geography may be a valid growth strategy for you.
In addition, the increasing prevalence of Private Equity-backed TSPs, and their desire for faster growth through acquisition, is also accelerating the pace of multi-city expansion.
What would be the proper reasons for deciding when to open another geography?
The answer is that, even if – as the threat from COVID-19 recedes – the Work from Home balance only swings partially back to Work from Office, the odds are good that those customers and prospects who are aggressively growing their businesses, will be more “Work from Office” and will want to partner with firms who are local to their office.
Put another way, Best-in-Class growth in the TSP business is dependent on strategic-thinking customers who place a high value on IT and who make higher than average investment in IT. These customers prefer to do business with IT firms who have someone in the Principal role, in the same geography. Much as they prefer to do business with a law firm or accountancy that has one or more Managing Partners in town, so do they prefer their chosen IT partner to have one in town.
Thankfully, there are best practices for managing multi-city operations, and that is the topic of this Service Leadership newsletter.
Based on the lessons we can take from your initial success in your first market, and from those who have succeeded in opening and operating new markets, let’s outline the rules for opening a new location.
If you abide by these 11 rules, you’re not guaranteed to be successful in establishing a new location, but you’re more likely to be. These are the methods used by those who have most often succeeded in the past.
There are further nuances to evolving a successful multi-location operation – matrix management, proper P&L structure and allocations, career pathing, centers of excellence, incentive compensation, and so on – but following these 11 rules will get you off on the right foot.
As noted above, the local leader – the local Principal, if you will – is key to the successful launch and growth of the new market. This person must “own” the income statement for the geography, and must have both Sales and Service reporting directly to them. In other words, they must be general managers.
Top-performing multi-branch TSPs, as measured by overall profit and operational performance, use an organizational structure that has:
This newsletter provides guidance to the headquarters executive responsible for the field, in how to manage the GMs in each geographic location.
The principals of Service Leadership not only built and ran successful multi-branch TSP businesses, but also continue to evaluate and improve the performance of many others. Top-performing ones overwhelmingly deploy a decentralized structure with GMs for each material geographic location responsible for both Sales and Service.
This is especially true as the TSP grows Services Revenue as a proportion of total Revenue. Nearly all multi-branch TSPs with Services Revenue at 40% or more of total Revenue have adopted this structure.
Why does this structure work best, and why do other structures not work as well?
Having an executive responsible for growth and profitability for each branch provides four key benefits. Specifically:
All four of these are critical to the optimal growth, profitability and Service quality within the geography and for the successful and accountable execution of the company’s global and local strategies.
When a TSP has only one location, these four requirements are in place by default, in the person of the CEO or owner. Generally, a TSP can open a second location and get away with not having a GM in that location. Performance will not be optimal, but the lack of performance will likely not severely injure the company. When a third location is opened, lack of geographically-deployed GMs will often sub-optimize performance to the extent that the company’s continued operation is at risk.
Because there is no school for running a multi-branch TSP operation, many TSPs as they grow to three branches and more, will:
As a result, we see organizational structures all along the continuum from overly centralized to overly de-decentralized, most of which produce sub-optimal results. Thus, one purpose of this newsletter is to describe the structure most often used by top-performing multi-location companies. The organizational structure described above – a GM with P&L responsibility supported by centralized strategic and operational resources – is the only that consistently works.
From this point forward, this newsletter focuses only on the aspect of managing the GM, both individually and collectively. The topics of how the local sales and service operation function below that person, and how the headquarters departments and matrix-structure resources work with that GM, are the subjects of other Service Leadership OML Best Practices Guides.
To quickly recap, the four critical functions needed in a given geography that the GM structure fulfills are:
How should the headquarters executive manage his GMs to achieve these outcomes?
It is important that the GMs understand that although they are responsible for the local P&L and the local team, this does not equate to having the authority to:
Successful multi-branch operations count on the GMs’ intelligent and productive input and guidance, and do not allow the headquarters departments to blindly dictate to the GMs. These operations exhibit positive collaboration between field and headquarters to cooperatively and collegially evolve the company forward in an efficient and effective manner.
Inexperienced GMs may view the three rules above as either ignoring their local needs and/or stifling their natural inclinations to innovate. Let’s examine these two sometimes-valid concerns.
This is a delicate balance which nonetheless heavily favors headquarters leadership. Headquarters is always responsible for developing and executing a Value Creation Strategy that has been specified by the shareholders who shoulder the investment requirements and the risks of the business. The field GMs, in turn, are responsible for executing the Value Creation Strategy in their local marketplace. The GM, though expected to be suitably entrepreneurial, is not an entrepreneur in the narrowest sense in that he is typically neither an investor in the business nor taking any associated capital risks.
The GM is expected to:
It is important to understand that the GM earns the right to make these recommendations to headquarters and to expect them to carry increasing responsibility, based upon their local performance in delivering on the shareholders’ Value Creation Strategy.
Unfortunately, too often the GM who has the most frequent and/or most strident recommendations for headquarters is the GM who is failing to deliver on the existing goals associated with the Value Creation Strategy.
The executive responsible for managing GMs must exercise finely tuned judgment regarding requests and recommendations from GMs who are not performing to plan by:
That said, it is incumbent on headquarters, with the guidance of the executive to whom the GMs report, to devise the strategies and tactics, and provide the resources needed, to enable the GMs to successfully execute the corporate strategy in their local markets. It is a collaborative effort: both corporate and field are responsible to each other, in service to the shareholders’ Value Creation Strategy.
Most shareholders construct a Value Creation Strategy for delivering the highest return possible at the lowest pragmatic risk, which generally requires a plan that is aggressive but attainable. An unrealistic Value Creation Strategy – which may be so for one or more reasons – is unlikely to produce the outcomes the shareholder’s desire.
It is the responsibility of the CEO (regardless of whether they are a shareholder or not) to ensure that the headquarters and the branch teams understand the Value Creation Strategy, buy into the plan, and are aligned in achieving the plan. If the CEO (or whichever executive is directly responsible for managing GMs) is unable to gain the buy-in of a given GM, and the reason is deemed to not be because of a failure of the strategy, centralized Services, or the managing executive, then the GM must be replaced.
In a well-run organization, a GM must buy into the corporate strategy to keep their job – even if they are producing a profit that meets or exceeds their profit goal. This is for one simple, overarching reason. In a well-run organization, activities in a market which are outside of what the organization supports (even if those activities generate great profits) deprive the organization of the leverage it needs in each of its operating departments to successfully scale and serve all of the locations.
To see why, let’s start with a nonsensical example. Let’s say that the GM responsible for the P&L in the Neverland branch decides to meet his or her profit goals by deviating from being a TSP and opening a muffler shop. The muffler shop generates great profits and growth, and the clever GM handily exceeds the profit goals set for them by headquarters. Is this acceptable behavior?
The answer, of course, is “no”, partly because in this nonsensical example an IT company clearly doesn’t want to be a muffler shop.
The real reason is that most of the investments in support and delivery capabilities by headquarters for branches not only goes unleveraged by that branch, but the evolution, refining and improving of those capabilities that comes from the branches using them, is lost from this branch. Even worse, if that branch is not successful as a muffler shop, then the company even loses the profits that might have come from the branch to further invest in resources for all branches to use.
Let’s now use a common example that’s closer to home:
The GM in Neverland attempts to sell the defined Managed Services offering1 to mid-market and finds that they are falling behind plan in this area. They mistakenly conclude that “mid-market customers in my market don’t want Managed Services” and sell Managed Services to SMBs instead. In selling Managed Services to SMB customers, they are wildly successful and exceed their Managed Services Revenue and profit goals.
In addition, in all other aspects of their appropriate mid-market business, they’re hitting it out of the park. In fact, they’re the only GM meeting any of their goals; the rest of the GMs, who are fully compliant with the company’s mid-market TCP, are failing.
How should the executive responsible for managing GMs respond? Should he or she allow the high-performing but “off the ranch” GM continue to sell Managed Services to customers outside the TCP?
The answer, of course, is no, for several reasons:
Worse, while some of the other GMs may emulate the first GM entirely, and mimic his or her move to SMB (in this example), others might follow only in spirit, and instead move away from mid-market to, say, enterprise.
At this point, headquarters will have lost its ability to provide cost effective, differentiated Marketing, vendor management, product selection, Solutions and Services offerings, because it is not possible to do so across multiple TCPs without a massive (and likely fruitless) increase in investment by the shareholders.
How, then, is the executive responsible for managing GMs, supposed to cope with this high-achieving but renegade GM?
The answer is to take a multi-pronged approach.
In these ways, the rewards for the renegade GM for continuing the counter-productive behavior diminish, and the rewards for behaving correctly increase. Most GMs will respond to this approach; if they do not, the executive responsible for them must replace them or face a disintegration of the business strategy and/or their leadership credibility.
Another reason GMs may attempt to not follow or leverage headquarters resources – such as HR, procurement, recruiting, the central NOC/Service Desk in a Managed Services company, and so on – is not because they’re following an unapproved strategy, but that they view (wrongly or rightly) that the headquarter resource is not doing its job.
This may in fact be true. In this case, the executive managing the GMs must work with his or her counterpart at headquarters to improve the performance and applicability of the headquarters resources. If the executive managing the GMs is the CEO, then he or she can take direct action to improve the performance of the headquarters resources.
What cannot be allowed is for the GM(s) who are the internal customers of these inadequate headquarters resources to replace using them with their own local, duplicative operations. This of course would lead to the misalignment and dilution of headquarter’s efforts, as well as higher costs. Even if the GM has valid reasons, it simply can’t be allowed, because company strategy would splinter and the branch’s chances for success in meeting the Value Creation Goals would dramatically decrease.
The responsible GM must work with the headquarters resources to bring their ability to support the branches as internal customers, to an acceptable level.
Inexperienced GMs may also react to perceived headquarters restrictions as hampering prospective innovation on their part and that of their team.
In practice, this is rarely the case. This is because running a business – even the GM’s single location – is a complex and challenging task, requiring as much focused brainpower and as many applicable best practices and leveraged resources as possible.
Successful multi-branch operations capture more innovation because they are more tightly managed, rather than loosely managed, so-called “entrepreneurial” multi-branch operations. This is for two reasons:
Done correctly, each branch is a sort of petri dish in which the business culture or media is the same from branch to branch (dish to dish) so that beneficial innovations which spring up can be quickly cloned from one location to many, while counter-productive strains which pop up in one branch can then be headed off in others before they become malignant.
It is one of life’s many paradoxes that more disciplined multi-branch operations harness branch innovation more effectively than loosely run ones, perform better, and are more fun and exciting places to work.
In addition, company growth is easier when methods are the same across the company because an up-and-coming star in one branch can more easily move to another branch to even up talent distribution and offer career opportunities.
Effective management of GMs requires certain tools and factors to be in place. Obviously, as implied by the discussion above, these include:
In addition, it is important that:
With these foundations in place, a GM can be managed to performance which aligns with the company’s goals.
As always, good management relies on consistent focus on desired goals, proper behaviors, objective measurement, and constant coaching and communication. What follows is a checklist for this regular cadence of activities and communications between the GM(s) and the executive responsible for managing them to performance.
|Weekly||One page branch Key Performance Indicator report, assures no surprises||
|Weekly||One hour 1:1 meeting between GM and his/her manager||
|2x Monthly||One-to-two-hour, GM group conference call, all GMs and the executive responsible for them||
|Monthly||Executive visits every location||
|Quarterly||One-to-two-day, all-GM meeting at headquarters.||
|Annually||Either the fall or winter quarterly GM meeting||
Good GMs are driven by competitive needs for attainment and recognition. The executive can capitalize on this by using open (and fair) comparisons between them as measures of performance.
For example, as noted above, every branch has a budgeted goal for profit dollars and profit percentage, as well as Revenue mix. Branch A may have a goal of $1mm in profit, while Branch B may have a goal (because it’s a newer branch or a smaller market) of $500k.
In comparing performance, let’s say Branch A actually attains $900k in profit while Branch B attains $550k in profit. In this case, Branch B would appear higher (better) on the GM (or location) stack ranking chart because it attained 110% of goal while Branch A attained 90% of its goal.
It is true that Branch A actually contributed more to the company’s well-being than did Branch B, but in terms of attaining the goals set out for it by senior management, Branch B is the better performer. Branch A’s larger contribution is silently recognized in the fact that the GM in Branch A probably has a materially larger pay package than does the GM in Branch B, because of the greater skills needed to run a larger branch.3
Openly stack ranking branches based on the degree of their attainment of budgeted KPIs, is one way top-performing multi-location operations drive appropriate GM behavior and optimized outcomes.
It is often the case that one GM’s decisions can impact the performance of locations managed by other GMs and/or headquarters. Some examples of this are:
For this reason, some component of the GMs’ incentive pay should be placed on company-wide attainment of budget goals, instead of their entire incentive being placed on the performance of their own territory. More detail is provided in the Compensation Functional Area of SLIQ.
The guideline to “praise in public and correct in private” is effective in this environment. Typically, public correction of ineffective behavior is difficult for most executives to do with good results and is not a skill we recommend building.
Make efforts to catch a GM doing something right and publicly praise them for it. Being a GM – or an executive managing GMs – is a lonely job and often one without many thanks. Having their leader and mentor publicly recognize them for doing a good job at something once in a while goes a long way towards keeping morale up and energies focused on the job at hand.
The challenge, investment and risk of building a successful multi-city operation are considerable. However, the opportunity to more quickly grow to a size perhaps not possible in your existing geography (or geographies), and to have a materially larger geography and team into which to attract and promote talent, is also considerable.
This newsletter summarizes the methods used by those successful at building high-performing multi-city TSPs. Leveraging these best practices will save you time, investment and risk.
Service Leadership is dedicated to providing total profit solutions for IT Solution and Service Providers, directly and through industry consultants and global technology vendors. The company publishes the leading vendor-neutral, Solution Provider financial and operational benchmark: Service Leadership Index®. This includes private diagnostic benchmarks for individual Solution Providers and their business coaches and consultants. The company also publishes SLIQ™, the exclusive web application for partner owners and executives to drive financial improvements by confidentially assessing and driving their Operational Maturity Level™.
Service Leadership offers advanced peer groups for Solution Providers of all sizes and business models, and individual management consulting engagements for Solution Providers from US$15mm to US$3bb in size worldwide. In addition, Service Leadership provides global IT vendors with advanced partner enablement assets, partner ROI models, management consulting and advanced peer groups, as well as executive and industry best practices education and speaking.
For more information about Service Leadership, please visit www.service-leadership.com.
Notice: All materials published (electronically or print) by Service Leadership are proprietary and subject to trademark and copyright protections, regardless of where and how it is sourced. The terms and concepts of SLIQ™, Service Leadership Index®, (S-L Index™), Predominant Business Model™ (PBM™), Operational Maturity Level™ (OML™), Normalized Solution Provider Charts of Accounts™ (NSPCoA™), Total Cost of Managed Services™ (TCMS™) and Service Factory™ are proprietary to Service Leadership, Inc. All Rights Reserved.
1The example could be Managed Services or any other product, solution or Service offering; the concept applies regardless of what is being sold, although the criticality of it increases as the example contains more and more Services content.
2 SLIQ, our TSP Operational Maturity Level improvement app. A one-year, 5-user subscription to SLIQ, with more than 30 OML Traits and many exclusive best practices tools and assets for Solution Providers seeking top quartile growth, profitability and stock value. Go to http://www.service-leadership.com/SLIQ for more information or to subscribe.
3However, as per the OML Traits in the Compensation Functional Area in SLIQ, since incentive compensation probably comprises about 40% of both GMs’ total pay packages, it’s possible that the Branch B GM, despite having a lower base pay then the Branch A GM, may get paid so much more of their available incentive that they out-earn Branch A’s GM in dollar terms, at least for that period.
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