Very often sales leaders don’t really understand how to create shareholder value. They understand how to hit a number by delivering revenue, but they can’t translate that necessarily to increasing the value of the firm. I recently interviewed John DiMarco, Chief Executive Officer for Cedar Document Technologies, a provider of hosted customer communications management services to large enterprises. As part of the interview we discussed the different revenue types and how not all revenue is created equal. If you want to follow along, download a guide to the discussion and review the Objectives phase on pages 54 – 59 of the PDF workbook.
John described the different types of revenue that his sales force can deliver. The highest value is when his sales force delivers a closed win that includes ongoing transactional services revenue combined with professional services revenue. Recurring revenue is what everybody wants to build their business based on in the technology world. There’s a real benefit to a recurring revenue model from a stability and a resource standpoint for John’s company. The highest value creating event for both the client and his company happens when a new client experiences successful delivery. The inclusion of professional services increases the probability of success for the client and the long-term value of the solution. This is the type of revenue John wants the sales force to bring in since it’s the core of what drives our value and his ability to deliver and grow future services.
The compliment to recurring revenue is a large professional services revenue aspect that helps bring along all the different threads of the solution to clients. Bringing in this type of revenue helps overcome the traditional management challenges associated with professional services. These include finding the right skill-sets, maintaining the bench and growing it. By coupling the professional services revenue with the transaction level services revenue, it gives John’s company cross revenue leverage to be able to fill valleys in with value-driving work and to carry more strength, optimize operations. There’s certainly different types of growth, with transaction level services revenue being the key for John’s company.
This is an area for those sales leaders to think seriously about, particularly those sales leaders who aspire to reach the CEO level. Not all revenue growth is not equal. Some revenue growth is strategic, it maybe carries a different EBITDA multiple. A specific type of revenue may unlock products that you can sell on the back of it like in John’s case professional services. It’s not enough just to make your topline revenue number. You need to make your number with the right revenue mix because the goal is to create shareholder value. Creating shareholder value is not only important to your shareholders, but also the executive team because they probably own a piece of the company through some type of employee stock program.
Different types of revenue growth also convert into different cash flows. There is not always a proportional growth and cash flow based on the revenue type sold. In my interview with John, we discussed this in depth. John describes an occasional maddening delay in that conversion. Sales leadership who think strategically about margin and business value obviously are operating at a different level.
In John’s case, he bills in arrears for professional services so he’s already paid his staff when work is completed. He’s also already paid for the servers. Having the margin, having the cash flow, having the payment process be tuned to the business is incredibly important, right. It’s the difference between having the discretionary resources to do client valuable R & D, to do sales and marketing initiatives that drive growth. It’s that kind of management reserve to impact the business in a positive way and clients benefit in a positive way as well. It’s an important nuance for sales leaders to think about if you really want to get to the next level in management.
For the full interview with John, download his podcast The Real Drives of Revenue Growth to listen to during your next workout. If you would like to spend time with me on your revenue growth drivers, come see me in Dallas at The Studio, SBI’s multimillion dollar, one-of-a-kind, state-of-the-art executive briefing center. Invite your CEO to come with you. The Studio is a safe-haven for learning and after just a few days clients leave with confidence and clarity your revenue growth strategies and sales and marketing motions to make your number.