The What and Why of PBM and OML

www.service-leadership.com
WHITE PAPERTotal Profit Solutions for IT Companies™
The What and Why of
Solution Provider
Predominant Business
Models©
and Operational
Maturity Levels©

www.service-leadership.com
© 2017 All Rights Reserved – Confidential and Proprietary – Licensed Material
Table of Contents
Executive Summary ........................................................................................................................................................1
The Operational Maturity Level Approach ............................................................................................................2
How Operational Maturity Relates to Financial Performance........................................................................3
OMLs Are Made Up of “Traits”...................................................................................................................................5
Predominant Business Models Defined..................................................................................................................7
Identifying Revenue Streams That Make Up PBMs......................................................................................... 10
Making Accurate Benchmarking and Appropriate Best Practices Possible ........................................... 12
Putting It All Together................................................................................................................................................ 14

www.service-leadership.com | Page 1 of 15
Executive Summary
There are as many ways to run a Solution Provider business as there are proverbial snowflakes.
That said, the Service Leadership Index® shows that that those Solution Providers/Managed
Service Providers/Cloud Service Providers (SP/MSP/CSPs) in the top quartile of profit
performance consistently deliver Earnings Before Interest, Taxes, Depreciation and Amortization
(EBITDA) % about 2.5 times higher than those with median profitability (see Figure 1). This is
true regardless of size, geography, age of company, or target market segment.
Figure 1 - Top quartile and median EBITDA % for Solution Providers of different Predominant Business
Models.
Clearly, the top quartile firms are doing things differently than the median and the bottom
quartile ones. Yet, there is no school for Solution Provider owners on how to run the business,
add new offerings, or evolve from the current Predominant Business Model©
(PBM©
) to a desired
one. To the extent that such guidance exists, it is generally tactical (for example, certification
training and guidelines for starting new solutions areas) and misses the foundational aspects
needed to make such efforts less risky and more profitable more quickly.
The principals of Service Leadership have used the Operational Maturity Level©
(OML©
) model
internally for several decades, long before making it available externally to our clients. We

evolved it over our years as Solution Provider executives to meet the challenge of successfully
rolling out new offerings within our companies as we grew them from one to nine offices (SMB
and mid-market focused), from 14 to 44 offices (enterprise focused), a 14-office firm (enterprise
focused), and from one to 18 offices (SMB focused).
In our experience, any new offering – and indeed evolving from one PBM to another – initially
meets with greater or lesser success in one office as compared to another. This is a result of two
factors:
• Each office’s management team has a differed level of business management skills; and
• Each office has evolved a different current base of solutions and Services skills and
preferences.
In this white paper, we’ll discuss the basics of Solution Provider Operational Maturity Levels, and
how higher OML relates to higher profitability, growth and Service quality.
We’ll also discuss why improving operational maturity starts with identifying your PBM, to
ensure accurate comparison of financial performance and the selection of the right best
practices to maximize results and minimize risk.
The Operational Maturity Level Approach
The concept of evolving operational maturity is not new. The Capability Maturity Model (CMM)
developed by the Software Engineering Institute at Carnegie Mellon University, is an example of
an early methodology for accomplishing these goals within software development operations.
However, the CMM only deals with technical delivery, not business results, and it doesn’t
address infrastructure-centric Solution Providers.
Prior to Service Leadership’s development of the Operational Maturity Level methodology, no
such methodology existed for improving SP/MSP/CSPs performance. The OML approach
systematically brings an SP/MSP/CSP company to the operational execution level needed to
attain and sustain Best-in-Class (top quartile profit) financial performance.
The OML approach encompasses all aspects of running a profitable and growing SP/MSP/CSP
business, not just the “Service Factories©
”, if you will, and includes:
• Strategy, starting with value creation strategy,
• Marketing and Sales and their supporting operations;

• Service operations; and
• Finance and administration.
Note that we’ll use the term “Services” in most cases to denote both “solutions” (that is,
products installed with Services in the form of projects) and “Services” (that is, Services delivered
as operational support to the client, for solutions already installed and operating).
This is because the term “solutions” can mean the sale of equipment without Services of any
kind; there’s nothing wrong with this, but the more complex and riskier activity treated here
includes assessment, design, installation and ongoing support Services.
How Operational Maturity Relates to Financial Performance
Disregarding for a moment the differences between PBMs (more on this later), as we noted
earlier, the Service Leadership Index reports that those SP/MSP/CSPs in the top quartile of profit
performance consistently deliver EBITDA % about 2.5 times higher than those with median
profitability. The bottom quartile SP/MSP/CSPs, unfortunately, operate at zero profit or below (at
least until they either improve towards median or cease to exist in their current form).
Clearly, the management teams of the top quartile firms are doing things more effectively than
those of the median-performing firms, who in turn are doing things more effectively than the
bottom-performing firms.
The “things” that each management team is doing are the same across all these firms; there is a
minimum set of activities needed to operate a Solution Provider firm. While it is true that a very
immature firm will simply not be doing some of them, their ignorance does not diminish the fact
that they soon will be or will be out of business.

In the Operational Maturity Level construct, we’ve identified five levels of maturity (see Figure 2):
Figure 2 - Operational Maturity Levels of Solution Provider Firms.
In terms of financial and Service quality performance, most often, those Solution Provider firms
who are at:
• OML 1 or 2 are delivering sub-median financial performance – and most often losing
money – and struggle to deliver quality,
• OML 3 are most often delivering roughly median financial performance and have
moderately consistent Service quality,
• OML 4 or 5 are most often delivering top quartile financial performance and have very
good Service quality.
It is important to note that the degree to which an:
• OML 1 might be doing less well than an OML 2 is most often characterized by the
direness of their financial situation: poor profits, minor losses or major losses.
• OML 5 might be doing better than an OML 4 is most often characterized not by the
degree of high financial performance, but instead by the extent to which they are adding
very advanced or even non-IT Services to their offerings, of course in a controlled way.

The correlation between OML and profitability is shown in Figure 3.
Figure 3 - Relationship between OML and profit performance.
Similar correlations are evident between OML and Revenue growth, and between OML and
Service quality.
OMLs Are Made Up of “Traits”
What are those “things” which every SP/MSP/CSP must do, to have at least a basic, reliable
business model, and must do well to have a top-performing business model? We call these
things, OML “Traits”.
Depending on the Solution Provider’s business model, there are between 30 and 39 Traits
comprising the five functional areas shown in Figure 4 on the next page.

Figure 4 - The five functional areas of a Solution Provider firm.
Here are several examples of OML Traits:
• Value Creation Strategy – Lower-performing Solution Providers often mistakenly assume
that if they grow each year, they are on the optimum path to creating high value for the
shareholders. Faster-growing, higher-profit Solution Providers purposefully set explicit
stock value goals, time frames and the desired value extraction methods, even if it will be
years until they plan to extract that value.
• Driving Technology Standards – Lower-performing Solution Providers often mistakenly
assume that if they represent multiple product lines for a given segment of the
technology stack, their sales will grow faster. In fact, faster-growing, higher-profit
Solution Providers purposefully narrowly limit the range of products they represent.
• Solution and Service Offering Development – Lower-performing Solution Providers often
mistakenly add new solutions and Services without a clear understanding of the
investment needed, an explicit number of deals of a planned size within a planned time
frame, and defined marketing and sales plan to attain that number of deals. Faster-
growing, higher-profit Solution Providers do not add a new solution or Service until they

have defined and committed to all of these success factors, which often means
decommissioning and existing offering.
• Charging for Technical Assessments – Lower-performing Solution Providers often
mistakenly assume that if they give away technical assessments (or charge for them and
then credit them back), their sales will grow faster. In fact, faster-growing, higher-profit
Solution Providers purposefully charge for technical assessments.
Examples of other OML Traits include: Cross-Selling Execution and Use of Budgets in Managing
the Company.
For each of these OML Traits – and all the others – there are specifically identifiable methods
(levels) by which they low performers do these things less effectively, and the high performers
do them more effectively.
By understanding how they do these things in the context of these levels, a Solution Provider
can determine exactly where they are and – most importantly of course – how best to get to the
next level of execution, and attain higher financial and Service quality results.
In the Solution Provider business, there are unfortunately hundreds of ways to “leak” profit and
quality.
If the OML Traits in the five functional areas are executed effectively, they form a set of checks
and balances, or natural barriers, which reduce leakage of profit and quality to a minimum, set
the “levers” up for optimizing profit and growth, and give management the information and the
time to more fully focus on driving the business as opposed to plugging leaks and putting out
fires.
Predominant Business Models Defined
A Solution Provider’s OML, then, is a key determiner of their financial performance and Service
quality.
We noted earlier that there are different Solution Provider Predominant Business Models
(PBMs). We also noted that while some OML Traits apply to all PBMs, many OML Traits are
specific to only a few or just one PBM.
Therefore, if the goal is improving one’s OML to improve one’s performance, it’s critical to first
know one’s PBM.

Until the Service Leadership Index, there was no standard method of objectively identifying a
Solution Provider’s business model. A Solution Provider could simply assert that it was an MSP,
for example, even if it had very little recurring Revenue. The danger of this, however, is that if
they then tried to implement best practices appropriate for MSPs, they would likely damage
their own performance.
To resolve this, Service Leadership breaks the SP/MSP/CSP community into 10 Predominant
Business Models (PBMs) based objectively on their Revenue mix. Why? Because different PBMs
have different inherent financial drivers. Meaning: they have different best practices needs. For
example:
• In firms in which Time and Materials (T&M) support (hourly or break/fix) is predominant,
more work per customer equals more profit. But in Managed Services firms – which
largely offer the same types of support but under a different contractual construct – less
work per customer equals more profit.
• In Product-Centric and Project-Centric firms, the more often the customer upgrades, the
more profitable the Solution Provider becomes. In Managed Services firms, once the
customer is brought up to standards, the less often the customer upgrades, the more
profitable the Solution Provider becomes.
In each of these cases, the best practices suitable to each business model, are diametrically
opposed. These are just two examples from a wide range of practices or methods which are
specific to each given PBM.
If the wrong best practices are applied, either no improvement will result, or performance will
degrade. This is a key reason that a Solution Provider management team must know its PBM
before it begins to select and apply best practices.
In addition, each PBM also has a different profit potential, as shown by the Service Leadership
Index results for each (see Figure 5).
It’s important to note that although the profit potential for each PBM is different, the top
quartile profit percentage is about 2.0 and 3.0 times higher than the median profit percentage,
regardless of Solution Provider size, location, age, or customer segment. This delta in
profitability is a result of Solution Provider in a given PBM, being at different Operational
Maturity Levels.

Figure 5 - Top quartile and median EBITDA % for Solution Providers of different PBMs.
The Solution Provider’s PBM also determines the overall context in which each practice must
operate.
That context includes the skills of the people, their compensation incentives, their business
culture, their customer value proposition, marketing and lead generation, the nature of their
vendor relationships, and so on. Brief descriptions of these are shown in Figure 6.
Only by knowing their PBM, can a Solution Provider objectively compare financial performance
against others of its type, and select the best practices which will have the highest chance of
improving, rather than degrading, results.

Figure 6 - Characteristics of Solution Provider Lines of Business.
Identifying Revenue Streams That Make Up PBMs
Solution Providers rarely are exclusively only one practice; most have multiple practices each
with an associated Revenue stream. However, within a given Solution Provider, the practice
which delivers the preponderance of Revenue – if it is enough larger than its other practices –
will determine its PBM.
Notice we specify Revenue, not Gross Margin dollars: These business model shifts are clearest
when measured in Revenue dollars.
Although most Infrastructure-Centric Solution Providers and MSPs sell product, do some T&M
support (break/fix) and projects as well as Managed Services, it is the Revenue size of each of
these lines of business relative to each other which determines the different business
management needs. The tipping points in Revenue mix between the different business models,
are shown in Figure 7.

Figure 7 - Algorithm for objectively identifying a Solution Provider's Predominant Business Model.
As Service Revenue grows to approach 40% of total Revenue, management will change its
decision-making behavior to optimize the Services business (since it now has more risk and
reward) as opposed to the product business.
Unfortunately, lower-performing Product-Centric firms frequently sub-optimize their Services
business (and therefore financial performance), lower-performing Services-Centric firms
frequently sub-optimize their product business, likewise hampering growth and profits.
Both mistakenly assume improving one is a zero-sum game in relation to the other. The higher-
performing firms, however, understand how to optimize both “sides” of the business at once. In
fact, it’s difficult to reach top quartile performance optimizing only one side of the business.
As the firm continues to add Services, most often one of the lines of Service business – T&M
support, projects or Managed Services – will become the predominant one within the firm. This
happens either intentionally as a matter of strategy, or by the conscious or unconscious
preferences of the leadership team, or by the luck of having a large customer or series of
customers which ask for that Service.
When that line of Service becomes at least 10% larger than the second largest one, it dominates
management’s thinking just as did product resale when (and if) they started in that business
model. As we have seen, that predominant line of business determines the specific best

practices which will have the most benefit and least risk, and will also determine the overall
financial performance potential of the company. We call this, their Predominant Business Model
or PBM.
Making Accurate Benchmarking and Appropriate Best
Practices Possible
The PBM approach enables consistent, comparable and actionable benchmarking within and
across the range of Solution Provider business models. This provides the basis for diagnosing
Solution Provider business challenges and prescribing best practices to overcome them, as well
as for measuring whether the implementation of those best practices is resulting in the desired
improvements.
Comparing Apples-to-Apples
An advantage of the PBM approach is that it enables apples-to-apples benchmarks of
actionable business drivers, making it possible to determine which management techniques and
decisions produce the best results.
For example, a Best-in-Class Solution Provider with 80% of its Revenue coming from product
resale will have different operating ratios from a Best-in-Class Solution Provider with 80%
Services Revenue.
Comparing the two would be largely meaningless, and many of the best practices for optimizing
one would be largely inapplicable – and often damaging – to the other.
Other examples of this:
• The methods of optimizing Infrastructure-Project (Professional) Services profitability and
growth within a Solution Provider that is 80% product resale are different than for
optimizing the same professional Services within an Solution Provider that is 80%
Services.
• Likewise, the methods for optimizing the profitability and growth of Infrastructure-
Professional Services in a professional Services company are different than for optimizing
the same professional Services within a MSP.
The best practices applicable to optimizing Infrastructure-Professional Services in one of these
business models will either not work, or will actively degrade financial performance and Service
quality if applied in the other business models.

Without this kind of knowledge, best practices suitable for one PBM, may unknowingly be
applied to another with unexpectedly poor results. The fact is that only Solution Providers with
the same PBM can be meaningfully compared and best practices derived or applied.
Different Patterns of Billable Utilization and Skill Sets
Top financial performance is based on the Solution Provider’s ability to recognize and optimize
the particular needs of each major practice area. These are a result of the different billable
utilization patterns and skill sets needed for each major type of Service practice.
For example:
• The techniques for optimizing the profitability and growth of a Project Services team are
inherently different than those needed to optimize a Managed Services team.
• Likewise, these techniques are also inherently different between a project team that
implements applications and one that implements infrastructure.
This is because each PBM has a different pattern of billable utilization and/or skill set, as shown
in Figure 8.
Figure 8 - Differing patterns of billable utilization which need to be optimized, by line of business.

By recognizing these “genetic” differences between Services practices, the Service Leadership
Index provides a framework for providers of best practices to develop the most effective
solutions.
Putting It All Together
There is a positive correlation between a Solution Provider’s Operational Maturity Level and its
financial performance. To improve its performance, the Solution Provider management team
must first know and improve its execution of the OML Traits applicable to their specific business
model.
Therefore, they must first determine their PBM, that is, which line of business is predominant
according to Figure 7 (see page 11). Then they can compare their financial performance and
exchange best practices with others of the same PBM.
For any given PBM, there are distinct OML Traits — things that every Solution Provider must do
to have at least a basic, reliable business model. And they are the things that must be executed
at a high OML to achieve and sustain Best-in-Class profitability and growth.
The Service Leadership Index benchmark shows that the higher the aggregate OML level against
all Traits, the higher the probable profitability, scalability, Service quality and growth of the
Solution Provider.

About Service Leadership, Inc.
Service Leadership is dedicated to providing total profit solutions for IT Solution Providers,
directly and through industry consultants and global IT 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. Please visit www.service-leadership.com for more information.
Contact Us
Paul Dippell, CEO
Service Leadership, Inc.
Tel +1 972-798-1288 x111
Fax +1 469-362-1179
Paul@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.

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