IP on top of Microsoft Dynamics CRM
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This document outlines a business case for Microsoft Dynamics CRM partners to develop industry-specific intellectual property on top of the CRM platform to generate higher profit margins. It finds that developing a specialized software add-on focused on a specific industry can yield profit margins above 75% with breakeven in 1.5 years. The methodology includes a survey of over 100 CRM partners that identified success factors for "top performers," such as focusing on one industry-specific solution and investing in related technologies like Azure. Distributing IP solutions through indirect channels like other partners can provide over 100% return on investment.
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IP on top of Microsoft Dynamics CRM
- 2. HOW TO MAKE A PROFITABLE BUSINESS WITH INDUSTRY-SPECIFIC INTELLECTUAL PROPERTY ON TOP OF MICROSOFT DYNAMICS CRM BY WIM GEUKENS Executive MBA Brussels 2014-2016 Promoter: Prof. Dr. Leten Bart Company promotor: Özkan Erener, Ceo VeriPark 24th of November 2016
- 3. © Vlerick Business School AGENDA 3 1. Objectives & High level findings 2. The building blocks 3. Methodology 4. Results 5. Q&A
- 4. 1OBJECTIVES & HIGH LEVEL FINDINGS
- 5. © Vlerick Business School OBJECTIVES Business case - how to make a profitable business with industry-specific intellectual property (IP) on top of Microsoft Dynamics CRM For CRM Services partners, not yet an ISV Success factors - how to become a Top Performer with profitability > 75% 5
- 6. 6 FTE3 FTE 200k-2M$ NPV 900k$ IRR 102%5Y Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Breakeven 1,5Y Indirect Channel ROI 106% Profit. Margin > 65% HIGH LEVEL FINDINGS
- 8. © Vlerick Business School CUSTOMER RELATIONSHIP MANAGEMENT CRM is not just software, but a strategy Moving from product to customer centric Worldwide CRM market = 26.3 billion $ Growing with 12.3%. 8
- 9. © Vlerick Business School MICROSOFT DYNAMICS CRM 9 Growing with 35%-40%
- 10. © Vlerick Business School MICROSOFT DYNAMICS CRM - PARTNER ECOSYSTEM 10
- 11. © Vlerick Business School CRM PROJECT IMPLEMENTATION MORE VALUE, FASTER AND CHEAPER 11 $ Time CRM Software 12 Months Customer Specific Services 100 IP Customer Specific Services <100 Implementation Services <12 Months
- 12. 3METHODOLOGY
- 13. © Vlerick Business School METHODOLOGY B2B survey Target group = All Microsoft Dynamics CRM Partners Population size N = 5.000 Confidence level c = 90% Margin of error E =10% Response distribution = 50% n (sample size) is 67 people 117 responses, 77 completed Data collection Difficult since no partner lists available Hans Peter Bech, Amazon bestselling author & blogger Social media (Twitter, Linked In, Yammer) Emailing's to 471 people ExtremeCRM website 13
- 14. © Vlerick Business School SURVEY DESIGN 14 EfficiencyQuestions topics Personal Product Marketing IPDistribution Business case
- 15. © Vlerick Business School SURVEY ANALYSIS Top performer > 75% margin Average performer between 75 and 35% margin Bad performer below 35% margin Answers were Clustered Focus on ISV
- 16. 4RESULTS - BUSINESS CASE - SUCCESS FACTORS
- 17. © Vlerick Business School THE PROBLEM STATEMENT Services Gross Margin related to Microsoft Dynamics CRM is only 28% (avg) Many related risks – people business Need for higher margins with another business model that can co-exist in the same company leverage the CRM knowledge and experience. 17
- 18. © Vlerick Business School HIGHER MARGIN AND VALUATION Monetizing IP, by entering the Software Product market 84% Profit @ survey Top Performers Not including “big” ISV’s with investments over 2 Million $ with revenue over 20 Million $ Software Vendors are 2 times more valuated than IT Services 18
- 19. © Vlerick Business School 6 SOLUTION OPTIONS 1. Build a horizontal add-on 2. Build an accelerator 3. Build a starter-pack 4. Build an industry specific add-on 5. Do nothing 6. Offer the Software for free, add services on top of the Software 19
- 20. © Vlerick Business School BUSINESS CASE ASSUMPTIONS The partner has between 15 and 80 active partners 40 customers after three years 150 users on average deals Recurring revenue per customer of 50k$/year IP revenue growth of +/- 50% Partner margin of 15% Discount rate of 10% Tax rate of 33% Operational cost of 10% Services are not taken in to account Average complexity of the solution 20
- 21. © Vlerick Business School WHAT PARTNER CHANNEL TO USE 21 Price Complexity Direct Channel Online Channel Indirect Channel Business Case Business Case
- 22. © Vlerick Business School DISTRIBUTION CHANNEL ROI 22 Item Per year Item Per year Software License Value/Deal $ 50 000,00 Software License Value/Sale $ 50 000,00 Number of Partners 15,00 Number of Sales/partner 2,00 Income Per year Income Per year Number of Deals/Year 20,00 Number of Deals/Year 30,00 Revenue from Deals/Year 1 000 000,00$ Partner Revenue from Deals/Year 1 500 000,00$ Margin from Sales (@100%) 1 000 000,00$ Margin from Sales (@85%) 1 275 000,00$ Net income from Licenses $ 1 000 000,00 Net income from Licenses $ 1 275 000,00 Expenses Per year Expenses Per year FTE's 720 000,00$ FTE's 560 000,00$ Travelling budget 15 000,00$ Travelling budget 15 000,00$ Marketing budget 15 000,00$ Marketing budget 35 000,00$ Renting Microsoft Azure features like storage, virtual machines, SQL, ... 10 000,00$ Renting Microsoft Azure features like storage, virtual machines, SQL, ... 10 000,00$ Total Expenses $ 760 000,00 Total Expenses $ 620 000,00 Net Income $ 240 000,00 Net Income $ 655 000,00 profitability 24% profitability 44% ROI 32% ROI 106% Direct Indirect ISV Solution, 3 people in Sales Team ISV Solution, 12 partners engaged
- 23. © Vlerick Business School PROJECT MILESTONES 23 STEP 1 - Select Industry Create the Team Deliver a MVP Become local champion References STEP 2 - Add extra modules Extend the team First partner opportunities Setup distribution channel 600k$ revenue Become breakeven STEP 3 - Go global Invest in marketing Add sales revenue STEP N - Scale fast Add 400.000 to 500.000 $ per year in sales revenue >50% margin 40% 20% 60% 100%
- 24. © Vlerick Business School COST BENEFITS ANALYSIS 24 Associated benefits Degree of Explicitness Do New Things Do Things Better Stop Doing Things Financial B5) New income for IP licensing: B1) Less CRM people needed: release 1 FTE staff, cost savings 80.000$ p.a. Quantifiable B6) Higher Enterprise Value (share price should go up when public company) B7) Increase market share in other regions B8) Recurring revenue B2) Reduction in bad debts: reduced payment write-offs: 20.000$ p.a. Eliminating invoice follow- up, since payment is needed before license key gets delivered B3) No project overruns, Measurable B9) Lower attrition rate of team members, since part of a small dedicated team B10) Opportunity for home office, and flexible hours B4) Less need to “connect” with the local company in all his aspects since new markets are addressed and less need for cross and up sell Observable B11) Improved customer satisfaction and retention B12) Improved relationship with Microsoft B13) Less sales staff frustration, since there is always room to sell Software, B15) Higher quality output (IP is more replicable than projects)
- 25. © Vlerick Business School COST BENEFITS ANALYSIS 25 Discount Rate 10% Operating Costs 10% Taxes 33% Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Recurring costs Internal development costs Quantity Quantity Quantity Quantity Quantity Yearly salary cost - Team Manager 10 000$ 10% 20 000$ 20% 50 000$ 50% 50 000$ 50% 50 000$ 50% 100 000$ - Product Manager 10 000$ 10% 20 000$ 20% 30 000$ 30% 30 000$ 30% 30 000$ 30% 100 000$ - Scrum Master 10 000$ 10% 20 000$ 20% 20 000$ 20% 20 000$ 20% 20 000$ 20% 100 000$ - Business Analyst 40 000$ 40% 40 000$ 40% 50 000$ 50% 50 000$ 50% 50 000$ 50% 100 000$ - Functional Consultant 40 000$ 40% 40 000$ 40% 50 000$ 50% 50 000$ 50% 50 000$ 50% 100 000$ - Technical Consultant 100 000$ 100% 100 000$ 100% 100 000$ 100% 100 000$ 100% 100 000$ 100% 100 000$ - Channel Manager 20 000$ 20% 40 000$ 40% 70 000$ 70% 100 000$ 100% 100 000$ 100% 100 000$ - Pre-Sales Consultant 20 000$ 20% 20 000$ 20% 20 000$ 20% 20 000$ 20% 20 000$ 20% 100 000$ - Back-Office Manager 8 000$ 10% 12 000$ 15% 24 000$ 30% 24 000$ 30% 24 000$ 30% 80 000$ - Support Follow Up 8 000$ 10% 12 000$ 15% 16 000$ 20% 16 000$ 20% 16 000$ 20% 80 000$ - Partner Support 10 000$ 10% 15 000$ 15% 30 000$ 30% 30 000$ 30% 30 000$ 30% 100 000$ - Technical Assistant 10 000$ 10% 15 000$ 15% 20 000$ 20% 20 000$ 20% 20 000$ 20% 100 000$ - Product Trainer 10 000$ 10% 15 000$ 15% 20 000$ 20% 20 000$ 20% 20 000$ 20% 100 000$ - Project Manager 20 000$ 20% 20 000$ 20% 20 000$ 20% 20 000$ 20% 20 000$ 20% 100 000$ - Marketing Manager 20 000$ 20% 30 000$ 30% 40 000$ 40% 40 000$ 40% 50 000$ 50% 100 000$ Travelling budget 5 000$ 10 000$ 15 000$ 15 000$ 20 000$ Marketing budget 5 000$ 20 000$ 35 000$ 50 000$ 75 000$ Renting Microsoft Azure features like storage, virtual machines, SQL, ... 10 000$ 10 000$ 10 000$ 10 000$ 10 000$ Total recurring cost 356 000$ 340% 459 000$ 425% 620 000$ 570% 665 000$ 600% 705 000$ 610% Revenue from License sales 200 000$ 600 000$ 1 000 000$ 1 500 000$ 2 000 000$ Gross Income -156 000$ 141 000$ 380 000$ 835 000$ 1 295 000$ Operating Cost (10% of Gross Income) 10 000$ 14 100$ 38 000$ 83 500$ 129 500$ Net Income Before Taxes -166 000$ 126 900$ 342 000$ 751 500$ 1 165 500$ Taxes -$ 41 877$ 112 860$ 247 995$ 384 615$ Initial investment (one-off cost) 20 000,00$ Purchase Hardware and Software (devices for testing, test-software, etc..) 10 000,00$ External consultancy for specific short term advise 10 000,00$ Net Income -20 000,00$ -166 000$ 85 023$ 229 140$ 503 505$ 780 885$ NPV 900 283$ > 0 IRR 102% > 10% PI 46,01 > 1
- 26. © Vlerick Business School COST BENEFITS ANALYSIS 26
- 27. © Vlerick Business School SENSITIVITY ANALYSIS 27 Net Present Value Internal Rate of Return
- 28. © Vlerick Business School SUCCESS FACTORS ON HOW TO BECOME A TOP PERFORMER Use government grants for Research and Development Sell reused code to customers Use own IP and other ISV’s IP in the CSP model Focus on only one ISV solution Invest in a richer platform including Office 365 and the Azure components Support both models: Cloud and On-premises Top performers’ Average IP Deal size is 35k$, and have around 12 CRM consultants 28
- 29. Conclusion
- 30. 5Q&A
- 31. 6 FTE Questions & Answers 3 FTE 200k-2M$ NPV 900k$ IRR 102%5Y Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Breakeven 1,5Y Indirect Channel ROI 106% Profit. Margin > 65%
- 32. THANK YOU! WIM.GEUKENS@HOTMAIL.COM +32 473 320727
Hinweis der Redaktion
- come up with a business case on how to make a profitable business with industry-specific intellectual property (IP) on top of Microsoft Dynamics CRM . This business case was made for partners having an existing Microsoft Dynamics CRM Services practice, not yet being an Independent Software Vendor (ISV ), and interested in investing in IP on top of Microsoft Dynamics CRM. A market research was conducted, mainly by using an online survey , to get some insights and numerical data to be used in the business case. All partner data was clustered in three groups around profitability: Top Performer (> 75% margin), Average Performer (between 75 and 35% margin) and Bad Performer (below 35% margin). to define the success factors on how to become a Top Performer. These learnings came out of the survey, by analyzing all questions where the Top Performers cluster had unique survey-results compared to the other 2 clusters.
- Microsoft sells more with the same nr of partners Customer pays less, and is faster in production (so a better GTM) Partner is making more margin on IP compare to Services
- Since there were 77 completed answers, this test passed and these were sufficient to deliver a 10% margin of error. So, if the survey would be repeated, there is a chance of 90% that the results would be the same.
- Product information Marketing questions IP related experience and best practice Personal data, to make sure the right partners participated Numerical and Financial data, to be used in the business case and to cluster partners in top, average and bad performers Information about their distribution channel
- Product information Marketing questions IP related experience and best practice Personal data, to make sure the right partners participated Numerical and Financial data, to be used in the business case and to cluster partners in top, average and bad performers Information about their distribution channel
- Step 1: MVP, sales in local market Define your market MVP - 6 months development Direct sales channel only Build references Become a winner 200.000$ sales revenue Build marketing materials Get on AppSource Keep it SMART Step 2: Extra modules, setup distribution channel Build some extra modules on customer request Get support from Microsoft Extend your Product team Setup the first partners opportunity driven (re-active way) Focus on customer satisfaction and retention Setup partner materials (training, support, demo, …) 600.000$ sales revenue Step 3: Go global Make sure you are breakeven Become pro-active in channel setup Invest in marketing (events) Add 400.000 to 500.000 $ per year in sales revenue
- Almost nobody is using government grants for Research and Development. However, 60% of the partners that use grants are in the Top Performers cluster. I’m convinced based on my own experience with grants, that there is a huge potential there, but it will ask for a big investment in time and management attention. So, if a partner is considering to ask for grants, it’s better to contract an external company to figure it all out for them. Some of them work also on a no-cure no-pay basis. Almost everybody is re-using source code from one project to another one, but only 60% is letting the customer pay for it. It’s remarkable to see that 71% of the Top Performers sell their reused code. Customers value something they pay for more than something they get for free, since many times nobody from the customer realizes that the partner gave them a present free of charge. Once the partner realize that this revenue is bringing him net profits, he will start to like this, and apply this more and more, and integrate this even in his offerings. More than 55% of the partners use their own IP in their CSP offering, while only 34% is using IP from other suppliers in their CSP bundle, like using Resco to extend their offering with more mobility options. Since 50% of the Top Performers use other ISV’s in their CSP solution, this seems like a successful formula. It makes no sense to put the energy in developing something another ISV partner offers for a small amount of money. Try to focus on delivering more value to the customer, and include in white label (or not) also other solutions that fit well with the one from the partner. Another good example is a rule engine, offered by InRule. Focusing on delivering only one ISV solution, will be more successful. Looking at the Top Performers, 57% has only one ISV solution, 14% has 2, 14% has 3 but none of them have more than 3 different ISV solutions. Realdolmen has built a vertical solution for the insurance industry based on Microsoft Dynamics CRM, but while doing that, they isolated some code that could be used in a horizontal market as well. This made them come out with more than one product, but still very focused on a limited number of solutions that were related to each other. Top Performers invest more in a richer platform that the others, including Office 365 and the Azure platform. One on two Top Performers has already incorporated these components in the ISV solution package. 85% of the Top Performers support both models: Cloud and On-premises. Apparently the less people the better the performance on ISV activity. Top Performers have only 12 CRM consultants on average. Quality is more important than quantity in this business model. To calculate the IP revenue, the next question would be “What is the average customer deal size with your ISV solution(s) for a yearly subscription fee?”, where the average answer was around 16k $, but it seems that Top Performers have deals that are twice as much, so this is also categorized as a success factor. Defining the pricelist is very important, but will depend a lot on the value the partner brings to the customer. Realdolmen made deals between 10k and 250k, and on average 35k per deal. VeriPark has an even bigger spread of deal minimum and maximum, but the average deal size will be above 100k$.