Presenter: Al Bates, Principal, Distribution Performance Project According to the TechServe Alliance Operating Practices Report, high-profit IT and engineering staffing firms are more than twice as profitable as the typical firm. How do they do it? In this special 2 hour session, Dr. Al Bates, the chief architect of the OPR and Sales & Recruiter Metrics Report, will draw upon the industry’s most comprehensive benchmarking reports to provide a roadmap and demystify what it takes to become a high-profit firm. In outlining the five essential actions that you can take to drive greater profitability, he will lay out not only “what to do” but “how to do it.”

1. Five More Points
Five Essential Actions
Prepared For
TechServe Alliance
Prepared By
Distribution Performance Project
3985 Wonderland Hill Ave., Suite 201
Boulder, CO 80304
720-668-8840
bigal6212@gmail.com
distperf.com
November 8, 2018

2. Distribution Performance ProjectExhibit 1
Objectives Of The Session
• Review the Profit Structure of the
Industry
• Identify the Key Pressure Points in
Improving Profitability
• Develop an Action Plan to Improve
Financial Performance
Distribution Performance ProjectExhibit 2
Income Statement Results For
Mountain View, Inc.
Dollars Percent
Gross Revenue 10,000,000 100.0
Direct Costs 7,350,000 73.5
Gross Profit 2,650,000 26.5
Payroll and Fringes 1,550,000 15.5
All Other Expenses 800,000 8.0
Total Expenses 2,350,000 23.5
Profit Before Taxes 300,000
Fixed Expenses 1,850,000
Variable Expenses 500,000 5.0
Accounts Receivable 1,500,000

3. Distribution Performance ProjectExhibit 3
A Tale Of Two Firms
You Are You Should
Here Be Here
Gross Revenue 10,000,000 10,000,000
Direct Costs 7,350,000 6,950,000
Gross Profit 2,650,000 3,050,000
Payroll and Fringes 1,550,000 1,500,000
All Other Expenses 800,000 750,000
Total Expenses 2,350,000 2,250,000
Profit Before Taxes 300,000 800,000
Gross Revenue 100.0 100.0
Direct Costs 73.5 69.5
Gross Profit 26.5 30.5
Payroll and Fringes 15.5 15.0
All Other Expenses 8.0 7.5
Total Expenses 23.5 22.5
Profit Before Taxes 3.0
Distribution Performance ProjectExhibit 4
How Do They Do That?
Revenue per Salesperson $3,294,000 $4,682,000
Revenue Per Recruiter $2,239,000 $2,066,000
Revenue Growth 5.1% 14.1%
Revenue per Job Order $18,000 $18,000
Gross Profit 26.5%

4. Distribution Performance ProjectExhibit 5
The Recent Trend
In Profit Margin
0.0
1.0
2.0
3.0
4.0
5.0
2013 2014 2015 2016 2017
Year
PBT--%
Distribution Performance ProjectExhibit 6
Thinking Back to the Dark Ages
2004 2017
Gross Revenue $7,000,000 $10,000,000
Direct Costs 5,110,000 7,350,000
Gross Profit 1,890,000 2,650,000
Owner's Compensation 285,000 350,000
All Other Payroll 870,000 1,200,000
All Other Expenses 455,000 800,000
Total Expenses 1,610,000 2,350,000
Profit Before Taxes $280,000 $300,000
Gross Revenue 100.0 100.0
Direct Costs 73.0 73.5
Gross Profit 27.0 26.5
Owner's Compensation 4.1 3.5
All Other Payroll 12.4 12.0
All Other Expenses 6.5 8.0
Total Expenses 23.0 23.5
Profit Before Taxes 4.0 3.0

5. Distribution Performance ProjectExhibit 7
The Two Requirements
Of Any Business Proposition
• Adequate Salary--Hours Worked
• Adequate Profit--Risk Taken
Distribution Performance ProjectExhibit 8
The Annual Income You Will Enjoy
For Twenty Years At Retirement
Current Salary 150,000
Starting
Age 3 6 12 15
30 32,614 65,228 130,456 163,070
40 17,234 34,468 68,935 86,169
50 7,792 15,584 31,167 38,959
60 1,995 3,991 7,981 9,976
Percent Add-On For Retirement

6. Distribution Performance ProjectExhibit 9
Determining The REAL Profit
For Your Firm
1 Reported Profit 300,000
2 Owners' Compensation--Total 150,000
3 Replacement Compensation 125,000
4 Adjustment to Profit [ 2 - 3 ] 25,000
5 Actual Profit [ 1 + 4 ] 325,000
Distribution Performance ProjectExhibit 10
An Improvement Path
For Profit Margin
0.0
2.0
4.0
6.0
8.0
2018 2019 2020 2021 2022 2023
Year
PBT--%

7. Distribution Performance ProjectExhibit 11
The Five
• Set a realistic profit target
• Understand the factors that drive profit
• Maintain adequate sales force performance
• Drive a significantly higher Gross Profit
• Develop a complete profit plan
Distribution Performance ProjectExhibit 12
The Improvement Model:
A Rack-Suit Plan
Increasing revenue by at least the inflation
rate plus a safety factor of
Force payroll to grow slower than revenue to
create a revenue to payroll wedge of
Increase the gross profit percentage
(not gross profit dollars) by
Decrease the other expense percentage
(not expense dollars) by

8. Distribution Performance ProjectExhibit 13
The Relationship Between An Investment Reduction
And Profit Margin
0.0
2.0
4.0
6.0
8.0
0.0 5.0 10.0 15.0 20.0
Reduction in Accounts Receivable--%
PBT%
Distribution Performance ProjectExhibit 14
The Relationship Between A Revenue Increase
And Profit Margin
0.0
2.0
4.0
6.0
8.0
0.0 5.0 10.0 15.0 20.0 25.0
Revenue Increase--%
PBT--%

9. Distribution Performance ProjectExhibit 15
The Relationship Between An Expense Decrease
And Profit Margin
0.0
2.0
4.0
6.0
8.0
0.0 5.0 10.0 15.0 20.0 25.0
Decrease in Expenses With the Existing Revenue--%
PBT--%
Distribution Performance ProjectExhibit 16
The Relationship Between A Gross Profit Increase
And Profit Margin
0.0
2.0
4.0
6.0
8.0
0.0 5.0 10.0 15.0 20.0 25.0
Increase in Gross Margin Dollars With Existing Revenue--%
PBT--%

10. Distribution Performance ProjectExhibit 17
Implications From Other Industries
Rev. Rev. Oper. Impact
Size Growth GM Exp. DSO on PBT Low Mid High
1 147.5 2.5 6.2 8.7
2 122.2 2.2 5.6 7.8
3 120.5 2.2 5.5 7.7
4 65.6 1.7 4.1 5.8
5 60.9 1.6 4.0 5.6
6 58.7 1.6 4.0 5.6
7 57.9 1.6 3.9 5.5
8 56.1 1.6 3.9 5.5
9 46.3 1.5 3.7 5.1
10 43.5 1.4 3.6 5.0
Resulting PBT
Distribution Performance ProjectExhibit 18
The Gross Profit/Expenses Linkage
0.0
10.0
20.0
30.0
40.0
50.0
0.0 10.0 20.0 30.0 40.0 50.0 60.0
Gross Profit
TotalExpenses

11. Distribution Performance ProjectExhibit 19
Where Do The Payroll Dollars Go?
Percent of Percent
Payroll Category Revenue of Payroll
Officers/Owners 3.3 21.3
Sales/Recruiting 8.0
Accounting/Admin. 1.4 9.0
All Other 2.8 18.1
Total 15.5 100.0
Distribution Performance ProjectExhibit 20
The Range of Performance
Median 25th% 75th%
Base Compensation $60,000 $47,000 $70,000
Bonus/Commission/Incentives 41,000 27,000 78,000
Total Compensation $101,000 $74,000 $148,000
Revenue Generated $1,260,000 $390,000 $2,900,000
Gross Profit Generated $361,000 $132,000 $783,000
Contribution Dollars Generated $260,000 $ 58,000 $635,000
Common Experience
Range of

12. Distribution Performance ProjectExhibit 21
The Variations Within a Single Firm
Dollars Gross Profit Compensation Contribution
Top Salesperson $620,000 $150,000 $450,000
Second Salesperson 457,000 117,000 320,000
Third Salesperson 325,000 106,000 210,000
Percent of Top Salesperson
Top Salesperson 100.0 % 100.0 % 100.0 %
Second Salesperson 73.7 78.5 70.2
Third Salesperson 52.4 71.1 46.0
Ratio of Top Salesperson to This Salesperson
Top Salesperson 1.0 1.0 1.0
Second Salesperson 1.4 1.3 1.4
Third Salesperson 1.9 1.4 2.2
Distribution Performance ProjectExhibit 22
The Ten-Year Trend
In Sales Performance
2007 2017 Percent
Change
Base Compensation $53,000 $60,000 13.2
Bonus/Commission/Incentives 37,000 41,000 10.8
Total Compensation $900,000 $101,000 12.2
Revenue Generated $1,675,000 $1,160,000 -30.7
Gross Profit Generated $430,000 $360,000 -16.2
Contribution Dollars Generated $340,000 $260,000 -23.5

13. Distribution Performance ProjectExhibit 23
It’s Not a PowerPoint Presentation
Without a Pie Chart: 2010
Distribution of Sales People by Gross Margin Generated
(Millions of Dollars)
Under $.5 Million
$.5 to $1.0 Million
Over $1.0 Million
Distribution Performance ProjectExhibit 24
It’s Not a PowerPoint Presentation
Without a Pie Chart: 2017
Distribution of Salespeople
by Gross Profit Generated
(Millions of Dollars)
Under $.5 Million
$.5 to $1.0 Million
Over $1.0 Million

14. Distribution Performance ProjectExhibit 25
Alternative Sales Force
Compensation Systems
Summary
Income Statement Current Normal Draconian
Gross Revenue 1,250,000 1,187,500 1,187,500
Direct Costs 918,750 918,750 918,750
Gross Profit 331,250 268,750 268,750
Commissions 41,000 33,265
Other Var. Exp 21,500 20,425
Fixed Expenses 231,250 231,250 231,250
Total Expenses 293,750 284,939
Net Profit 37,500 37,500
Unnecessary Price Cut
Distribution Performance ProjectExhibit 26
Profit-Based Commission Rates
Price Commission Commission
Cut Dollars Rate
0 41,000 12.4
1 28,715 9.0
2 16,430 5.4
3 4,145 1.4
4 -8,140 -2.9
5 -20,425 -7.6
10 -81,850 -39.7

15. Distribution Performance ProjectExhibit 27
The Mandate For Change
During Each Of The Next Five Years
Gross Revenue 5.0
Gross Profit % 0.8
Revenue to Payroll Gap 1.0
Other Expense % -0.1
Distribution Performance ProjectExhibit 28
The Impact Of Making
The Mandated Changes
2018 2019 2023
Gross Revenue 10,000,000 10,500,000 12,762,816
Direct Costs 7,350,000 7,633,500 8,870,157
Gross Profit 2,650,000 2,866,500 3,892,659
Payroll and Fringes 1,550,000 1,612,000 1,885,812
All Other Expenses 800,000 829,500 957,211
Total Expenses 2,350,000 2,441,500 2,843,023
Profit Before Taxes 300,000 425,000 1,049,636
Gross Revenue 100.0 100.0 100.0
Direct Costs 73.5 72.7 69.5
Gross Profit 26.5 27.3 30.5
Payroll and Fringes 15.5 15.4 14.8
All Other Expenses 8.0 7.9 7.5
Total Expenses 23.5 23.3 22.3
Profit Before Taxes 3.0 4.0

16. Distribution Performance ProjectExhibit 29
Mountain View’s Planning Process
This Year Next Year
Item Actual Plan
Revenue 10,000,000
Direct Costs 7,350,000
Gross Profit 2,650,000
Payroll & Fringes 1,550,000
All Other Expenses 800,000
Total Expenses 2,350,000
Profit Before Taxes 300,000
Distribution Performance ProjectExhibit 30
The Conceptual Planning Process
•
• Forecast Revenue
• Nudging Gross Profit
• Calculating Expenses

17. Distribution Performance ProjectExhibit 31
Step One:
Setting A Profit Target
1 Net Profit Before Taxes $ 300,000
2 Gross Revenue $ 10,000,000
3 Return on Revenue [ 1 / 2 ] 3.0 %
4 Improvement in ROR [ 1% to 2% ] %
5 Target Return on Revenue [ 3 + 4 ] %
6 Target Profit [ 2 x 5 ] $
Distribution Performance ProjectExhibit 32
You Can’t Do It This Way
• Planning profit first is the only way to improve results
• The fact that other factors--Revenue, Gross Profit and the like are unknown
is completely immaterial
• The rest of the plan must support the profit results

18. Distribution Performance ProjectExhibit 33
Step Two:
Forecasting Sales
1 Actual Revenue Last Year $ 10,000,000
2 Conservative Increase--% %
3 Conservative Increase--$ [ 1 X 2 ] $
4 Revenue Forecast [ 1 + 3 ] $
Distribution Performance ProjectExhibit 34
Step Three:
Nudging Gross Profit
1 Current Gross Profit--% 26.5 %
2 Nudge Factor 0.5 %
3 Planned Gross Profit--% [ 1 + 2 ] 27.0 %
4 Planned Revenue $ 10,500,000
5 Planned Gross Profit--$ [ 3 X 4 ] $ 2,835,000

19. Distribution Performance ProjectExhibit 35
Step Four:
Planning Expenses
1 Planned Gross Profit $ 2,835,000
2 Planned Profit $ 400,000
3 Planned Expenses [ 1 - 2 ] $ 2,435,000
4 Current Payroll $ 1,550,000
5 Planned Revenue Growth 5.0 %
6 Planed Revenue to Pay Delta 1.0 %
7 Planned Payroll Growth [ 5 - 6 ] 4.0 %
8 Planned Increase in Payroll [ 4 X 7 ] $ 62,000
9 Planned Payroll and Fringes [ 4 + 8 ] $ 1,612,000
10 Planned All Other Expenses [ 3 - 9 ] $ 823,000
Distribution Performance ProjectExhibit 36
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Designed for distributors, but
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20. Distribution Performance ProjectExhibit 37
Summary And Conclusions
A realistic profit goal is a 8.0% ROR,
but probably over a five-year period
Distribution Performance ProjectExhibit 38
Al Bates? I Thought He Was Dead
Dr. Albert Bates is founder and Principal of the Distribution Performance
Project, a research and education entity focusing exclusively on distribution.
He makes approximately 100 presentations each year on topics such as
Improving the Bottom Line, Doing More With Less and Pricing for Profit. He
also heads the firm’s investigation into profitability research for over fifty
different trade associations.
Al received his doctorate from Indiana University. He is married and has three
daughters. All four of the ladies in his life have black belts in Tae Kwon Do,
so don’t criticize his presentation too much.