Tim Yoder
Founding Partner, Solution Source
The X-Factor B2B Relationship
What is the X-Factor Business Relationship? The X-Factor Business Relationship is one based on symbiosis, where both companies benefit from a long-term, continuously engaged business relationship that facilitates strategic growth and is beneficial to everyone involved. These relationships are not easy to find, but every company that is in one instinctively knows the benefits and feels some sense of pride in the mutual success they share. If the X-Factor B2B relationship is so beneficial, why doesn’t every company actively seek them out?
At Solution Source, we have asked ourselves this question many times when we see potential X-Factor partners, who are not in the software business, hire people in-house to develop and support business software. I am the founding partner of Solution Source, a business software consulting firm and NetSuite ERP Value Added Reseller and solution developer. Solution Source has been in the software consulting business since 1993, and we are the second-oldest NetSuite partner in the world. Our entire business model is built around finding and cultivating X-Factor relationships with companies we identify as X-Factor Clients.
Should a company make the decision to hire their own in-house employee to work on development and support of ERP software versus seeking an X-Factor B2B relationship with a Value Added Reseller(VAR) or consulting firm with trained experts? The answer to this question is as varied as the companies that are making the decision. Core competency of the business and value associated with the X-Factor relationship are the keys to this answer.
Core Competency…Strategic Advantage
Many entrepreneurs and C-suite executives are generally strong leaders and natural problem solvers. When faced with a business problem, often their first response is to look to their own strengths or internal expertise in crafting a solution. However, if everything can be done successfully in-house, why do some of the best and most profitable businesses choose to outsource parts of their supply chain or manufacturing functions?
Core competency should be the number one factor in deciding whether to have a function in-house versus outsourcing. Core competencies are the resources and capabilities that comprise the strategic advantages of the business. The bottom line goal of every company is to generate revenue and ultimately profit from the sale of products or services. The most successful companies maximize internal core competencies to increase competitive advantage and brand recognition in their industry. But what if a competency is strategic but not core to the main focus of the business? The most successful companies understand the value behind building strong X-Factor business partnerships that leverage the core competencies of strategic vendors who can contribute to their competitive advantage. Most entrepreneurs and C-suite executives today understand that business software is definitely a strategic investment.
The first decision point should be: Is software development and support a core competency to the business or is there an X-Factor partner who can do it better because it is the core competency of their business?
Highly Specialized Skills, Equipment & Facilities
Many core competencies require some combination of specialized skill, training, equipment, and facilities. All of these things are expensive. But if they are core to production of the product or service that define a business’s competitive advantage, then the cost can be justified. Better yet, if these competencies can be implemented in a way that creates economy of scale, then the business is maximizing both effectiveness and efficiency which has direct impact on the financial bottom line. For many manufactures, painting or powder coating elements of their product is an example of a competency that is strategic but not core to their business. The paint or powder coat process requires all of the specialized items identified above. As a result, it is often more cost effective to hire a vendor that does painting or powder coating as their core competency.
Information technology and especially business software development and support is also one of these highly specialized disciplines. Companies who are not in the software business, should strongly consider if they truly want to get into the software business. In most cases, a better alternative is building an X-Factor relationship with a company whose business is built around the core competencies required to be financially successful in software development and support. Software development is a technical skill that requires a specialized education and continued training to remain current and productive. Specialized computer equipment and software development licenses are required, as well as facilities that promote a productive work environment. Highly-specialized fields benefit from peer interaction and group problem-solving, so teams of programmers and technical support staff working together is the best way to create economies of scale. This same team approach mitigates risk related to isolation of technical knowledge in one person.
The second decision point becomes: Is the company prepared to make the investment required to run an in-house software development business? If the company is large enough and the software is strategic and a core competency, the answer may be yes. However, for most companies who practice due diligence, the investment in an X-Factor B2B relationship is a much better strategic decision.
Employee True Cost
Understanding the true cost of hiring a full-time technical software specialist is very important. An article by Joe Hadzima, Senior Lecturer, MIT Sloan School of Management, offers some great insights into estimating the true costs of an employee. In the article, Joe identifies what people forget when they just use the base salary to figure employee cost to the company. The first step is to add employment taxes and benefits to the base salary which generally is done by computing a range of 1.25 to 1.4 times the base salary. The second step is to consider office space, furniture and equipment costs. The article does not cover costs related to continuing education and software development licenses, but for a technical hire these should be included. The article gives an example of an engineering services company that computes employee costs at 2.7 times base salary. If one uses a more conservative model, like the range 1.3 to 1.75, a company hiring a full-time Software specialist for a base salary of $120,000.00 per year will end up with total employee costs of between $156,000 and $210,000. Having only one technical expert increases risk, in that all the knowledge is contained in a single employee. To mitigate risk and create economy of scale, like a software company must do, additional technical staff will be required. Now the company is truly investing in running a software business alongside the primary business.
In conclusion, the decision to hire in-house ERP software specialists and developers versus engaging in an X-Factor B2B partnership with a Value Added Reseller(VAR) or consulting firm should be given careful consideration. Core competency, strategic advantage, economy of scale, risk, and true costs all play vital roles in the final decision.
At Solution Source, we have over 30 X-Factor clients and have strategic business plans to double that in the next 5 years. If X-Factor B2B relationships are strategic to your business model, we would enjoy engaging with your company.
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