Quartile Management, where are you?

Quartile Management, where are you?

In a previous blog we introduced the Revenue Rocket Growth Principle, which we define as the optimal, sustainable growth rate for IT services firms. This principle postulates that a company’s top-line, year-over-year (YOY) growth rate as a percentage — plus Net Income as a percentage of revenue — should not exceed 45 percent if a firm wants to grow profitably. The ideal mix of the two components of this principle works out to be a 30 percent YOY top-line growth, and a 15 percent net income growth, thus equaling the 45 percent number.

So, with 45% as the limit, the ideal, we looked at a number of firms and plotted their growth rate as they fall within four quartiles. What we found was that entry into the top quartile starts at a growth rate of 32.5%, the second quartile starts at about 15.0%, beneath that the third quartile starts at 7.5%, and the bottom quartile starts at 0%. We didn’t factor in companies not growing at all.

It’s been our experience that firms that outrun this 45 percent target are likely not growing profitably. They’re probably borrowing from the past with accumulated cash on their balance sheet, or they’re stealing from the future, sourcing funds from a credit facility or an investor. Firms that are mired in the lower quartiles are there because they are not running their business as efficiently as they can. Maybe they don’t have a plan, or they are not sufficiently specialized, or their sales and marketing apparatus is wanting, or they don’t have a PSA tool that helps them manage utilization efficiencies, or, or, you get the picture.

We use this Growth Principle as a metric to help clients determine where they are relative to the market and as a starting point from which to begin digging into the factors that may be keeping them from moving further up the quartiles. All of which begs the question. Where are you and what’s stopping you from getting there?