Start, Build, and Scale a Consulting Firm
In general, there are two types of consulting firms: implementation or strategy focused. This article is based on my experience moving from purely the former to a mix of the two. Bonafero began by purely delivering great software, but as the firm grew we were brought in to define and deliver on technology strategy for progressively larger organizations.
It’s going to be all about cash. More to the point, cash flow management — the most critical lesson you will learn is the instability of the deal funnel.
The type of firm we’re discussing here is not a one-person practice, the idea is to scale the team proportionally to the amount of work. The founder of the practice becomes the bread winner for the rest of the team.
- The first priority is to start with a cash cushion. 100k is a good starting point. This is your insurance policy. Do not touch this cash.
- The second priority is to land a contract which will take 3 engineers 6 months to build.
Point two is in general the more challenging aspect, but if you can commit to a longer term contract having hired a few people you will set yourself up better for success. Hire all your people, and get to work.
One third of your day will be spent on existing clients and work. One third will be spent on retaining and hiring the best people. One half will be spent lining up new engagements.
The keen reader will notice I’ve made a mistake in adding up my fractions, but it’s a deliberate attempt to draw attention to the fact that:
- The 40 hour work week will be a pipe dream.
- Always be creating opportunities for new business, and subsequently closing that business.
Alright, we’re one year in. With any luck, we’ve managed to grow our team with great people, we’ve made our clients supremely happy, and we’ve got more business in the pipeline than we know what to do with.
Don’t plateau. Welcome to year two.
We’re not in this to build a lifestyle business. If that is your goal, please congratulate yourself and take a well deserved vacation.
What follows is a critical phase in market strategy and brand development.
- Reflect over the previous year in business. Are there any projects that required a steep learning curve from yourself or your team? Did you provide significant value aside from developing and delivering software? With these questions, begin to formulate a strategy for differentiating yourself from a run of the mill dev shop.
- Work on your brand. Thought leadership is more than a buzzword of late, develop materials which present your firm as a leader in the space and solidify your image as a source of knowledge.
Raise your rates. You’ll notice temporarily that engagements at the top of your funnel are mostly cut out, but work that makes it through is of high quality and desirable.
As the size, depth, and scope of your engagements increases, you will find that certain clients set their own parameters. Yes, you are now a serious contender in the space, but a microscopic organism in the scope of an engagement with The Enterprise. The Enterprise (“Bank”, “Insurance Company”, “Large Retailer”) will be imposing their terms on you.
The Enterprise is not interested in making sure your employees get paid on time, they’re interested in formulaic enrolment in their vendor management platform. Aggressive payment terms (Net-30, Net-60), coupled with a long sales cycle will lead you to bleed cash between pay days. This is where your cash cushion comes in handy; make sure your banker is your best friend in the undesirable case that you may need a line of credit. Over the past year you’ve learned that this business is about relationships, do not neglect your own vendors.
Strategy, strategy, strategy
Set goals. Do not presume that a goal is the same as a strategy, e.x.:
- 20% MoM increase in sales volume is a goal.
- We will build relationships with SMBs in the automotive sector by attending trade shows and providing value by scheduling a one hour consultation is a strategy.
The second point may or may not be a winning strategy, but it is a strategy nonetheless.
Develop strategies to achieve goals. Pay attention to your client base and their shifting needs in order to identify new market opportunities. Retain all your clients by creating more value. Don’t sell snake oil (perceived value: blue sky strategy sessions), but remind them of the ROI your firm has provided, and new, useful services you are able to provide.
Seek to cut cost and eliminate wasteful spending (those are not the same). Do not, in fervour of eliminating cost, compromise on employee on happiness; at this stage in your business a refrigerator chock full of buddha coconut water is not frivolous if it may help to maintain morale. Be strategic.
We’ve got a good thing going now. We have name recognition. We have prestige, constructed with care through well curated white papers and happy clients. What we don’t have, most likely, is exponential growth.
Don’t blame yourself entirely, the nature of a professional services firm is rife with factors that limit easy scale. An option to consider at this point is extra spend on incubating your own products and ideas, or creating an accelerator program for startups.
The advantages are two-fold; inherently there is no value in a consulting firm aside from the client roster and employees, you will create long-term value in equity and with your knowledge and connections you may be able to hit that exponential growth after all.
This is a waiting game; a slow grind. It takes years to develop name recognition, trust, and vision. I wish you the best of luck and the best of clients. Measure risk carefully, and don’t touch that pile of cash.