Professional Services – The first few stages of growth…

I was on a panel last night at a MoDevDC event (this Meetup is a group of amazing DC Metro entrepreneurs focused on the mobile applications space).  Many of the people in the audience were either on contracts as 1099 consultants or they were building mobile applications with the hope of building a sustainable company.   A topic came up during the panel about the different stages of growth an entrepreneur can expect as they grow their business.   I raised the point that the stages of growth are different for a services business than they are for a software business.  I also raised the point that running a company with both product and services can be complex as well.

There is a ton out there on the stages of growth a product entrepreneur goes through—just read one of the following and you will find all you will need:

• http://bhorowitz.com

• http://blog.pmarca.com

• http://www.avc.com

• http://www.paulgraham.com/articles.html

If you are building a Product + Services company there is also a great book by the 37 Signals team called “Rework”.  However, if you are a one person shop and thinking about building a professional services technology consulting business I found that there is very little for a startup founder to read so I thought I would detail just a few thoughts below from the panel discussion on those stages.  Hopefully we can build on this as time goes on…

So here goes…

The Indie Stage…
You are en extremely talented programmer… company’s hire you on a 1099 basis to get the job done in a high quality way…   they pay you a high rate for your talents… you are a mercenary of sorts.

Your income could be in the range of $150k to $200 US depending on your rate and the number of hours you work (your utilization).  For example, if you bill $125 an hour and work the standard 1410 hours per year you can make ~$176,250 a year before taxes.  Not bad.  (Calculated as: 260 work days (52 weeks in a year * 5), minus 10 days unpaid vacation, 5 unpaid sick days and 10 unpaid holidays that leaves roughly 235 maximum billable days and hopefully you will never be under 75% utilized for a minimum of 176.25 billable days or 1410 billable hours.  At an average bill rate of $125 per hour one person is $176,250 in revenue.)

Your overhead is also minimal.   Get an LLC or S-Corp setup– Use a company like Legal Zoom to easily set it all up for a low cost…. Open a company bank account (Ensure they do ACH transactions)–  PNC has a great program for small businesses however a local bank may be a better choice once you start needing a line of credit.   Get your own domain and invest your time in free tools such as Google Apps

The dip your toe in stage…
The next stage many Indie services professionals go through is expanding their current contracts by hiring other 1099’s for $75/hr and billing them out at $125+/hr.

• Income

You: ~$176,250
Adding additional people to projects:

revenue  =  $176,250

cost at $75/hr * 1410 hours/yr = $105,750

Net $70,500 per

• Overhead (Your goal at this stage is to keep overhead as low as possible and work out of your homes and coffee shops)

Trademark the company name
Start investing in tools such as Basecamp
Get a good part time Quickbooks accountant ($500/month)
Invest in a SaaS Time Keeping system that integrates into Quickbooks
Get a good lawyer with standard professional services contracts
Allocate some weekend time to:

Build your bid / scoping methodology

Understanding the P&L – Score.org and SBA.gov are great resources

Building some marketing decks & PDFs that outline your company’s capabilities, case studies and differentiators

MAKE YOUR CUSTOMERS HAPPY!

The Management & Overhead Stage (A giant leap of faith)
So you worked your tail off and billed 100% of your time last year while still somehow hiring  5 1099’s and put $250,000+ ($70,500*5 minus taxes and hiccups) in the bank and you want to use that to scale.   This will by far be one of the hardest stages to get your new company through… It’s called the “Management” Stage because most of your work will require a lot of YOUR great managerial skills and a little leadership.    It’s call the “Overhead” Stage because this is the stage where you will have to invest money to make money—as well as take on personal risk (Line of Credit).

• Obviously this is a stage where Profit and Loss management are key….   Get to know the “70, 20, 10 Rule”.  Your P&L should always balance out to a 70% maximum Cost of Goods Sold, a 20% maximum overhead and a 10% minimum profitability.

• This is the stage when you go from billing yourself out to managing a team full time (you are overhead!)

• This is the stage where you can begin to craft the company’s values (hint: Integrity must be at the top for a professional services firm—it better be true or you are in the wrong business).  You should also take a stab at a company Vision, Mission, Goals, and Objectives & Strategy.

• This is the stage where you turn your 1099’s into W2s… (There are laws)

• At this stage YOU are the sales person.   This is the stage where you have to determine what type of customer you want—not all customers are good customers… What size of deal is sustainable?  What is a good project?   It can’t cost you three months of sales calls and a week’s worth of someone’s time writing an RFP response to get a $25k gig.

• This is the stage where YOU have to build out and document all of your companies Quality Assurance, Design, Project Management processes and methodologies—Why? –because you will be producing a low grade product inefficiently without them, and your customers are going to ask to see them…

• Income

10 people is $1,762,500 in revenue

260 work days (52 weeks in a year * 5)
Minus 10 days paid vacation
Minus 5 sick days
Minus 10 federal holidays

235 billable days at 75% utilization = 176.25 billable days or 1410 billable hours
At an average bill rate of $125 per hour one person is $176,250 in revenue

Cost of Goods (62.4%)

$1,100,000 – Your consultants probably get paid roughly $110,000 per year
Overhead ($400,800 or 22.7%)
$176,250 – You
$    2,000 – Insurance (Workman’s comp, Liability, Errors and Emissions)
$ 39,600 – Benefits ($300 per employee per month)

Consider starting a relationship with a PEO (Administaff or Trinet)

$  6,000 – Tools: Email, Highrise CRM, Unfuddle ($500/month all up)
$ 12,000 – Marketing ($1,000 per month)
$ 12,000 – Computers for your staff (12 * $1000 = $12,000 or ~$1,100 per month on a lease)
$  5,000 – Line of credit ($5,000 enrollment fees and a lot of personal liability)
$ 88,000- Payroll Expenses (Salary * .08)
$ 60,000 – Rent

Net: $261,650 (14.8%) — Wow, not much better than last year and it was a great deal harder… but this year is going to allow you to successfully scale for many years to come…

Grow the contracts… Grow the people… Increase the bank account… Increase your Line of Credit…  MAKE YOUR CUSTOMERS HAPPY!

The Stable Growth “Leadership” Stage

This is the stage where your revenues and net income allow you to invest in more overhead.   You begin to fill out an organization structure.   This stage is referred to as the “Leadership” stage because you will have to grow leaders that you empower to run major portions of your company.
This is the stage where you begin to offer “solutions” with prebuilt intellectual property (IP) so make sure you write your contracts in a way that you at minimum ‘share’ ownership in the IP.
I cannot write much more about this stage and those beyond that has not already been well documented in detail by David in the book at this link http://davidmaister.com/books.mtpsf/ .