Navigating the treacherous financial waters of IT consulting

There are two things that can make the life of an IT consultant unbearable: money and customers. Actually, the real challenge is separating your customers from their money, because the last thing you want to do is work hard and not get paid.

Getting paid on time (or at all) takes special skills that go beyond the typical skillset of the geek. That’s why so many IT consulting businesses fail, for despite the breadth and depth of technical skills you might have, you also need some basic accounting skills and customer relationship skills if you want to succeed in the cutthroat world of consulting. Fortunately, what you need most of all are simply guts and common sense — the brains to know when you’re getting scammed, and the guts to keep asking until you get what you deserve.

To learn more about this subject I recently had a conversation with Andrew Baker, an experienced consultant who is the president of BrainWave Consulting, a company that provides Virtual CIO services for small- and medium-sized businesses. Below are seven tips from Andrew that can help you successfully navigate the financial challenges of IT consulting.

Set financial expectations early on

As with most business ventures, starting off on the right foot is essential. That’s why Andrew recommends you communicate your remuneration expectations right from the beginning, and that you do so in a way that money starts flowing in before the project gets far advanced.

“It can be very tempting when starting out, or when trying to secure a new customer, to ignore the details about how and when payments will occur,” Andrew says. “This is being penny wise (if that) and pound foolish. You should take the opportunity to be clear about your rates with customers and prospective customers. When starting a new project or engagement, especially when you do not have any background with the customer in question, don’t go for flat-project costs. Instead, start with your hourly rate and set an early checkpoint — maybe a couple weeks or a month — to solidify the long-term project cost.”

Avoid flat rates in most cases

While customers may prefer a flat rate for an IT project because it establishes a ceiling they can chisel into stone in their operating budget, offering a flat rate for your work can easily backfire. Andrew suggests that you “really only want to head into the land of flat project costs when you have a very clear picture of at least 80-90 percent of the project.” Along with this he also recommends that you “be very clear about what milestones are required for payment, and for moving forward with the project.” In other words, it should be clearly written into the work-for-hire contract for the project that payments must be issued at agreed upon milestones and that the project cannot proceed further if those payments are not received.

Get paid for your planning work, too

PlanSometimes a potential customer wants to have a detailed project plan in writing before they are willing to sign a contract and hand you the keys. Let’s say you agree and spend a dozen hours putting together a detailed step-by-step implementation plan for the customer. You present your plan to the customer and wait to hear from them. A week later they inform you they’ve decided to go with a competitor instead of your own consulting company. You’ve just spent a dozen hours working on something but won’t get paid a penny for your effort. In fact, you may just have saved your competitor a dozen hours of project planning! The end result is that you end up being angry at the customer, but you’re probably even more angry at yourself. Is there a way to avoid such a situation from happening? Andrew thinks there is.

“I once had a prospective customer who wanted to perform a pretty intensive overhaul of their enterprise resource management process, which was very manual at the time. They wanted to implement some pretty extensive software across their office and field agents. Initially, I put together a timeline for them and a project overview, but because they had encountered previous negative experiences from other vendors, they wanted me to put together a detailed project plan before they would agree on whether or not to move forward.

“Realizing that this would be a significant investment of time and energy for me, without any reasonable guarantee of getting the final work, I instead proposed the following: First, the prospect would pay me upfront to conduct a product analysis and provide a very detailed project plan in 30 days, at which time they could use anyone they wanted to implement the services. And second, if they decided to use my firm to implement the services, I would deduct the cost of the project plan from the overall proposal.

The result, Andrew says, is that they agreed to this and paid him immediately for the deliverable. “I provided them the deliverable on time, after which we had a couple of high-level conference calls to discuss next steps. Although they indicated their satisfaction with the proposal and expressed a willingness to proceed, some internal issues caused them to postpone the project. But I did get paid for the pretty sizable investment of time I had already put into the endeavor, so I had no qualms about the project not going further.”

Putting together your bid

A key step in the consulting process is making a bid for work you want to take on for a potential customer. While being a poker player might help in this regard, there are some other dimensions that Andrew clued me in on. For example, Andrew suggests, “When pursing a bid, make sure to include travel expenses. You will regret it every single time you forget this.” And remember, life is too short to allow yourself to have regrets.

Setting a bottom line is another key element in successful bid-making. “When putting together a bid, know what your absolute breakeven number is, and never, ever go below it — ever. Very few things are more miserable than a consultant on a multi-month project who knows that he or she is essentially paying the customer to work for them.”

When to offer a discount

DiscountsWhile you should (and must) always watch your bottom line so you’re making money, there are times when it can be best to show some degree of flexibility on the financial side of things. The key is, you’ve got to be shrewd about how you do this. For example, Andrew says, “Once you’ve set your rate for a service, never lower that rate. At best, you can offer a discount or introductory pricing on that rate. It is much easier to revert back to your normal pricing from the introductory pricing than it is to raise your rate.”

Don’t treat all customers the same

A friend of mine who used to be a small-business IT consultant once told me that one of the keys to his success was that he would periodically determine who was his worst customer and then fire that customer. Not all of us have the mindset to do this sort of thing however, but there is another approach you can take: offer different service tiers to different customers. Andrew shared his own experience on how he learned the importance of this.

“When I was starting out just doing computer installations for home users and home-office users, I had a very detailed and elaborate configuration process that I used to provide my customers. I felt very proud of it, and it looked pristine for all of about 30 minutes after I turned it over to the customer. But, it took me about two to three hours of setup time — time that I could not legitimately charge the customer for. So, all I was doing was damaging my own hourly rate.

“I soon learned to do good work, fast work, that allowed me to set up a robust system in an hour, which better synchronized the balance between the quality I delivered and the amount that I could afford to charge the customer. And for those that desired it, I offered another tier. This was so much better for all concerned, and I was able to service more customers on a weekly basis.

“So I learned that if you are the type of person who gives 110 percent and has great attention to detail, you will be tempted to provide white glove service to every customer every single time. You will soon learn, however, that there is a reason why tiered service levels exist.”

What to do with the customer who won’t pay

Finally, any of us who have done any kind of IT consulting or offered services of any type to customers will have had at least one experience (and probably more) of the customer who just won’t pay for services rendered. Andrew’s final piece of advice is cautionary. “If you find a customer who won’t pay, you have a number of decisions to make, but whatever you do, do not sacrifice your integrity. Don’t hold customer data hostage, or sabotage customer environments, etc. If the customer has a legitimate financial issue, try to work with them. If they are shady, then cut them loose as soon as you can and move on. And take some time to review those warning signs that you overlooked when pursuing this customer — they were there.”

What could be some warning signs that a customer might not pay your bill? I asked Andrew this and he responded by giving me a list of warning signs he has  seen that made him question the ethics of a customer as it pertains to a willingness to pay promptly and fairly:

  • They are clearly using unlicensed software, or talk openly of getting software costs down through alternative acquisition options.
  • They want you to jump in and take a look at the problem they are having (almost always break/fix work), but they don’t discuss anything pertaining to rate, payment options, or payment timing.
  • Even in an emergency situation, where business is impacted (for example, malware outbreak), they’re complaining/haggling over your rate.
  • They agree to your rate without any issue, but either complain one month because “I didn’t realize you were going to bill for that time” or you don’t get the payment when expected, and they tell you that the payroll/accounting person is “out for a few days.”
  • They change the scope of a project, which you indicate will change the costs of the project, but then they only pay for the original costs at the end.
  • They are unwilling to pay any upfront costs for a major project or for equipment in a large systems/networking deployment. This might be expected when dealing with a larger organization with a heavy culture of processes and procedures, but when you see it in a smaller, less organized firm, it is a potential warning sign.

My final word of advice to IT consultants is this: ignore those warning signs at your own peril.

Photo credit: FreeRange Stock

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