Don Xml's Grok This

Since I publicly advertised that I am looking for some more consulting work I’ve been approached by a couple people about starting up (or joining) an new IT consulting firm.  For those of you that don’t know my background, I’ve been an independent consultant for almost all of my career (over 12 years as an independent).  During that time I tried my hand at starting up a boutique consulting business.  In the end the money I made was pretty good, but not enough to stop consulting all together, and I also noticed that I actually loved consulting.  Combine that with the fact that I hated trying to run a business (bookkeeping, stressing over making sure I had enough work for my consultants), and it was pretty easy to deduce that staying an indie was the thing to do.

That isn’t to say that I don’t think this is the wrong time to start up a new IT consulting firm.  With the demise of so many firms during the dot com bust, there is very little competition, and the market has been picking up steadily over the last year.  So if you wanted to start a firm, this is probably the best time to do it.  On the surface, joining up with a couple of your friends that are well known bloggers and MVPs might seem the right thing to do, but here are some random things that I’ve learned over the years about the IT consulting business.

• Friends do not make good business partners.  Just because you know each other and get along, doesn’t mean that you will under the stress of running a business.
• It takes a lot of money to run a consulting business, even if you only use consultants that work as 1099 (i.e have their own firms or use pass-thru companies).  What kills you is what I call “the float” or the money you have to pay out to your consultants before you get paid by the client.  Most consultants want to get paid within 30 days of submitting the invoice to you.  Most big firms have a 60 to 90 day period.  That means that even if you turned around and invoiced a customer as soon as you get your consultant’s invoice, you will be floating one to two months of the consultant’s rate.  You only get back the float once the consultant comes off assignment (which isn’t not something you usually want to happen).
• Seasoned consultants know the going billing rates and know what is acceptable for a firm’s cut.  Anyone that has been around this business knows what is going on.  The firm’s job is to find the work, and for that, they take a cut of the rate.  The consultant will always find out what the firm’s rate is (and a lot of firms try to hide it anyway).  A consultant on a 1099 will accept a 20% fee (given that the customer pays within 45 days).  If they want to reduce the firms cut, they may offer to wait until the firm gets paid by the customer (to eliminate the float). 
• The greater the firm’s overhead, the more their cut needs to be increased, and the less likely that you are going to get the best consultants.  So a firm needs to stay very lean in order to get the best consultants.  The leanest firms are the boutique firms, because they don’t have dedicated sales people, only consultants.
• Most customers prefer to go to “known” firms, but they typically have high overheads, and will not be able to get the best consultants for the same bill rate.
• Working with large companies is a dirty business.  I can’t begin to tell you all of the cases of “kickbacks” going on in the consulting world.  With large corporations, some directors/managers use this method to “supplement” their salaries.  I’m not saying that everyone does it (it is probably a small minority), but you tend to noticed it.  I’ve always wondered why the mob never got involved in IT consulting.  Sometimes it seems right up their alley.
• The recruiting infrastructure has been decimated.  The biggest problem with keeping a consulting firm going now-a-days is finding decent consultants.  Since the bust, the best recruiters left the IT side and are now somewhere else.  Combine that with a glut of below par developers filling up the inboxes of recruiters with resumes that don’t qualify for a position, and it becomes impossible to find developers outside your personal network.
• The same thing hold true for sales people.  The best IT sales people left the industry, along with all their contacts.  If you had a firm and wanted to add to your overhead, finding a good IT sales person is harder than finding good consultants.
• The pressure to grow.  If you have a successful boutique consulting firm, at some point you are going to want to grow bigger.  To grow bigger, you have to add overhead (sales people, recruiters, etc.).  If you add overhead, then you have to up your cut (your percentage of the rate), which makes it hard to get good, experienced consultants.  At this point you have to transform your business model from a boutique firm to a normal “meat market” churning out consultants.  Is this really what you wanted when you started this business?
  

I’ve got a lot more to add, but this is a good start.  If you have any other nuggets you want to add, feel free to add them as comments.