by Wayne Shulz
The consulting climate has changed drastically since the hype and over-selling of 2000. This is now a mature business that sees fewer new client inquiries each year. And the few good prospects almost always can select from multiple value-added resellers for the same product.
How can you change your consulting practice to increase its value? The answer is to build recurring revenues.
Experienced marketers in other industries also refer to this as the back end - or, in other words, the amount of value that a client can be expected to generate once the initial sale is made. This is the ability to make the client return consistently to make follow-up purchases.
In consulting, there are really only three ways that you’ll increase your revenues: sell more, increase the size of the purchase or increase the number of times an existing client returns to purchase.
New client sales are absolutely needed for growth; after all, they provide the fuel for back-end (recurring revenue) growth. However, I’ve seen many consulting firms ignore the huge profits that can be had from following a few simple principles on all new clients.
● Rule 1 - All new clients must be on a phone support plan. No exceptions. Your firm cannot bill hourly for telephone support. If you have not been including an unlimited phone support plan in your proposals then you are passing up a gold mine of revenues. Rarely if ever are phone support plans questioned by new accounting software purchasers.
The accounting software vendors are now requiring product support plans with all software purchases. Clients are used to this method of billing. The consulting model needs to follow the path blazed by the software companies. Don’t give the new clients an option to pay hourly.
● Rule 2 - Any orphans or clients who you did not sell the original software to must join the phone support plan if they want assistance with their software. No exceptions.
● Rule 3 - By far the toughest people to convince to join a software support plan are your existing clients. They already know the number of hours that they pay you annually for phone calls. The only way that I’ve found to approach this problem is to offer two options. Clients can either go on an unlimited phone support plan or be treated as a legacy client (meaning we sold them software before we required phone support plans) where we allow a per-incident fee.
The software companies have all done a great job of turning their customers into recurring revenue streams. They have largely succeeded by offering no other way to do business with them other than through an annual maintenance fee. If your firm hasn’t already caught onto this policy, strongly consider implementing it for all new engagements and watch the value of your practice grow alongside your yearly cash flow.
How to get an additional $12,000 per client
Here’s a special edition news alert: Sell the support plan and service it yourself and collect 100 percent of the revenues! How satisfying is it to sell another support plan to collect a relative paltry 10 percent to 20 percent commission?
Let’s assume that you charge $3,000 per year for unlimited phone support and the average life of a client is five years. That’s a total of $15,000 additional revenue - versus the $1,500 that a 10 percent commission would generate! Multiply that additional revenue by 30, 40 or 50 clients and the numbers really add up. And this conservatively estimates the life of a client at five years. Many clients will be using the software for 10 or more years.
Assuming that consultants are all in business to grow their organization with an eye toward eventually selling it for as much cash as possible - without a recurring stream of revenue, your consulting practice might be one of the least desirable assets that you own.
Which practice would you rather purchase?
● Consulting Practice 1 - It has 250 clients and none are on any type of prepaid support or consulting agreement. The staff is generally kept busy by ongoing emergencies and upgrades for good clients. The 80/20 rule is in force here as in any other business and 20 percent of the client base generates almost all of the revenues.
Note: You earn extra credit if you mention that the 250 clients generate additional fees in the form of vendor commissions for maintenance and other ancillary services. Relying on a steady commission stream from the software vendors is not a fantastic business plan since software publishers are under intense pressure to increase profitability - and slicing VAR commission/margins is easily accomplished, and there is nothing the average VAR can do to fight it.
● Consulting Practice 2 - It has 100 clients, 75 of whom pay the consulting firm $3,000 per year for unlimited telephone support. The remaining clients fall into the 80/20 rule, as well.
Now which business is worth more? As a buyer are you more excited about paying cash to an owner and taking over the existing client base?
Granted both firms have value. However, most purchasers will want the owner of Practice 1 to stick around for a much longer period of time and will only agree to make payments based on a percentage of revenues collected. This is a surefire way to guarantee that you are going to have a working retirement.
Wouldn’t you rather own Practice 2, with a stable number of clients paying a fixed fee per year? The buyers of Practice 2 are going to want some assurance that the clients will stick around - though they’ll be much more eager to value this practice more highly than one with no recurring revenue.
Regardless of plans to sell your practice, recurring revenue is more critical simply because the consulting business is changing permanently. Over the coming years, we’ll likely see the continuation of one or more of the following trends:
1. Basic general ledger, accounts payable and receivable single users of systems like Great Plains, Solomon, MAS 90, Accpac or Navision will largely downgrade to lower-end software packages. Those clients will be gone forever as they walk away from expensive ongoing software maintenance and features they no longer use.
2. Microsoft’s channel marketing has the potential to prompt an unbelievable number of its resellers to flee and resell other software systems.
3. Business from quality “orphan” software end users, who lose or fire their resellers, will slow to a trickle. Many of the current orphans are products of bad software fits and are increasingly impossible to turn around.
4. These days, custom software is less of a dirty word when prospects who thumbed their noses at industry-specific software in favor of off-the-shelf offerings are willing to consider either industry-specific or relatively new solutions that fit their needs.
5. Fewer companies switch software - those that are on less-than-perfect systems make do with what they have.
6. Software companies will continue to market aggressively into the installed customer base, attempting to cross-sell solutions that some resellers may not represent.
7. Absent a requirement for electronic data interchange or electronic commerce integration, most companies have no driving need for a brand-new software package.
Given these assumptions, it makes a great deal of sense to capitalize on your most loyal source of business - your existing client base. The most important thing you can do to increase your revenues - and to increase the value of your practice - is to make certain that you have a healthy recurring revenue base. For consulting firms, the most significant source of recurring revenue is an annual prepaid telephone support plan.
