Does Your Business Model Make Sense?By Theresa Lina Stevens | Posted 2004-01-28 Email Print
How to bid projects on a fixed-price basis, build in enough cushion to cover risks, and know in advance you'll make plenty of money.
While I toiled away in my twenties for a large, prestigious consulting firm, one of my friends had a carpentry and renovation business. Ironically, our businesses had a lot of parallels (e.g., both were essentially project-based professional services companies). But to my fascination, his followed a very different and much more profitable model.
My company's model was time and materials. This put a ceiling on how much the company could make without hiring more people. Multiply the number of consultants by the number of hours we could work by the billing rate, and that was the maximum revenue potential for the year. Revenue growth was limited to the company's ability to charge more per hour or hire and sell more bodies. Margin growth was limited to their ability to raise my hourly rate relative to my effective hourly pay or reduce the costs associated with delivering services and managing the business.
On top of that, we would go in and do whatever the client asked us to do. We were always climbing a learning curve, whether it was related to the client's industry, the client's processes or the specific type of project. This took time, cost either the client or the company money, and slowed things down. Naturally, it also limited our revenue potential. Basically, we were a glorified temp agency.
Meanwhile, my friend had a bunch of different ways in which he could make money, increase margins and grow the business. (Put on your lateral thinking cap, and you'll see how you can borrow from his playbook.) The key to it was that he only went after certain types of projects. They were projects he had done enough times in enough different situations to know roughly how long it would take him and what variables could affect the schedule and his costs. There was no learning curve, he could get them done quickly, and he could quote a competitive yet profitable price.
But it gets better.
Becoming the go-to guy
Because he knew these types of projects like the back of his hand and had seen it all, he was able to systematize his approach and teach most of the techniques to less skilled, less expensive laborers. This enabled him to keep several of these jobs going at once, each involving only a fraction of his time. The specialized expertise enabled him to adhere to a very high standard of quality, so he kept all of his customers happy.Of course, this made him the go-to guy, which led to referrals for similar projects. His reputation was so strong that people sought him out, he rarely had to offer a competitive bid, and his cost of sales per new customer was almost zero.
He also had all of the right tools needed to be as efficient as possible, so it took him about half the time as someone less experienced with that type of project. He had used the tools on so many projects that their cost-per-project went down with each new job, effectively raising his margins as he went along.
As a result of all of these factors, he could bid projects on a fixed-price basis, build in enough cushion to cover his risks, and know in advance that he would make plenty of money while giving the customer a fair price. Generalists didn't stand a chance against him; as a specialist, he commanded higher fees and had lower cost of delivery.
Doubling the value of value-add
He also doubled as a value-added reseller, earning a commission on his sales -- He would provide the materials for the job, get them at wholesale prices and charge the customer a fair retail price for his trouble. The repeatable nature of his work kept his costs low. As a repeat, high-volume customer, his suppliers gave him priority status and lower prices.
The best part is that his business was fairly predictable in terms of both revenues and costs. In addition to a strong stream of referrals, he had a few long-term contracts that paid him a monthly fee to provide ongoing maintenance and management services. By the end of a given year, at least half of the following year's revenues were already in the bag.
This is only part of the story, but I think you get the drift. Even as a fresh-faced kid, I could see that the contractor with the high-school diploma was obviously a much shrewder businessman than the Ivy-League MBAs running my company. He was also wealthier and didn't work nearly as hard.
Naturally, there isn't much of what I've mentioned that is rocket science. In fact, it's total common sense. But how many companies in this industry still operate on a time and materials model? A lot.
If you still charge by the hour and don't have a game plan for how to migrate away from that, get started. Investors hate it. Clients are increasingly coming to hate it. Employees will even start to hate it as they learn how much it constrains their career and income opportunities. It is an archaic and arcane business model. You need something better.
Reread my friend's story and look for parallels you can apply to your own business. If you tend to be linear thinker and just can't see how his example applies to you, enlist the help of someone who can. You may be surprised at how easy it is to borrow just a couple of ideas that have immediate impact on your bottom line.
Theresa Lina Stevens specializes in market dominance strategy and marketing for IT and professional services companies. She is CEO of Lina Group Inc., which helps clients gain and sustain a unique and high-profit, high-growth market position through a proprietary approach called the Apollo Method for Market Dominance. You can reach her at firstname.lastname@example.org or visit the Lina Group website at email@example.com www.linagroup.com.