Risk Mitigation During Early Stage Consulting

by on July 29, 2013 | posted in Entrepreneurship

RossBlogHeader_risk

Making the jump. Quitting your job. Making a living outside of your 9-5. These things are difficult to do, and one of the things that prevents most from ever doing it is the risk. The risk of being stuck out in the cold and suddenly unable to find work. That’s a scary thing, and for good reason – nobody wants to have faced that fear and failed.

Mitigating the risk of this situation is something that’s worth considering, and worth putting long, deliberate thought to. Many startups have the opportunity to blow up in your face, and one of the great benefits of a consulting company is that it can be run in an efficient fashion that isn’t nearly as volatile.While my few years of consulting have not made me an expert in risk mitigation, I’ve learned a few lessons along the way that I believe are worth passing along, especially as it comes to the early stages.

Ask for Money Up Front

I occasionally see people complain about clients not paying up on time or at all on Twitter. Thankfully, I rarely have this problem, because I ask for money up front. This works in an inbound marketing scenario especially well because you’ve established trust before the agreement has ever been made, allowing you to do these kinds of things without concern.

By getting the money up front, you lower cash flow risk within the business. The only exception to this policy that I recommend is with big companies. If you know the name, they will almost certainly always pay – it may take them forever, but they’ll pay. They have trust based on visibility on their side that allows them to flip the request.

Also, if it’s a one time gig such as with an audit, I will generally ask for a 50% down payment – a reasonable request that also allows you to gauge the seriousness and timeliness of the client.  A prompt delivery on the first half will almost always result in a timely payment of the second.

Minimize Business Development Time with Inbound Marketing

The benefits of inbound marketing are numerous, one of which is being able to ask for payment up front. The second is also minimizing the sales cycle for each new client. Because I’ve established trust through blogging, tweeting and speaking, most inbound inquiries do not need an elaborate sales proposal in order to pitch them on what Siege can offer of value.

Compare this to the outbound cycle – for them, the sales process is long, and one that potentially can blow up in your face with numerous sales cycles that end with nothing. If you’ve got two clients that are 50% of your income each, and you have a need to dedicate 33% of your time to a single sales pitch over a week or more, there is high risk involved if those sales cycles do not pan out for a consulting shop of one.

 inbound-marketing

Most important for those considering full-time consulting, inbound marketing is a way of building your client base before you ever need one. Blogging, tweeting and speaking are all ways of creating demand while working in house before you actually ever need it.

Supplement Consulting with Subcontractors

During the in-between period of hiring an employee or not, you’ll face uncertainty about whether or not you have the bandwidth to handle new work, or if you do hire someone, if you can afford to take on that cash-flow risk.

One way to mitigate that risk is with subcontractors. If you’re thinking about making the jump, you hopefully have a backlog of intelligent people you’ve worked with in-house or at an agency, who are capable of doing great work to supplement your own.

Many of them may not be able to generate their own side work, so by going to them, you get a good consultant at an affordable rate. Almost always, the margins when working with subcontractors will still be suboptimal, but it’s still a strategy worth pursuing because of the potential risk mitigation.

Since you can then focus on business development instead of outreach, with the help of a consultant, you can then ramp up inbound lead flow. When the time is right, you can drop the outside consultant and hire someone on, actually improving your bottom line – something many might not see happening when they initially thought of hiring someone full-time.

An added plus is that many of these subcontractors will actually be better at specific tasks than you are – by delegating appropriately, you not only get an improved consulting product, but you also get an optimal risk profile for a company looking to grow.

Don’t Let Non-Core Competencies Exceed 30% of Personal Bandwidth

Diversifying your portfolio of clients is not something that is necessarily groundbreaking as a recommendation. If someone or something (see: Google) becomes an outsized portion of your income, it inevitably leaves you at risk for volatility.

Screen Shot 2013-07-25 at 12.48.37 PM

However, personal bandwidth as it relates to the core competency of the business is something I don’t hear talked about as frequently, that I think is also valuable for mitigating risk. As a business builds, even for a high profit one, its possible a few of your bigger clients may account for upwards of 50-60% of your time, even with additional smaller ones that lower the overall risk.

These clients are likely going to be outliers – people that might want to pay for your specific knowledge and energy for a multitude of tasks, and pay well. They want strategy, not execution. And often times, this strategy pours over into non-efficiencies of your projected long-term consulting business.

While helpful, it is not these kinds of clients who are looking for high-level strategy for secondary services that will actually help you build your business – because they are not scalable, and there is not real efficiency built through repetition. By continuing to allow them to be a large portion of your business and effort, even if there are other salvos being fed through other employees, you increase risk by not continuing to build on those secondary arms.

Innovation suffers, real business efficiency is never built or focused on, and you don’t begin building a referral arm of business that comes from the type of work you would like to continue to scale. As such, you will likely begin to find yourself treading water, offering average services at everything, and opening yourself up to be outpaced by competitors in the market.

To give an example of this, Siege Media is a content marketing agency. We hope to become an industry leader in promoting amazing content, with a primary focus on growth through SEO. I personally have many people come to me wanting advice on on-site SEO, CRO, or occasionally PPC, and at times, I’ve had to turn down well-paying contracts because they distract from the main arm of the business – even if technically still consulting. For example, a company like Shari’s Berries may contact us looking for CRO – it might be an attractive task to take on, but it’s not a competency and it overall will be distracting.

While these gigs are great and lucrative, they distract from truly building efficiency in the primary arm – content marketing. As such, I believe the founder of a consulting company, in the early stages, should keep a tight eye on their personal mindshare as it relates to the core competency of the business.

It will be a necessity to take on these random contracts in the early going to supplement income, but it will also be an important fight to beat back their stake in your income and time – or you will likely languish as it comes to business growth and efficiency.

Price Based on Expected Value

expectedvalue

All clients are not created equal. I don’t price based on what I think the client will pay. I price based on the value of my services, adjusted for the expected value of that client.  Expected value is the net expected return that comes from doing good work.

For example, if I do great work for someone I think will be a long term client that potentially can be a large referral source, I will lower my hourly rate to account for the potential that the net value will be larger by improving the chances I engage with them in the short run, and also, the likelihood they will be happy with our services based on return in the long run.

On the flip side, if I get engaged by another unknown SEO consulting company who wants a one-time project and is unlikely to ever engage me again, I will up my rate accordingly to account for the potential opportunity cost I am incurring by doing work with them. To be worth working with, they essentially need to be a high contribution client because the long term and back-end value is so minimal.

Given the risk profile of both clients, working with the higher paying client is actually worse for the business because of the potential volatility that comes with working with them. It is many of client A that will build a high profit, low-risk business – it is many of client B that will burn one down.

By upping the necessary hourly payment to engage client B, we don’t completely turn them away, but we account for the risk by bringing on additional cashflow buffer to handle less-measurable costs like additional business development, overhead from underutilized employee time, and a lower expected lifetime value.

Expected Value as a Business Philosophy

To build on this article, I suggest additional reading on expected value (EV), a term that popularized from the world of poker. Because of poker’s volatility, one sometimes loses even though they make the best decision, such as having their pocket Aces lose to a 43 offsuit after going all in pre-flop.

Screen shot 2013-07-21 at 10.13.32 PM

However, the long run says they made a positive EV decision, which allows the poker player to sleep well at night based on their choice. If we decided to under-charge our services for a low-potential client, or take on a client that is a non core-competency, it’s possible we may have made a negative EV decision, even if it seemingly works out in the short run.

By pricing and/or choosing clients accordingly with positive EV decision making, we lower risk and improve our chances of growth for the long haul. Risk goes down, and the business goes up. Not a bad combination.

tagged as

  • Dan Shure

    Killer post dude, and something I could add I think;

    Build up your network within the industry.

    Referrals and just help in general have been HUGE for me coming from other SEO consultants or agencies. Some of these have been enough to keep me going early on in a slower month or two when no other leads came in – definitely really saved me at times in the beginning.

    I drove the 6+ hours round trip to/from NYC just to attend Distilled MeetUps, and meet people face to face. Attended local events, and engaged with industry people online too.

    That might not work for every industry of course, but definitely in ours.

    • rosshudgens

      Yup, great tip. It sorta goes in the “inbound marketing” area but I wasn’t nearly as explicit about it, totally agree though.

  • josephjrobison

    I like the idea of charging a bit less for those you know you’ll have a longer term relationship with because it reduces the costs of finding new clients. Do you position your services as an investment and price off the value it will generate the client as Patrick McKenzie suggests?

    • rosshudgens

      Hey Joseph, unfortunately I don’t. I think it’s a little harder to measure in SEO and also getting GA access then doing that kind of deep analysis makes it extremely time consuming as a process. Generally I do look at things like keyword volume x CPC to quickly see if they have a big enough budget to use us/what they would need to compete, but as of now I don’t go that far.

  • http://www.canuckseo.com/ Jim Rudnick

    Yup…spot-on Ross….one thing tho…in my mentoring processes, when I’m advising new startup founders….the simple fact that they can actually “ask” for a 50% retainer is so “outside” their level of experience…that it usually is accompanied with a forehead smack too! It’s a lesson that should be a part of any biz, that cash flow is truly king!
    Oh, and nice to hear that your own firm is prospering too! Good on you!

  • Pingback: Gianluca Fiorelli’s Super Search Update – July edition - State of Search

  • Pingback: HWPCC News » Blog Archive » Gianluca Fiorelli’s Super Search Update July edition

  • Benjamin Beck

    Russ, I needed this. Thanks for the great tips! Really appreciate it.

  • http://www.tweedsolutions.com/ Tweed Solutions

    Great advice yet again thanks

    George

  • http://www.parafriv.net/ Para Friv

    I do not have much knowledge of this information, it may make sense to the reader, thank you.

  • http://www.jugarjugar.net/ Jugar Jugar

    Really useful information for my job. The limiting risk in the early stages is very good advice indeed, and highly effective. I’m really looking forward to more in it

  • Nishargo Nigar

    Do You Need MUSIC

  • sofenza

    Yup…spot-on Ross….one factor tho…in my guidance procedures, when I’m suggesting new start-up creators….the point that they can actually “ask” for a 50% retainer is so “outside” their stage of encounter…that it usually is with a temple slap too! It’s a session that should be a aspect of any biz, that income is truly king!
    Oh, and awesome to listen to that your own company is booming too! Excellent on you!

    NyLotto

Previous post: