How to Start an IT Consulting Business...Profitably
Are you learning how to start an IT consulting business?
Be careful. Starting an IT consulting business isn't all that difficult, but for many, some of the basics can be a little counterintuitive.
Watch this video tutorial now to learn about three must-have revenue sources that can help you start an IT consulting business...profitably...the first time around.
A lightly edited transcript follows below:
So the question is, “What income streams should I obtain for my new business?”
That’s a great question. I don’t love the way it’s phrased, but I think it’s a great question. The reason why I don’t love the way it’s phrased is like, using the words “income streams” sounds kind of sleazy, sounds kind of get-rich-quick, sounds kind of like biz-op and that’s not at all what we’re talking about.
We're talking about building a solid IT services business in the technology provider industry. And sometimes it’s called being a computer consulting business, sometimes it’s known as being a value added reseller or a VAR. Sometimes it’s known as being an IT solution provider or systems and network integrator. Sometimes it’s called being a managed service provider or computer repair business.
And in all those scenarios, income stream? I just don’t like the terminology. It’s more like building up service revenue. I think “service revenue” is a better way to describe it, or just “revenue,” in general.
And with that in mind, if you’re focused largely on helping small businesses in your own local area with their IT needs on an outsourced basis, there are four different revenue streams—there are four different types of revenue that I want to talk about.
Start First with Proving Ground Projects
The first type of revenue is the revenue that comes from what we call “proving ground project.” It’s all about you proving your value to a new customer: that you’re dependable, that you show up on time, that you explain things to them in a language that they can understand, that you have empathy to the struggles that they face as a business and understand the frustrations that they have with their IT systems, and that you really get what makes their business tick. So, you’re proving your value to them.
Along the same lines, this new customer is doing the same--it’s a mutual proving ground project. They’re proving their value to you, they’re proving that they are willing to pay for professional services, that they’re not just out to be a mooch or a leech, that they’re not just out to rip you off. They understand that you bring strong business and IT problem solving skills to the table. So it really is about the two of you, your business and your new customer, getting used to working together.
That’s why we call it a mutual proving ground project. You should be interviewing them the same way they are interviewing you. And that’s usually what happens during the sales appointment to determine whether you would want to get to the point of having a proving ground project. So, revenue stream number one, type of service revenue is the proving ground project.
Second, Progress on to Remediation Projects
The second kind of service revenue items besides proving ground projects, are what we call remediation projects. Generally, when a proving ground project does well, as it should go well most of the time, when you’ve done lead qualification the right way and when you’ve handled the sales process the right way, generally, most of your proving ground projects will go pretty well. And they usually result in follow-up projects that we call “remediation projects.”
Remediation projects are usually system upgrades or network rollouts. And they’re generally designed to take things that you’ve identified during your proving ground project, which sometimes is called an IT audit or technology assessment. They’re designed to take system deficiencies that you’ve identified during that initial project, and group them all together and fix the underlying problems so you can bring your new customer up to the standards that you’re comfortable supporting.
So, for example, if they have data protection software issue that just hasn’t been updated in, literally, three years because the vendor that made the solution went out of business two and a half years ago, it’s important to bring them up to a standard where their data protection software is up-to-date and it meets the standards of what you are comfortable supporting for them. That would be an example of a type of remediation project. And, usually, that would be one of many items that is identified during a proving ground project that’s good folded into remediation.
So, in terms of revenue streams or types of service revenue, we have proving ground projects, and we have remediation projects, sometimes called system upgrades or network rollouts.
Third, Graduate to Annual Service Agreements
The third type of service revenues are what we're going to call “annual service agreements.” Annual service agreements are, generally, when things go well during the proving ground project and are followed up by a good successful follow-up or remediation project, usually at the same time you are talking about that big upgrade, that big rollout. “Gee, and by the way, have you given much thought to how you’d like this handled on an ongoing basis?” “Have you given much thought to how you’d like this supported on an ongoing basis?”
And usually your new customer, your new client, will say, “Well, I actually haven’t. What do you recommend?”
“Well let me tell you what we do with our other clients, and the different benefits they’ve received from doing so, and how we work with companies like yours on an ongoing basis.” And you explain what your annual service agreement program is all about.
So that’s the third kind of service revenue or third revenue stream. First, we start with a proving ground project, and then again, we’re taking this sequentially in the order that you usually see these things appear and the life cycle of a customer and client which, as long as you’re doing a reasonably good job, should be a very long life cycle where you have most of your clients with you for many, many years to come.
So you have your proving ground projects, you have your remediation projects, your upgrades and rollouts and things along those lines. When those go well, usually the natural follow-up to that is how you like support to be handled on an ongoing basis. That’s your annual service agreement, annual support agreement program.
Fourth, Know Where Product Reselling Fits In (...If It Does At All)
And the fourth source of revenue, one that we're really not thrilled about, but just doesn’t seem to want to go away in our industry, is product reselling. That’s where you act as more of a traditional reseller of desktops, notebooks, servers, switches, routers, software licenses, things like that. And you’re actually taking title of the goods and buying them at wholesale and selling them at retail.
And in theory, there’s enough of a gap between wholesale and retail, then there’s some profit margin. And the reality is the wholesale being over here and the retail being over here is kind of like the way things existed years ago. It’s more like, now, OK, this is wholesale and this is retail and that’s your little thin, threadbare profit margin.
The reason why I say it’s controversial is a lot of people just don’t want to give this up. But the reality is that when you figure out your cost of capital, your credit risk, all the overhead that’s involved in doing this the right way, unless you have heavy seven-figure, even eight-figure businesses, it’s very, very hard to do it the right way with very low volume.
So usually most people end up gravitating toward them. What we strongly recommend for smaller firms, especially start-ups, is instead of getting involved as a traditional product reseller, what you do for your clients is you identify what their IT needs are, you spec out what they actually need. You go get competitive quotes for them, you help them compare those quotes and decide which is the best option for them. You place the order on behalf of them so you make sure that nothing gets messed up in the translation. You follow the order to make sure it ships on time. You inspect the goods when they arrive to make sure they actually got what they purchased. And then you go ahead and start customizing, configuring, and installing it and getting it all fully integrated in their network.
And all of those procurement-related tasks—the idea of specing out the design of what they need, and getting the price quotes and comparing the quotes and placing the orders, tracking the system, tracking the shipments, and inspecting them when they come in—those are the things that you simply charge by the hour, in the same way that you charge for your other technical services. And it puts a lot more transparency in the process.
Because your small business clients know exactly what they’re paying for. There’s not this mysterious cloud of, “Gee, I bought twenty-five thousand dollars in notebook computers from you and you’re telling me there’s not enough margin in it? Then you got to nickel and dime me for all this little stuff?”
Generally not a good way to go with all that in this day and age when the profit margins are so narrow. It used to be that this was wholesale and this was retail and there’s a big nice gap between there with your margin. Now it’s to the point that this is your wholesale, this is your retail, there’s not much to deal with there. And all it takes is one person changing his mind or a return or DOA or something like that, and then you’re up the creek.
Review the 3 Must-Have Revenue Sources for How to Start an IT Consulting Business
So, generally focus on three different sources of service revenue:
your proving ground projects,
your remediation projects, and
your annual service agreement revenue
And if you really, really, really want to kind of ignore our advice here, there is product reselling revenue. But at this stage of the game with being a start-up, you’re usually better off focusing on the service revenue and being an adviser for what to do for your clients’ product purchases.
So I thank you so much for asking the question, “What income streams should you obtain for your new start-up?” Again, we prefer to just call it what kind of revenue should you be looking for, what kind of sources of revenue or what different kinds of revenue should you be looking for. But we certainly appreciate the question.
Share Your Thoughts on How You Plan to Start an IT Consulting Business
So how do you plan to start an IT consulting business? Are you midway into the process? Or are you just at the research phase? What's worked so far? What hasn't?
Please share your thoughts in the Comments area below. If you got good value from this tutorial, please post this link to your favorite social network and send it to a friend who could benefit as well.
And to follow-through on the ideas introduced in this tutorial, be sure to download your free special report on How to Start a Computer Consulting Business: 6 Proven Ways to Build Your Initial Client Base.