Leveraging the success of that forum, SXSW has created the Startup Village this year.  The 4th floor of the Hilton will be converted to startup mecca.  I thought the “Lean Startup SXSW” track might have gone away in favor of this modified (and bigger billing) approach.  Apparently not so.  Today SXSW.com announces that they’re bringing Lean Startup SXSW back – and some of the chief instigators are involved again – Eric Ries, Dave McClure, Steve Blank, 500 Startups, et al:

The Lean Startup SXSW will take place on Saturday, March 10th from 9:30am – 6:00pm at the Downtown Hilton (across from the Convention Center), and the most up-to-date agenda can be found here.

So, more central location, same Saturday location in the schedule (good call).  The agenda already has enough speakers identified for me to plan my Saturday schedule.

Once again, good evidence of how SXSW adapts and co-opts good ideas from the outside.  Congrats to the organizers, I’m looking forward to it.

Related posts:

1. SXSW 2011 day 2. The Lean Startup Phenomenon
2. Lean Startup SXSW: Introduction
3. What BPM Can Learn from the Lean Startup

• Just today, OtherInbox announced it is selling to ReturnPath for an undisclosed amount.  Based on the smiles from the OtherInbox team, this was a good sale, at a good time, for the team.  Looks like a great fit with the parent company. It marks another success for Joshua Baer, who (along with a few others) has really re-energized the startup scene in Austin.  Interestingly, part of the value ReturnPath perceived in the deal was getting a good footprint in Austin, TX:

“The decision to acquire OtherInbox was based on its technology and its broad customer base, but separately we’ve been talking about where we might expand operations, and Austin was on that list,” Forman said. “The cost of living, the tech scene and the talent pool were very attractive to us. The opportunity to get that as part of the bargain with OtherInbox is awesome.”

• Socialware just landed an investment from the CrunchFund.  I’ve known Chad Bockius since ’99 and I’m impressed at how he’s been able to get visibility for the company with investors outside of Austin (note that Austin Ventures is also an investor in the company, however).
• The Austin office rental market is tightening up.  This trend has been going on for some time.  Locally, in our office building, this is noticed as I have to drive one extra floor up in the parking garage to get parking these days.  There just isn’t any vacancy.  Prices are moving more gradually but they are starting to move.  I saw a lot of growing firms in Austin reach for bigger space in 2011, with designs on growing headcount, and a belief in the stability of their businesses.
• There are IPOs on tap for Austin as well.  Bazaarvoice is the most likely candidate with a strong growth track record and a strong product offering.  Chuy’s, a Tex-Mex restaurant chain based in Austin is also planning to go public to fuel expansion (if a location comes your way, two recommendations:  DO order the “macho burrito”, and DO order the tres leches for dessert – but find a friend to share it with).  3 other companies are up to bat this year, having already filed for an IPO.
• All of this really has me looking forward to the Angelou Economic Forecast.  I took a look back at my notes from last year, and it looks like he pretty well nailed the economic forecast for Austin and Texas.  Not only does AngelouEconomics provide some of the best economic development consulting, it is also a local Austin startup-made-good story itself.  Quite a local success story.

Here’s to 2012!

Related posts:

1. Congratulations to OtherInbox
2. Seven Austin IPOs this Year?
3. Jobs and the Economy

• Formula 1 is back on track.  There’s some debate, locally, about the value this has for Austin’s economy, but it is clearly a net-positive for the next 10 years.  Perhaps not coincidentally, a couple of new hotels are scheduled to be built downtown over the next couple of years.
• The Samsung plant in Austin is producing the A5 chip for Apple.  This was a massive investment from Samsung in local infrastructure ($3.6B).  Those of us following the news in Austin a few years ago probably recall what a close decision this was for Samsung.  It was the biggest investment in chip manufacturing capacity since the heydey of silicon in Austin.  These days, Austin is more of a hotbed of design than manufacturing.    As I understand it, Austin is Samsung’s second largest infrastructure investment – and the largest outside of South Korea.  People often forget how much is manufactured in the US in general – but this kind of high-tech component is particularly unusual to be manufactured onshore.
• Austin is attracting more early stage investments than other parts of Texas. $280M in Austin alone last quarter.  Fifty Austin companies received funding.  This reminds me of the 90′s in Austin.  There have always been complaints about it being much harder to raise money in Austin than in the Valley, and perhaps it is.  But it clearly is easier in Austin than it is in many other parts of the country.
• It looks like the “best performing cities” are moving to Texas…
• The unemployment rate nationally recently dropped to 8.6%.  But in Texas?  8.1% (down .3%).  A half-point better than the country as a whole. Austin, however, is a full point lower still, at 7.1% – 1.5 points lower than the national average.

So it appears to be a good time to be bullish on Austin.  But if you’re just now noticing, you’re late to the party.  All through the downturn, it seemed clear to those of us who live here that Austin was building up, slow and steady, a diverse and growing economy.  I’m looking forward to going to the Angelou Economic Summit in January – there are typically some key insights into how the local economy has been performing, and this year should be particularly interesting.

Related posts:

1. How to Make Austin the Next Silicon Valley?
2. More Money Raised in Austin
3. Austin Entrepreneurship gets another Voice

BlackLocus, a technology company founded in 2009 by three Carnegie Mellon University students, is making Austin its headquarters to take advantage of the area’s cloud computing talent pool.

The company, which sells Web software that helps e-commerce companies price their products, raised $2.5 million from Silverton Partners of Austin and DFJ Mercury of Houston in July.

Since then, BlackLocus has built out its senior management team and is working to double its 15-person workforce over the next two quarters.

AustinStartup has a more personal touch to their coverage:

“We are excited to join the high tech community in Austin,” said Rodrigo Carvalho, co-founder and CEO of Black Locus.  “We have been graciously welcomed. The technology companies here and the people behind them want to see others succeed. Everyone has been so helpful. It comes down to the networking, the resources and the top tier talent. Austin was our top pick. “

They also covered a couple of the recent team additions, which happen to include my friend Rob Taylor, previously of TrueCar, and Trebor Carpentor, previously of Lombardi, of all places.  It is a small world.

Related posts:

1. Austin is a Great Place to Start Your Company
2. Austin Business Journal: BP3 is #11 in the Austin Fast 50 Under $10M
3. Good News, Bad News for Austin Employment

Recently, topics for SXSWi-2012 were released.  These are the panels and sessions that were voted on by attendees or prospective attendees (although a vote isn’t the only input into the panel picking system).

If this year is like most, some additional featured speakers or top-down content will be added, in addition to a few late-selection panels to reflect any late-breaking news or changes in the world around us.

Topic areas:

• Keynote Presentations at the Austin Convention Center
• Featured Sessions (Austin Convention Center)
• Better Tomorrow (Austin Convention Center) – a focus on economy and social issues
• Book Readings (Austin Convention Center)
• Branding and Marketing (Stephen F Austin hotel – which was also the site of the BP3 all-hands meeting!)
• Convergence (Austin Convention Center)
• Design and Development (Austin Convention Center)
• Emerging (Hilton Austin – Downtown)
• Future of Work (Courtyard Marriott)
• Government and Global Issues (AT&T Conference Center)
• Health and Education (AT&T Conference Center)
• Journalism and Online Content (Sheraton Austin)
• Latin America (Hilton Garden Inn)
• Lifestyles and Sports (Campus TBA)
• ScreenBurn and Gaming (Campus TBA)
• Social Networks (Omni – Downtown)
• Startup Village (Hilton Austin – Downtown)
• Workshops (Radisson – Town Lake)

The biggest change I notice : moving the startup events to the Hilton (which is like ground-zero, right across the street from the Austin Convention Center), rather than having them at the AT&T Conference Center, as they did last year.  Last year’s startup sessions were really high quality – and the AT&T Conference Center at UT is a fantastic facility for an event like that – but it is removed from the core action at SXSW.  My guess is that there was an effort to bring this core area back to the center of the activity at SXSWi.  The only downside is it will be much harder to park this year!

To anyone trying to organize a conference, I submit to you that you just haven’t seen crazy til you’ve been to SXSWi.  The number of people and the logistics involved in feeding them, moving them, parking them, seating them, and providing wifi and 3g cell connectivity for their 3 connected devices is an incredible challenge.  And it is impressive how well it all works.

The Startup Village has its own set of articles on SXSW’s website.  This promises to be a great conference.  The number of topics is overwhelming, but the organization into campuses and topic areas at least helps focus attention on the topics you care about.

As I was about to post this, I ran across Austin Startup’s coverage of the same subject.  GREAT tidbits they pulled out from the schedule:

Stephen Wolfram on Computation and Its Impact on the Future. Any chance to hear him speak, I will take it.

Definitely. I look at this session as being potentially as promising as the Craig Venter session from the 2011 conference.  They also pointed out panels from Dachis Group, RecycleMatch, WP Engine, and Foreca.st (local startups).  Josh Baer will reprise a topic he owns: 3 Secrets to a Killer Elevator Pitch.  Even this far in advance it looks like a very strong lineup.

Related posts:

1. SXSW is Upon Us
2. Parting Thoughts on SXSW-interactive and Shark-Jumping
3. SXSWi 2011. Day 1. BPM @ SXSW

The Austin Business Journal honored the 50 fastest growing companies on Thursday at its annual Fast 50 awards ceremony at the AT&T Executive Education and Conference Center. The awards rank Austin-area companies based on compounded annual average sales growth over three years.

Numbers reflected calendar 2008, 2009, and 2010 performance – so the data is already a bit out of date!  Perhaps surprisingly, we’re growing faster in 2011 than we have in previous years, due to the great environment for BPM consulting services, and hope to be back on the list next year as a result.  Quite an array of companies and industries are represented in the Fast 50 list – congrats to all the other small firms who made it – it is these fast-growing companies that are driving employment in Austin (all the little #’s add up).  Every year the ABJ honors the “Fast 50″ – 25 fastest growing companies over $10M in revenue, and the 25 fastest growing companies under $10M in revenue.  There are restaurants,  consultancies, medical firms, financial firms, and real estate.  You name it.  For those of us in Tech, it is a good reminder that the main-street economy is alive and kicking.

The other interesting thing from our perspective: growing quickly just isn’t part of our goal-set.  We’re just trying to build the best team and capabilities in the BPM space, and provide great value for our customers.  If we can do that, then growth will likely follow as a side-effect.  I don’t think there’s a better way to do it a consulting business without taking outside capital.

Additional text in the print version of the article:

WHAT IT DOES: BP3 is a boutique business process management software consulting business.

HOW IT’S DIFFERENT:  Primarily, we differentiate ourselves with the quality of our expertise in the BPM space.  We’re the most experienced IBM BPM consulting vendor, as a result of our deep ties to its predecessor, the Lombardi BPM product line, dating back to 2003.

KEYS TO GROWTH: The key to our growth is finding more great people to join our team.  Our business is a people business.  Beyond that, the foundation of our growth is that the BPM software market in general is growing.  And, specifically, IBM BPM is growing nicely.

BIGGEST CHALLENGES: Already in 2011, we’ve added six employees to our firm.  Our big challenge will be to support our great people.  When you’re smaller, you can simply be a collection of amazing individual talent.  As we get bigger, to get the most out of this band of talent, we need to optimize our teamwork and organization.

Related posts:

1. Austin Business Journal’s Fast 50 Event
2. Startup Austin
3. How to Make Austin the Next Silicon Valley?

Fabienne: Whose motorcycle is this?
Butch: It’s a chopper, baby.
Fabienne: Whose chopper is this?
Butch: It’s Zed’s.
Fabienne: Who’s Zed?
Butch: Zed’s dead, baby. Zed’s dead.

- Pulp Fiction

There have been raft loads of articles and blogs written about “Millenials” over the last few years (not to mention Generations X and Y).  Chris Taylor has decided to take his shot, on BPM for Real-  “Does Generation Z have a ’2-second advantage’”?

What happens when a whole generation that has lived their entire lives with the ability to feed information to themselves (and at a time and format of their choosing) becomes the dominant group in the workforce?

My bias against these generational stereotypes is well recorded, but let’s review this one.  I expect predecessors to Generation X wondered what would happen when kids showed up at work who grew up their whole lives with a computer at home.  Of course, only a minority of kids at that point – but still more than in any previous generation.  Maybe it is because I was one of those lucky kids that I’m not particularly concerned about the changes this will effect on our society or workplace.

Chris Taylor explains:

I recently read The Two-Second Advantage, a Malcolm Gladwell-like book about how we learn and build mental models that predict what will happen next based on experience and data that arrives so quickly it would overwhelm–if not for our learned ability to work through it. Most of Generation Z has been living in a state of information overload longer than any human beings before them, and the result should be a capability to handle a complex world even better than we do. They should have more complete mental models for the workings of the world due to their ability to know whatever they choose, whenever they want. If you buy into the ideas of this book, they are likely developing a “two-second advantage” that should give them a leg up on the older generations.

Perhaps the new generation will be better equipped than the previous.  However, the world will change fast enough to make them feel as ill-equipped for the next transition as many of of those writing about Generation Z appear to feel now.  By objective measures, the rate of change appears to be increasing.

But the way information-technology-adept people deal with the world is not by addressing its complexity, typically.  It is by simplifying it.  Rather than having more complete models, they technologically adept will have meta-models that don’t require completeness.  We just had the Austin City Limits Music Festival here.  In the complete model world, I’d know pretty much all the acts performing, and that I was interested in, and on which of 8 stages they’re playing, and at what time.  I’d do my research before the concert and figure it all out in advance by sampling songs by various artists that are performing.

In the simplified world, as I’m walking to the concert I download an iPhone App that tells me what bands  are playing on what stages at what times.  I can quickly browse the bands and see if any of them appeal.  I can group-text my friends to find out what they’re listening to (more than one stage is active at the same time) – and that’s built in to the app if I don’t already use a group-texting application.  You can guess which of these two approaches describes my ACL Festival experience…

Think how “getting directions” has changed since GPS and maps have become so ubiquitous on cell phones.  You don’t really need directions, you just need a destination.  The only directions someone needs to give you are the little bits that never show up in a navigation system or map: “don’t turn in the first drive, use the second driveway”.

So the software and hardware is delivering the results of increasingly complex interactions with other systems.  Let’s face it, my iPhone computing directions to a destination using maps and GPS is much more complicated from a systems view, than someone scribbling directions on a piece of paper.  But the end-result to the user is actually simpler than the old way of doing things. I think that’s actually the metaphor to use going forward. The touch interfaces today give even infants a chance to interact – because the cause-and-effect is more clear.  So the interaction isn’t just the tactile (as it might be when they play with a physical keyboard), it is direct manipulation – something their brains are already wired to learn from.  The systems of the future (software and hardware) are likely to appeal more directly to the way our brains already work – and thus feel more natural to us, even as they get more complicated in principle, behind the scenes.

It isn’t really an issue of generational advantage- if you buy into Malcolm Gladwell’s thinking on practice – it takes about 10,000 hours to become an expert at something.  Any one, of any age, can become an expert if they put in that 10,000 hours of purposeful use with technology.  There’s no reason to let your kid be the only one in the house with a “2 second advantage”.  I watched my own parents leapfrog technology shifts.  They both bought iPhones before most of my friends.  They still have trouble using Microsoft Windows.  But they use their iPhones and iPad, and Kindle, just fine.  Don’t let these generational tags define you, or your views of others.  Besides, the idea of “2 seconds” being a short time is already a sort of generational bias, isn’t it?  But it does roll off the tongue better than a 2 nanosecond advantage.

Related posts:

1. Management of the Facebook Generation?
2. Another Year, Another Post on Millenials
3. Wait, is this a Positive GenX Reference? #startups

The company, which launched its service last year, received the funding from InterWest Partners of Menlo Park, Calif., and Austin Ventures. It has raised a total of $16 million.

Spredfast’s software lets clients manage campaigns and conversations on social media sites, including Facebook, Twitter, LinkedIn, YouTube and blogging platforms. Rather than going to each social site, Spredfast lets users publish and monitor social activity from one central platform.

[...]

“This is a big step for us, and we’re ready for the next stage of growth,” said CEO Rod Favaron, who joined the company in February. Favaron was previously CEO of Lombardi Software Inc., which was acquired in 2010 by IBM Corp. for an undisclosed price.

It is both a vote of confidence in Spredfast, and in Austin.  In 2010 it was common to read about the dearth of funding in Austin, but almost ever since then, we’ve been seeing more news about funding in Austin than I can remember since the ’90s.

In a followup to the previous post about recruiting talent to Austin, I think news like the above fundraising does more to recruit industry veterans to Austin than the recruiting trip they recently embarked on.  The coverage on MarketWatch wasn’t flattering:

In fact, I have to report that the Austin group’s recruiting night in San Francisco was something between a bust and a learning experience for the group.

It sounds like the two main events were, basically, a tough learning experience.  But hopefully the CEOs took advantage of the trip to prearrange a bunch of meetings with likely recruits rather than just depending on the group events.  Still, the target and the optics are all wrong.  Instead of getting a story about what a great place Austin is to work, and that people are coming here to work at our high tech companies, we got an article essentially about indifference in the Bay Area and how hard it is to find talent in Austin (which isn’t quite as dire as the article makes it out).

Imagine if these same CEOs had gone on a tour of Universities in California (or other states) to recruit talent?  To put the idea out there for college students to think about Austin as a destination.  University is the right place to strike.  The experienced industry veterans don’t need to go to a job fair to find companies in Austin – they’ll leverage their connections to find a job.  Its the college kids who need some help discovering Austin and Austin companies as a place to land.

The rest of the article focuses on “solutions”… and here’s one perhaps the 30 tech CEOs could get behind – an Austin-funded scholarship at several universities – giving us some press out there on the coasts.

Update:  This article on Austin startups finding funding via Angel List is probably relevant as well.  It just speaks to how the world of fundraising is changing, and there are fewer barriers than ever for Austin entrepreneurs:

Even for Austin startups that aren’t actively raising money, AngelList is becoming a way to get on the radar of potential investors, partners and customers.

Bill Boebel, an Austin entrepreneur and angel who has invested in 15 companies, calls it the “LinkedIn for startups.”

“It’s a startup’s resume,” he said. “Just like when you’re recruiting an employee and want to learn a little more about that person, it’s a great way to find out more about a company.”

And further, Ravikant says:

“Entrepreneurs inside Silicon Valley already have access to investors here, but it can be harder for a promising startup in Austin to break in,” he said.

“We have helped Austin startups get exposure to Silicon Valley and New York investors, and we also give those investors the lay of the land in Austin.”

Has there been a better time to invest in people and talent?

Related posts:

1. Investing in Austin, Investing in People
2. Austin is a Great Place to Start Your Company
3. Investing in People Revisited

• Most independent consultants have a hard time relaxing when they’re “off”.  They get enough time on the bench or on vacation to live a good life, but when they’re on the bench they’re worried about when the next project starts. It makes it hard to truly enjoy time off.
• Lack of camaraderie.  There’s no team as an independent.  At first that is liberating, but later on it is frustrating for those of us that are more social.
• Lack of vision.  Being an independent consultant does lack a certain vision.  What are the goals? What are we building toward?  What gets me excited about getting up in the morning to do this work?  You know, besides paying the bills?
• Not to mention, your income is clearly a function of hours worked * billable rate.  Not everyone likes that.
• You have to do it all: sales, contracts, insurance, delivery of the project, project management, QA, etc.

Most happy independents that I know offload at least a couple of these things:

• Having a spouse with insurance.
• Having another company produce most of their leads/business, while they just focus on delivery.
• Paying other independent consultancies to do things like accounting, benefits, and other bits that aren’t in the sweet spot.

So this leads to the question:  should you hire?  Should you try to grow your consulting firm to a bigger practice?  Jason writes:

Consulting can be a great way to fund a startup or make a bunch of cash. It’s easy to start; Just pick an hourly rate and jump in.

But someday soon you’ll notice there’s only so many billable hours in the day, and you’ll be tempted to expand. Maybe hire an employee for $30 per hour and re-bill them at $60. Easy money, right?

Unfortunately the math doesn’t work that way.

Jason is right. It isn’t that easy.  But it isn’t quite as bad as he makes it out to be either.  First, let me lay out some of the ground rules you can use as assumptions if you’re building a consulting company.

1. Base your budgeting on 2000 hours in a year.  It is a nice swag (2 weeks off), and it also makes the math easy!
2. Expect 80% billable as your realistic maximum, though some of your people will do better than this.
3. A good rule of thumb is that your minimum billable rate is 2x the hourly cost.  At 80% billable this is better than break even.  But at 50% billable you’re losing money. This isn’t a good billable rate, but it is the minimum billable rate. Because you do have costs: Medical benefits, 401k contributions, office space, vacation, downtime, sales & marketing, etc.  But there’s no reason to settle for the minimum rate.
4. If you are using a contractor (1099) in the US, you shouldn’t expect to markup their rate by more than 50% (ie, 33% margin for you at most).

So, even with all that, Jason paints a pretty bleak picture for your prospects of making money as a consultancy.  The primary issue is scaling the size of your business so that you can (a) reduce risk, and (b) make more profit.  If you talk to friends at startup software companies, they’ll spend lots of time discouraging you about the scalability of consulting companies (something investors and software folks are pretty convinced of).  Here are my thoughts about how to address scale, risk, profit:

Start with a co-founder.  If you don’t have one, find one who is also a specialist in the same area, or who has a tightly complementary specialty.  Make sure that you have enough skills overlap that you can cover for each other in a bind, but that you also have some different skills to augment each other in unique ways.  Starting as a company of two partners is easier than being the sole founder with one employee.  (Who wants to be your first employee, anyway?).  It allows you to reduce your risk – and if you charge correctly you can be break-even if one of you is billing.  And you’ll have more flexibility to chase leads, take vacations, etc. – without company revenue declining to Zero while that is happening.

If you’re going to grow, you’re going to forgo profits.  The independent consultants I talk to don’t want to admit that, but it is true.  At BP3, Lance Gibbs and I certainly could have had a more profitable first 3 years of operation if we just ran a two-man shop.  But we saw an opportunity to grow a bigger business.  We hired great people – and held on to the team through lean times in 2008 and 2009 – taking lower salaries ourselves and paying people when they were on the bench for long periods of time.  That scrappiness and determination got us into a great position to grow our team in 2010 and 2011 – from a bigger base.  But remember – every time you hire, you’re investing profits – reducing your cash flow for 60-90 days (or longer if training is required).  A good way to think about it is that people you hire in 2011 will add materially to your business in 2012 – it makes you plan conservatively around what you can afford.   Now that we’re a little bigger, it is easier for us to hire when we come across the right person – we don’t have to work as hard to time each hire just right.

This also means that it is better to not grow, than to hire the wrong people.  If you take this approach, when you can’t find enough talent to grow, you’ll be more profitable.  When you can find those people, you’ll grow the business at a little lower margin, and with a little tighter cash flow – but with your future baseline performance at a higher level.

Those early hires are really important.  See the previous point.  Early hires in a consulting firm set the tone: culture, discipline, follow-through, work-ethic, reputation, skill.  Don’t hire someone on reputation alone – better to hire someone whose reputation hasn’t caught up to their real performance than to hire someone whose reputation exceeds their real capability. If you hire the right people at the beginning, it actually gets easier to attract the right talent later on.

Forecast next year’s revenue based on your current staffing.  Don’t fall into the trap of building a consulting-based business plan that depends on hiring people in the same year that they contribute to your bottom line.  I’ve seen a lot of these “plans” before: “we’ll hire 3 people in Q1, 4 people in Q2, 6 people in Q3…”  To which my response is typically “which 3 people? which 4? which 6?”  If you don’t know who they are, take that out of your plan.  A better way to write it would be:

Based on our forecast we can afford to hire 3 people in Q1, 4 people in Q2, 6 people in Q3.

Point being: there’s a difference between what you can afford, and what you can actually execute.  Given how important each person is to the growth of your company, are you going to hire the best 3 people you can find in Q1, or will you only hire 2 if you can only find 2 you’re excited about?  Intellectually we all know what the right answer is but it is important to actually act on that knowledge.

Get Financing.  You may not think you’ll need it – but as soon as you can, get it.  When you’re a small consulting company, usually one customer has an outsized influence on your cash flow.  Having a line of credit or a loan can give you some cushion against the vagaries of their accounts payable.  Word of warning: it is very difficult to get a traditional bank to do this until you have 3 years of history as a business.  Second, you’ll be referred to operations that do receivables factoring, but I would recommend steering clear of those companies because their contracts are horribly one-sided and may make it difficult to get traditional financing later on. If you and your partner have the capital for it, it may make sense to put some money into a corporate savings account – to be tapped only in certain situations that all the partners agree upon.

Have a sharp focus.  You have to know how to say no to work that isn’t in your sweet spot.  Saying yes to all the opportunities that come your way will cause the following problems:

• You won’t build the necessary depth in your chosen area of expertise, or any particular area at all.
• Your win rate will be a lot lower – because you’ll be competing with people who specialize in each area, whereas you are essentially presenting yourself as a generalist.
• You can’t effectively partner with other people or companies because you always feel like you could be competing with them for business.  Ask yourself what kind of work you would refer to the partner firm, and what kind of work the partner would reasonably refer or sub to you.  If you can’t answer that question, one or both of you is lacking focus.
• You won’t build a reputation in your niche.  Reputation in the age of twitter and blogs is really powerful.  Lack of one is similarly powerful in its absence.  Start blogging, get on twitter, and learn your niche and who the experts are.  Those experts are rarely wanting for work.

Back to Jason’s Post:

Jason terms it “unfortunate” math for consulting… but the real problem is that consulting is an EQ business, rather than an IQ business.  It requires more emotional maturity and awareness, and the smartest guy in the room is not necessarily the best consultant.  Ideally you’re both high IQ and high EQ.  But don’t forget which one will get you further in consulting – EQ.  If you don’t have a high EQ, partner with someone who does!  There’s no one “right answer” to how to succeed as a consultant.  But there are definitely higher or lower risk plays on the business.

Jason points out in his post a series of problems a small consulting firm will face.  There are remedies to the problems Jason points out, and he offers a few himself.  But as you ramp up your team, in my experience when the firm is ~5 people is the hardest phase in growth.  At that stage you need everyone billing as much as possible, you can’t afford to pay for overhead (a non-billable person working for your company), and somebody (hello, founder) has to work a lot of extra hours to get things like invoicing, sales, and recruiting done – because customers don’t pay you to do that work with billable time, you don’t want to pay someone else to do it for you, and it has to be done right.

As you head north of 10 people, the math starts to work more in your favor.  You can hire non-billable help with administrative or sales work, or one of the knowledgeable billable people on your team can explicitly spend less time billing.  Another thing I’ve often heard from bigger companies is that getting past 15 people is a tough barrier – that you run out of “people you know” to hire, and have to get your operations in much better order than you required as a smaller company. I agree that somewhere between 10 and 20 people, the nature of your firm changes and you need to change with it.  I’m sure that is true at many inflection points further on as well.  If you just look at this as another interesting business problem to solve, you’re in good shape.  If someone tells you there’s a glass ceiling to how big your services business can get, just ask them if they know how big IBM’s professional services business is.

Jason’s thought on running the business at smaller sizes:

• None of these new tasks are fun or creative. It’s drudgery, and it’s on you. Congrats, you’re a business owner.

Well, don’t go down the path of building a business unless you enjoy being a business owner and running or building your business.  If you enjoy doing this sort of thing, it won’t feel like drudgery – it will feel empowering and gratifying*.  If you don’t enjoy this sort of thing… partner with someone who does, or get a job!

His other recommendations are in bold, my comments in regular typeface:

Recommendation: Charge more.  Well, this one is a bit obvious.  If you have too much demand for your services, you generally need to raise your rates or hire more people (increase supply).  Figure out which one you can do.  The basic issue is, pricing is incredibly important in consulting businesses.  Mimiran is a great resource for better pricing techniques.  But regardless, you have to understand that your consulting value is worth more than the hourly wage you put in.  You have uniquely differentiating value.  You’re likely committing to provide your customer with an outcome or else lose your “job” (contract) – which is something their own team may not be putting at risk.  An hour is not what you are truly charging for, you’re charging for the output you produce, and dividing it by the # of hours. There is a difference.

Recommendation: Bill more hours.  Generally consultants bill more than what Jason was describing in his post. While this is true, so long as you bill by the hour, I’d phrase this differently:  provide more value.  That might mean billing more hours.  Or it might mean that you will either raise your rate or the demand for your services by providing “better outcomes”.  Focus on the value.

Recommendation: Build a product.  I’d be very careful with this one.  Most consulting companies don’t make the transition.  The product you’re going to build has to be something that will get a lot of your attention and TLC – and likely something that earns money for you right away.  What you don’t want to do is take a profitable consulting company, plow the profits into a product that isn’t profitable (most products aren’t), and then find yourself with a less valuable enterprise overall.  Make sure the product is truly something you want to invest in, and make sure you understand how it will yield revenue.

Recommendation: Use subcontractors instead of employees.  This is lower risk, but lower reward – and I don’t just mean financially.  This choice comes down to what you want to be when you grow up. Is this a business or a body shop? There’s a difference.  If you’re building a business, you use contractors as a minority of your business or to augment specific skill sets or deal with variability of demand.  But if you’re building a business, it is your team, your employees, that will really build it with you.  You need to hire those people – contracting them won’t cut it.

Concluding Thoughts…

Jason’s conclusion:

It’s always hard. Most consulting companies don’t make much profit, and it’s one in a thousand that has the discipline to launch a successful product during off-hours. If you’re going to make it happen, you yourself need to be serious, disciplined, and relentless.

The idea that small consulting companies don’t make much profit doesn’t ring true.  A well-run consulting business is a good business.    Of course, for many consulting companies their margins may look lower because they do certain things:

• Provide generous benefits, from vacation to medical insurance, to 401k or profit sharing.
• Pay generous salaries & bonuses.
• Buy the latest and greatest hardware gadgets and software tools.
• Keep overhead (non-billable head count) low.

These tend to reduce margins in the short run, but retain top contributors in the long run.  Usually a tradeoff worth making.  But the biggest question for the independent consultant moving toward a small consulting firm:  What’s next?

Is the goal to build a big consulting firm?  To make some money?  To solve a particular problem in your industry or specialty?  To have a boutique firm of good friends and rock star specialists?

It really is up to you.  But the answers will help dictate what makes sense as you build your business…  For BP3 it is to be the best business process firm we can be – which is compatible, for now, with being a growth business.

*  Author’s note:  One of the things I enjoy about building the business, as a consultant, is the opportunity to practice our craft (BPM) internally.  As we get bigger, there are real payoffs to improving processes. And we have time to actually think about our business and improve it.

** Another note: Perhaps the title should just be “Consulting Math” since we didn’t discuss Software Math… but I think the prevailing public opinions about consulting businesses largely come from people with a software background – primarily that they don’t make much money and can’t scale, and are inherently riskier.  But, most people don’t mention the fact that these days, most software companies are probably less profitable than consulting companies.  There are really significant exceptions (e.g. Google, Microsoft) which is what people focus on.  But in enterprise software most of the money is in consulting these days.

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3. Oil and Water? (Software and Services)

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