The Narcotic Of Professional Services

In the technology world, selling new products is hard. Selling to enterprises is even harder. Small companies were (relatively) easy. They took a little bit of handholding to get your SaaS/software/hardware configured “just right” for them, but most of what they wanted pretty much fit into the offering anyways; it was “on the truck.”

As you expand up-market into larger customers, customization demands increase. They need:

  • Integration with their (unique) login system
  • Special compliance controls
  • Unique flows and processes
  • Added manual approval steps
  • etc.

Big companies have big processes and lots of existing customized tools, and expect you to work with them in exchange for the commitment (and big check that goes with it).

As your service or product company moves into those markets, you start to add or expand your “Professional Services” (i.e. consulting) arm. Initially, you use your ProServ arm just to assist onboarding new customers. You even are willing to lose some money on the cost of ProServ to get the big deal for product or SaaS recurring revenue.

All along, you keep in mind that consulting firms have much lower valuation multiples than product, let alone SaaS (committed recurring revenue/CRR), firms. The rule of thumb for SaaS usually is around 13%: you can let your consulting (one-time) revenue grow to <13% of your total revenue before your valuation starts to take a serious hit. This makes a lot of sense. As long as consulting isn’t too large a part of your revenue, it really is just on-boarding assistance. More that that, you risk turning into a consulting firm.

You try to keep focused by remembering that the valuation multiple of revenue for a consulting firm usually is 1x annual revenue. A firm that sells $10MM in annual consulting revenue will be valued at ~$10MM. Some firms have special brand value that boosts it, but only by so much. You, aggressive and ambitious CEO, are looking for the nice 5-7x that “real firms” get.

Then, one day, you hit a rough patch in revenue growth. Don’t feel too badly; every company does. As a colleague of mine likes to say:

“It takes years of hard work and many failures to become and overnight success.”

What to do, though? Your board and investors are pressuring you, you worry they may force you to make cuts, your head may be on the block… and there is that ripe old plum of consulting, just ready to bring in some cash. “It will just be for one or two quarters, to get the Board off my back.”

Don’t.

Boosting revenue via consulting for “just one or two quarters” is the start-up equivalent of boosting your mood via cocaine “just to get through the next few days.”

It is no coincidence that “consulting” and “cocaine” and “chocolate chip cookies” all start with cookie monster’s favourite letter “C”: all are equally addictive.

Summary

Consulting is an important and, when performed professionally (not Marty Kaan), invaluable and honourable business. It even can play an important part in a product or services company’s onboarding strategy when the product/service or customer integration is complex.

It also has revenue-boosting appeal like the sirens of Greek mythology. Like the ancient sirens, once you get closer, it nearly is impossible to leave.

Professional Services are a narcotic. Use only with a prescription for doctor-approved purposes. For anything else, call the doctor.

About Avi Deitcher

Avi Deitcher is a technology business consultant who lives to dramatically improve fast-moving and fast-growing companies. He writes regularly on this blog, and can be reached via Facebook, Twitter and avi@atomicinc.com.
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