In the professional services world, most businesses start the same way.
You begin with billing by the hour, growing revenue by hiring ever more people, and struggling to keep everyone engaged by constantly finding new projects and customers to keep the plane in the air.
Every year, revenue begins at zero and an educated guess as to what is probable based on last year. That century-old operating model is tired, very tired. It’s the opposite of a scalable and sustainable business.
What if there was a way to start every year with guaranteed revenue?
Hourly Billing Is The Only Way, Right?
I despise the billable hour and its evil sibling, the timesheet. You probably think customers will reject any creative alternative. So did I, but I was wrong. When I finally got fed up, I had real conversations with my customers. I was shocked by where the conversations went.
Even procurement people weren’t married to the concept of a billable hour. They just didn’t have anything else to leverage in their attempt to evaluate my company’s merit.
The hard reality was that the use of the billable hour was my fault. I was giving them the wrong lever to compare us to other firms that appeared similar.
I needed to make it harder to compare us so we could disrupt the playing field. This would allow us to stand out so we could emphasize more value and build a stronger relationship.
Will You Be My Huckleberry?
My customers all had one thing in common. While the route to this realization was a bit different for each customer at first, a pattern quickly emerged. They wanted to:
- Look smart for partnering with my company
- Grow top-line revenue and reduce operating costs
- Avoid scenarios that would damage revenue or increase operating costs
It was that simple. Using my experience as an example, these were large corporations that had deployed software to manage their supply chain operations. Yet the need holds true for any business. It may sound simple in retrospect, but simple is not the same thing as easy.
For years, my business had only focused on new implementation or continuous improvement projects associated with software offered by one of the largest vendors in our space. This meant when one finished we had to have another one lined up. It was feast or famine.
All the while, customers struggled to get the production support they expected from the enterprise software vendor. This software was deployed to facilitate mission-critical supply chain operations. However, there was a huge gap between what the vendor could support and customers required.
This gap found us by way of unplanned and disruptive calls when systems would go down. The calls mostly started with something like, “We can’t ship! We’re losing hundreds of thousands of dollars every hour! Please help!”. In hindsight, this was an obvious opportunity to sell something proactive. Yet I didn’t see it and billed by the hour each time my team stepped in to help. Even outside of normal office hours and on holidays when most disruptive to the lives of my employees.
That is, until the day I discovered service level agreements — contracts that guarantee specific performance with a formal fee structure. They changed my whole outlook. Suddenly, I was completely aligned with customers and hourly billing and timesheets were relics of the past.
A new world was opening for my business and the pricing possibilities were profound.
Even though I understood the need and was able to structure the offering to help both customers and my business simultaneously, I struggled with pricing at first until I learned four important lessons.
- Companies typically know how much an hour of downtime costs them and what the cost was to the business (by location) in prior years. Especially, if you are replacing another provider.
- Customers want predictable pricing so they can reliably budget without surprises. The large corporations I dealt with had operating budgets for each warehouse so pricing often needed to be broken out per location (among other factors).
- You can typically find out how much a customer pays for support of other mission-critical systems to establish a fuzzy benchmark. Sometimes, customers may even tell you, with the expectation that you come in with a lower price and superior value proposition.
- If customers are willing to provide a history of past tickets you can ballpark the cost to their business in prior quarters and years. When coupled with information from #1, this may approximate what you’d learn in #3.
Armed with my new-found knowledge of costs, I was able to negotiate pricing that produced margins much larger than I ever thought possible on the project side of the business. A new world was opening for my business and the pricing possibilities were profound.
Recurring Revenue For The Win
Service level agreements require consistency over time. This translated into annual and multi-year contracts. You cannot make the investments necessary for proactive and preventative support contracts without commitments from customers to invest in your business as well.
While my overarching goal was always to evolve beyond timesheets and the billable hour, I experienced several luxuries that few service businesses ever achieved using the default, outdated service model.
- Future revenue was now more predictable. At least for the support contracts. As I got bolder on the sales side, contract values and lengths increased. I was selling 3-year contracts and 5+ year variants were probable given how long the software we implemented remained in use before future upgrades.
- Cash flow fluctuated much less than before. While the support contracts alone did not cover all of my business’ operating costs, they were trending upward. I used a variety of strategies to aid cash flow — annual, quarterly, and monthly payment cycles — to ensure money was always coming in. While all-at-once payments are great, they only happen at the outset. I used those to help invest in scaling and strived for more granular payments to keep money flowing consistently.
- Operating costs could conceivably be covered by support alone. Within 18 months of the first signed contract, nearly 30% of the business operating expenses were covered. If we could get to 100%, that would mean that every implementation project we won would essentially be pure profit. Think about that for a minute!
The benefits of recurring revenue far exceed the few points I outlined above. Not only will your business align better with customers, but you will also finally have the stability you need to invest in sustainable growth.
The act of chasing project-work won’t go away, but now you have added value to share and the low points won’t be so extreme.
This was only one example of recurring revenue and I’m speaking from my experience alone. You will see others as you talk to your customers and seek to satisfy their primary needs.
The more you can reduce customer risk, create peace of mind, and make your customers look good, the easier it will be to upsell them with new subscription services.
When Incentives Align, Magic Happens
Not only were margins better, but I also had more levers available to continue improving them. I focused on four major initiatives to scale up the new offering.
- Process Automation
I set up service desk software and configured workflows to manage support tickets according to how our service level agreements were structured. This allowed customers to monitor progress, interact with our team, and hold us accountable. And we had the systems in place to analyze our performance and measure how we improved over time.
- Dedicated Team
I hired a new kind of talent. These were highly capable people new to our industry so training was necessary for them to be successful. Beyond commanding lower salaries than the consultants I had hired for project-based work, they brought fresh outside perspectives. They were inquisitive, creative, and eager to add value. Within a few short months, we had a team that could handle nearly all daily tickets without needing to escalate to our consultants.
- Proactive Resolution
We reviewed tickets (and historical information when available) to eliminate repetitive issues that caused the most operational harm. One by one, the new team resolved each issue with the help of a rotating cast of senior consultants. For our largest customer, we were able to reduce their ticket volume by 25% in the first 120 days and even resolve issues that had plagued them for multiple years with their prior service provider.
- Routine Communication
We held weekly and monthly check-in calls with our customers to provide updates on open tickets, share insights on resolutions, and recommend enhancements that would improve customer’s operations. This created new continuous improvement opportunities and drove greater loyalty across our customer relationships.
Our incentives were finally aligned. The result was fewer incidents, even better margins, new revenue opportunities, and happier customers. It felt surreal at first given how much easier it was than the project-based work where we were still subjected to hourly billing at that time.
The routine check-ins also helped warm customers to price continuous improvement work based on the value to their businesses. It was a step in the right direction, however, new implementation projects were a harder nut to crack. More on that some other time.
What Business Are You Really In?
Your customers want peace of mind. They are people just like you who are representing their employers’ businesses. These people want to look smart and have a positive effect on their companies.
I say all that to tell you this — you are in the ‘assurance’ business. You sell favorable outcomes that reduce risk. That is where your value resides. Your value is not in the number of hours you bill. Think results, not efforts.
When you discover the specific needs of your customer, incentives align naturally. This has the uncanny probability to improve your profit margins while also creating opportunities for recurring revenue.
How does that compare to starting every year without guaranteed revenue?
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