Consulting Business ModelNov. 11, 2022, 7:39 a.m.
For a business cash is king. This has been a truism and it is definitely something that I have paid little thought to. However, how money comes in and how it goes out to vendors/employees plays a huge role. Unfortunately, I have come more and more to the conclusion that getting paid upfront for a retainer and customers purchasing chunks of time is a better model.
- Fixed-Cost projects are great for customers because they only pay a certain amount for a task and overages are on the consultant.
- For a consultant it may not be the best because based on how the contract is structured they payment may be based on milestones so the onus is on the consultant to figure out how to raise money to pay vendors in the meanwhile. This can lead to not being able to grow as you are constantly chasing the money in the future.
- Cost overruns and spec creep. Fixed costs are also a benefit to customers in that customers can change the scope or add to the work that wasn’t previously scoped. Or there is a discovery that happens after the contract is signed that results in complexity.
- Hourly is beneficial to the consumer and consultant in that work can be more regularly paid leading to consultant having to only float the vendors/employees for a shorter period. The amount of accounts payable should hopefully be reduced in this scenario.
- However, growth in the scenarios is still zigzaggy as you can get more work but you may be pulled back from a lack of cash to pay the workers since there is a discrepency between when you are paid and when you pay your vendors.
- Some customers pay much slower than others resulting in a percipitous drop in cash so large cash cushion is needed which could otherwise be used for growth.
- The problem with the hourly model is that payment is always in the future, which means if you have a sales team that is growing your company, you may not be able to fulfill the work as you will have a lack of cash. So growing will lead to failure.
- Lastly, it is hard to prioritize work as every client is paying in the future. So each client is equally important.
- I think hourly retainer is the best mechanism for both a customer and consultant. A retainer being an upfront payment for a set amount of hours.
- A retainer gives a float to the consultant to allow them to hire the employees/vendors that can help fulfill the work quickly ensuring quality of delivery.
- It benefits the customer in that they can commit a small amount of hours and test the waters with the consultant and constantly move forward to the finish of the project. The hours can have accountability.
- The consultant can hire a team of sales and admin staff to help grow the company further, while not being afraid to fulfill the work needed.
- This model also incentivizes and prioritizes work to the clients that have a regular retainer. Ensuring that work is always prioritized.
Anyways this whole article is to say I’m moving to an hourly retainer model.