So you've decided to start a free software consultancy...
Recently a friend of mine told me that he was planning to start a free software consultancy, and asked for my advice, as I have an extensive background doing free software consulting for a living. While I have already given him some advice on how to proceed, I thought it might be nice to write a blog expanding on my answer, so that others who are interested in pursuing free software consulting may benefit.
Framing the value proposition
There are many things to consider when launching a free software consultancy, but the key aspect to consider is how you frame the value proposition of your consultancy. A common mistake that new founders make when starting their free software consultancies is to frame the value proposition toward developers. Rather than doing this, you should frame your value proposition towards management.
For example, my friend described the value proposition of his consultancy like this:
“I help people manage their open source server stuff for money.”
This is not a good way to frame the value proposition of a consultancy, because the manager will inevitably ask a question like:
“Why can’t we just hire an intern to manage that?”
In this case, the manager is right to ask a question like that, because the value proposition is not correctly framed. The purpose of a free software consultancy is to augment the business’ IT competencies by leveraging the consultant’s gained experience working in FOSS. When you frame your value proposition this way, it becomes more clear to the management why they should engage with your consultancy.
When pitching your value proposition to a prospective client, you should try to empathise with the needs of the client, and tailor your value proposition around how your consultancy can satisfy their needs.
Pricing for services
For serious engagements, pricing should be defined as a function of the value gained for the client from the engagement. For example, if the client saves $250k as a result of the engagement, then you should charge a percentage of that savings.
Proof of concept engagements should be priced lower than your standard rate, as they represent higher risk for the client. Since they are priced lower, the scope of work should also be reduced verses a normal engagement. A common strategy is to split proof of concept engagements into phases, so that the client does not have to commit budget for the entire engagement up front, which can provide an opportunity to charge a little more for the overall engagement.
When you are starting out, you will also want to focus on recurring revenue. This provides two key benefits: first, you have a bottom line greater than $0 if you aren’t able to close larger engagements, which happens from time to time, especially during the summer months, as managers tend to go on holiday. Second, the recurring revenue customers, assuming that you provide them with good service, will recommend your consultancy to others, including large businesses.
These types of engagements should be priced according to what you believe to be a fair value for X hours of your time per month. As a general rule, most consultancies charge at least $100 per hour for prepaid consultancy services.
An example of a recurring service would be something like server maintenance for a small business. In this case, you are augmenting the business with IT services, but the engagement is likely to not require a large amount of time, meaning that with automation, you can build out a customer portfolio of a few hundred of these engagements.
Professional services networks
It is critical to pursue certifications like the RHCE. The value in these certifications are the access to the professional services networks they provide. They will also help with customers who have compliance requirements that state that the engineers working on a project have to be certified.
Larger firms like Red Hat largely outsource their professional services engagements to consultancies which have passed their certification and joined their partner network. These types of relationships are critical: you get to leverage the power of the larger firm’s sales capability to acquire new engagements by bidding on them.
Similarly, you should seek out partnerships with other consultancies, as doing so will expand the range of capabilities that your consultancy has. For example, you might not have familiarity with enterprise networking equipment, but if you have a relationship with a consultancy that does have the ability to take on managing enterprise networking equipment, then you can join forces and bid on contracts which have that requirement in their success criteria.
All of the companies from Red Hat to AWS have professional services networks. Find the ones relevant to the skills your consultancy has and join them.
Invoicing and payment
Larger engagements will always be NET-30 at the least, where NET means no earlier than X days. This allows the client the ability to check your work and ensure they are satisfied with what you have delivered.
If you need the money sooner, there are a few options. First you can offer a discount for paying early, an industry standard is a 10% early payment discount. Another option is to use a factoring company. Factoring works by selling the obligation to a third party, which collects on your behalf for a fee and advances you the payment. If you use a payment platform such as Quickbooks or Bill.com, these platforms have integration with factoring companies, allowing you to get payment sooner.
An engagement will always consist of a written contract with a Statement of Work, frequently called an SOW. The SOW lays out the success criteria for the engagement. SOWs can be open-ended or they can be highly precise. There are advantages to both approaches when authoring an SOW, but an open-ended SOW can wind up creating problems during the engagement, as it provides flexibility for both you and your client.
Always negotiate deals in writing, never take an engagement on an oral promise alone. If a deal requires a third-party to provide some of the success criteria, get their commitment in writing, or you may be left holding the bag.
An engagement should ideally be thought of as a free-flowing conversation that results in the resolution of the success criteria stated in the SOW. Accordingly, it is vital to keep the conversation going.
This means that you should follow up with the client on a regular basis to keep them informed of the progress of the work being done as part of the engagement, and to solicit feedback early. It is far easier to change the course of an engagement earlier than after hundreds of hours have gone into the work.
When discussing the engagement, it should be considered an active listening exercise: you lay out what your team is building, and then the client provides feedback based on your presentation. From there, the conversation moves into defining what forward progress looks like.
These are just my observations from nearly 20 years of doing professional consulting around FOSS. There is no singular right way of running a consultancy, but these are the key aspects that helped me to maintain good working relationships with my customers.
Running a FOSS consultancy is hard work, but can result in a sustainable business, if you are willing to put in the work.