CXO

Keep revenue sharing and referral fees aboveboard

A consultant who wants to strike out on his own has some ambitious plans for working with existing consulting firms. If the arrangement involves referral fees and shared revenue, it pays to be careful.


Tim Heard is a technical recruiter for JC Malone, a career placement service. Tim shares his career advice by answering questions from TechRepublic members.

Question
I quit my job two months ago after my former employer’s business began to fail. (I hear he has just filed for bankruptcy.) Since leaving, I’ve been unable to land a new position, so I’m planning to create employment for myself and start my own IT consultancy.

Having identified operational management and people skills as my strong points, I’ve decided to start out in the area of IT service management, by initially offering assessment, mentoring, and vendor management services. I have decided to approach a few consulting firms and try to complement their services with my own. This way, I’ll get access to their clients through their word-of-mouth. Some of these firms are asking for revenue sharing for their referrals.

I have two questions:
  1. Have I chosen a good plan of action for entry to these organizations? Is there a better way?
  2. What sort of partnerships can I build with firms? Is revenue sharing the only acceptable way for me as the "needy" partner?

—Clinton

Answer
I admire your initiative. While your idea certainly does not guarantee you success, it sounds as if you have already found some firms that are open to considering your proposition.

Regarding your first question, I think that the success of your plan will depend largely on the degree to which your business partners actively promote your services, and the strength of the relationships they have built with their clients. It will be important for you to be selective regarding the firms you approach. But I think your premise is sound. Since you don’t have a solid list of contacts yourself, this method is probably the most likely to generate some business quickly.

On the other hand, the service you seem to be offering may not be one that companies will be comfortable outsourcing. Having a consultant provide vendor-management services is akin to hiring the fox to guard the henhouse. I think that this would be a role that most companies would prefer to assign to an internal employee. It could be especially problematic if you were asked to manage the client’s relationship with your business partner—a clear conflict of interest.

My recommendation is to find out which of the larger consulting firms in your area seem to be weathering the economic storm. Then approach the highest-ranking person in the organization that you can find who will take the time to speak with you. One option is that they may opt to partner with you. Another is that they may simply hire you outright. (A preferable alternative in the current market.)

Regarding revenue sharing: Aside from the possibility that you might be hired, I can’t think of another alternative. I’m assuming you mean an arrangement in which you promise the business partner a share of the revenues that you generate in return for access or referrals to the partner’s clients. This practice is common in both the recruiting and consulting industries, and there need not be the perception that one of the firms is the “needy” entity.

The split can be determined by a variety of factors. In general, if one firm does the legwork to find the need, and the other provides the service, the split is 50/50. This is generally a split of the profits after expenses. A vendor paying a contractor, for example, would get more in revenue, because it would need to pay the wages of the contractor in addition to making a profit.

In today’s market, though, it can get complicated. For example, one firm may be paying someone a referral fee to learn of the need for a provider of vendor management. The client may be asking for a discount, because a dozen other firms are offering similar services, and then there must still be a big enough piece of the pie left for you and your partner firm to make a living. In short, you need to be very specific when you get down to discussing bill rates and splits.

You also asked about referral fees, which are an excellent way to extend your reach. One way you might use referral fees is to let it be broadly known that you’ll pay others to act as independent agents on your behalf to bring clients to you. In return, you would pay them a referral fee, or commission, when you’re able to close a deal and produce income from a referred client.

I’ve made several placements in the past few years because of the assistance of others who happened to know of a need and got in touch with me about it. In two cases, individuals referred people to me with hard-to-find skill sets. In another, which is more similar to your situation, a contractor let me know about a company in the city that was actively hiring and working with recruiters.

A word of warning: You should define in advance who is eligible for referral fees and under what circumstances. For example, if your best friend is the CTO of an organization, he or she shouldn’t be eligible for a referral fee, not because he or she is your friend, but because the person probably has undue influence regarding the vendor selection process. In such a situation, a referral fee would look more like a bribe. It would certainly be unethical, and probably would be illegal.

Most companies allow for gifts of nominal value from vendors, but nothing more. A good rule of thumb is $25 or less. This kind of policy generally precludes offering referral fees to client employees in return for good leads. (A nominal gift of appreciation is the most you would want to offer without potentially getting in hot water.)

A policy like this doesn’t preclude using referral fees as an incentive to get others to network on your behalf. You just need to be careful about how you use this tool. In all cases, though, referral fees should be aboveboard, and recipients should understand that they will be reported as receiving taxable income.

As you begin exploring going into business for yourself, I recommend that you first contact your local chamber of commerce. It should have a packet of information that will include a checklist of things to consider when you’re getting started. It may also offer some free training, or information on other resources that you might want to draw on, such as the AARP. (Retired executives may not know the technology you’re using, but they know people, and may offer some helpful advice.)

Question
I am a 39-year-old physician with a strong IT interest that I have developed during the last five years. I’d like to segue out of clinical medical practice into IT consulting, concentrating on the immense opportunities present in healthcare.

I’m conversant with a wide variety of hardware and software, and have enough working knowledge of several programming languages that I can speak knowledgably with programmers and translate end users' desires into data usable to the IT staff. I’m quite solid in Microsoft databases including SQL Server, I’m conversant in Visual Basic, and I’m getting up to speed with Java.

I also have a decent understanding of ColdFusion, including some actual development work, and I am learning PHP and XML. My estimation is that the bulk of healthcare's IT needs will center around the technologies that allow storage (databases), transfer (XML), and presentation (server-side technologies) of massive amounts of data.

I see myself as a consultant helping healthcare organizations evaluate, develop, and implement IT solutions: everything from evaluating needs to selecting hardware and software and implementing the solutions chosen. How would you suggest developing this career path further? What, if any, additional formal education/training or credentials might be necessary? Any advice would be welcomed.

Answer
I think that this is going to be a difficult switch for you. Despite the fact that huge leaps are being made in the development of clinical systems, the healthcare industry is far behind when it comes to information technology. For example, it’s common for a hospital’s director of nursing not to have e-mail. The same holds true for physicians’ offices.

In a typical hospital, you’ll find one IT “top dog” and an assortment of direct reports—mostly computer operators who will run reports and help make sure that the clinical systems don’t go down. Because of the tremendous pressure on healthcare providers to keep costs down, the “top dog” will probably take a dim view of you coming in and selling your services.

On the other side of the coin, there may be a need among private practices for someone to come in and administer networks and help make decisions about purchasing software packages, but that person will probably be available at a lower rate than you will need to earn a living. (Keep in mind that network admin skills will be more dominant, since software selection will take place only once every blue moon.) Currently, there are many more network admins in the workforce than there are jobs. Compensation continues to be pushed downward in this field and even highly skilled contractors are being forced to consider relatively low rates on jobs.

Despite any ability to live frugally on your part, unless you’re willing to sell your house and one of your cars, I don’t think you’d be able to support your family doing this. Besides, you haven’t listed any network administration skills, which would be necessary for such a position.

If you’re absolutely determined to mix your medical background with technology, I suggest that you might go into technical sales. Research the various practice management and clinical systems and find the ones that you really think are designed well and worth the cost. Then contact those companies and offer your services as a sales rep.

It may be that your credentials will help you get your foot in the door on occasions when others would get the door slammed on them. Your background would undoubtedly help when making a sales pitch, because you would know firsthand how an application would be of benefit in a real-world environment.

Another possibility may be to hire yourself out to the same firms and assist with the software development process. In this role, you would not be pounding out code; you’d be interacting with clients to understand business needs, and working with programmers to develop specifications for the products.

I have another suggestion before you completely throw in the towel on your medical career. Why not contact a few organizations like Doctors Without Borders and go somewhere for a while where your skills will really make a difference? You’ll have the opportunity to do what you were trained to do without having to do daily battle with lawyers and HMOs.

I know that this isn’t what you were hoping to hear, but I don’t think that I would be doing you any favors by telling you to get into IT right now. The market is extremely soft and it’s only going to slowly improve in the coming year or so. (At least that’s what my crystal ball is telling me.)

If you decide to forge ahead with your plans, please keep us posted and let us know how you’re doing.

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