CXO

Partner up to create a powerful virtual firm

Virtual firms can help consultants win contracts that traditional firms and independent consultants can't touch, thanks to a low overhead. But before you put something like this together, ask yourself these five questions.


For Jeannie Giordano, the formation of her own company wasn’t risky, pressure-filled, or full of heartache. Last year, as her employer began layoffs, Giordano decided to skip what would have been her second downsizing and instead banded together with several coworkers to create an Internet consulting firm.

But the "firm" is without an office space, employees, or shared resources. Instead, partners at Internet consulting firm Thrilltek, LLC work from home, using their own equipment, and each one specializes in one area of programming, information architecture, or design.

The benefits are a larger base of expertise among partners, the ability to bring in bigger projects, low overhead costs, no employee expenses, and partners who work from home on a flexible schedule.

"My partner had just gone through a downsizing and was in the same boat, so we decided to team up," said Giordano, technical director for Thrilltek, who, along with her partners, is based in New York City.

Many IT consultants prefer to function as sole proprietors and use subcontractors. But the option of a more formal relationship between consultants—using one "company" name, with multiple partners specializing in different areas but with the benefits of a virtual firm—can attract more business and more lucrative projects.

Yet, before you enter into any kind of virtual company agreement and align yourself with other partners, ask yourself these five questions.

How will you choose your partners?
Before she agreed to work with five other partners at 8 Sharp, a virtual Web consulting firm in Pittsburgh, founding partner Raelin Sawka Musuraca evaluated a number of potential partners. She chose those who were reliable, self-motivated, and communicative. But most importantly, she chose people with whom she had successfully worked.

Nearly everyone Musuraca met with had worked with her in a previous company where the staff had been laid off. "Before you attach your name to someone else so permanently, make sure you want to do that," Musuraca said. "It's like a marriage. Your reputation becomes tied to their reputation."

And, like signing a prenuptial agreement, Musuraca and her five partners wrote into their contract a clause allowing a partner to be voted out of the firm by the remaining partners. Though it was awkward to discuss how to dissolve the partnership before it began, she said it was important that those who were not contributing could be removed if necessary.

Will the partnership incorporate?
After you've chosen your partners, the next consideration is whether the group will incorporate. While the primary legal benefit of incorporating as an S Corp, or limited liability corporation (LLC), is to remove personal liability from one's business endeavors, the effort can also pay off for a virtual firm by attracting bigger clients.

As individual contractors, Giordano said her group would not have been able to attract its larger projects without taking this step. Because the group of three formed an LLC, potential clients saw the company as more stable and committed. That translated into a high-profile Web project working with a video game company. The client, said Giordano, was set on using a consulting firm instead of an individual contractor.

But the other benefit of incorporating is that it helps clarify each partner's role on paper and solidifies the relationship among the members.

"It gives the group a sense of credibility," said Musuraca, who noted the importance of having agreements and contracts among the group members. "We are accountable to each other in a way you would not be if you are pulling people in to do contract work with."

How will you sell the virtual firm to potential clients?
Explaining to a potential client that the partners work from home but are agile and connected enough to handle all client needs could be a potential challenge. Emphasizing the client benefits is how Musuraca and 8 Sharp have handled this issue. A major selling point is that the firm charges a rate between 25 and 50 percent less than what other competing consultancies charge, she said.

"Working in a virtual model with no office and no overhead, they're getting a really good rate out of it," said Musuraca. "And they're getting a much better quality product than they would if they had to go with less experienced freelancers."

Emphasizing the bottom line also works for Giordano. When she explains that if the company rented a New York office space, its rates would increase by nearly 50 percent, clients are "right in tune with it," said Giordano. "They understand immediately. We have a lot of meetings over dinner or coffee."

Besides the bottom line, both firms explain they can work on-site if a client needs them to, or they can be contacted via phone, cell, e-mail, or Instant Messenger. That type of availability, coupled with lower rates, has won clients for both firms.

How will the workflow operate?
Any virtual firm needs to figure out how partners will handle the projects. You will need to incorporate all project management, billing, accounting, and other business-related matters into this equation. Paul Hoover, a Seattle-based partner with Red Squirrel Design, Inc., works with his brother, Dave Hoover, who is based in Chicago. For this virtual firm, the type of work the client needs determines the point of contact.

For example, a recent client required an Internet-based database, and though Paul brought the client to the firm, Dave will handle the project because his expertise more closely matches the project’s demands. The two have also determined that Dave will be responsible for the financials of the company, including invoicing, payroll, and taxes.

The pair also posts client notes on a "Wiki," a freeware program that can easily update Web pages. Each client has its own Wiki that the brothers rely on to stay informed.

Clients of 8 Sharp, on the other hand, work with whoever has brought them to the firm, and that partner acts as a project manager and brings in other partners’ expertise whenever it’s needed, while Musuraca handles the billing. The group communicates via e-mail and phone, and posts project information on a secured bulletin board.

"Most of the time, if you're going to make it work, you've really got to bring in your own client and use people to fill them in," Musuraca said.

How will you handle individual jobs?
Because a virtual firm, in many ways, exists so that teams can be inexpensively created and re-created with ease to meet client needs, there will sometimes be cases where only a single person is needed on a project.

Figuring out how individual billing will work beforehand is essential to avoid conflict. For Giordano at Thrilltek, when a partner brings in a client that requires just the single partner's time, the partner still bills the job through Thrilltek. Because each person has been assigned different tasks associated with every client, such as invoicing or collections, the fee is divided between the partners.

For Musuraca and 8 Sharp, if a partner brings in a client whose project requires just that person's expertise, the billing is done through 8 Sharp. But, in this case, the partner bills the company for his or her hours and then collects the entire fee, sans a small administrative charge.

"That was one of the agreements we had to make. If you had a project that was just your own, you had to bill it through the company," Musuraca said. "You have to be faithful."

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