Banking

Consider working with clients as a direct vendor

Try engaging a large client directly with a master services agreement (MSA). John Weathington says it's something any IT consultant can do.

If you're not contracting directly with your clients, you're surrendering your business practice and, by extension, your lifestyle to agencies that at best have your interests as a secondary concern. Regardless of what you may have been told, any IT consultant can engage a large client with a master services agreement (MSA).

The first large client that I had a direct relationship with was Silicon Graphics in the mid 1990s. I had been working through an agency for about two years when I decided it was time to attempt a direct relationship. Once my manager was on board with the idea, it was just a matter of due diligence. Here's the process I went through, which still applies today:

  1. Formed a Subchapter C corporation. This is the only business structure I recommend.
  2. Filed a fictitious business name (aka DBA) with the county, and obtained a business license with the city.
  3. Hired a payroll company and started paying myself a salary.
  4. Hired an accountant to do my taxes.
  5. Secured general liability insurance.
  6. Beefed up my marketing materials.
  7. Listed myself in the yellow pages.

If you're thinking this was an expensive move, you would be right. Insurance, accountants, and payroll taxes are not cheap; however, my income almost doubled. If I had not made that move, I would have left close to $500,000 on the table, over the life of my relationship with Silicon Graphics.

That was then, this is now

I admit that it was easier to form a direct relationship in the mid 1990s then it is today. Since then, several incidents involving Microsoft, Federal Express, and others have made it less attractive for large companies to do business this way. The main risk for the client is that a government agency such as the IRS would reclassify you as an employee instead of a contractor, or that you would sue them for the employee benefits they're not paying you. Microsoft fought and lost a landmark case around this scenario in the late 1990s.

Risk management

Corporate America responded by clamping down on its risk management practices. In almost all cases, companies will hire an outside risk management agency like PrO Unlimited or WorkforceLogic. These are not consulting agencies, so don't be alarmed when your client insists you work with them to facilitate the deal. You can usually distinguish these entities from other consulting agencies by their low take rate (typically 2-3 percent), their openness with fee disclosure, and relatively non-constricting contracts (i.e., there will be no non-compete clause that prevents you from marketing directly to the client).

Working with risk management agencies is easy, as long as you look like a consultant and not an employee. In addition to adopting all of the previously mentioned structural components of your business, ensure you do most if not all of the following:
  • Generate the majority of your revenue from another source. This can be tough sometimes, especially if you're new, but you must diversify your income portfolio or it will look like your client has financial control over your business, which is not a good thing.
  • Have as many clients as possible. It doesn't matter how much or for what services you're being paid, but try to accumulate as many clients as possible. For instance, try speaking for a fee, conducting workshops, or writing articles. Make sure to collect testimonials from all clients on their letterhead. This is the best evidence that you have other clients.
  • Market aggressively with print advertising. Occasionally run direct mail campaigns, and take out advertisements in magazines and other advertising channels. Always maintain professional marketing materials like business cards, one-sheets, and brochures.
  • Lease some cheap office space. Companies such as HQ and Regus have turnkey solutions for small businesses like us that want a big presence but have limited funds. Take advantage of these services.
  • Hire a personal assistant, and pay them a salary.
  • Consider setting up an ERISA health plan for your corporation.

It may sound like a lot of effort and expense to contract directly, but trust me when I say it's well worth the trouble. Negotiating is easier, collecting payments is easier, and the income differential can be quite substantial. But most importantly, the relationship with your client is built directly with your company, instead of another consulting agency, which will always put its interests ahead of yours.

In my next IT Consultant article, I'll discuss how to secure direct client contracts.

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About

John Weathington is President and CEO of Excellent Management Systems, Inc., a management consultancy that helps executives turn chaotic information into profitable wisdom.

4 comments
mtho.ncube
mtho.ncube

Great tips, John! Looking forward to your next article.

Sterling chip Camden
Sterling chip Camden

... and I definitely prefer direct marketing. However, I don't think that all of the expenses you enumerated are required. I don't have a personal assistant, for instance. I'm also a sole proprietor. Tell us why you think S-Corp is better.

nclevenger
nclevenger

He actually recommended a C-Corp in the article, however I hate the idea of paying taxes on corporate profits first where I'm the only owner then again as the salary I'm paid. S-Corp or just an LLC should work as long as the key point of multiple clients are shown. Also, detailed time tracking is critical, don't skimp on detail in the invoices ever!!

spchester
spchester

The C-Corp won't pay taxes on the income that they pay to you as an employee as it will be expensed on your 1120. You can use this to your advantage to manage the income level between the two entities (yourself and your C-Corp) to the point where you pay the least amount of tax. The common phrase double taxation only happens to dividend income.

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