Leadership

IT consultant strategies for weathering economic downturns

Check out these tips for keeping your consulting business afloat when the economy is tanking. Chip Camden discusses five marketing tips from Steve McKee and provides six do's and don'ts of his own.

 

Independent consultants are familiar with the feast or famine phenomenon -- you usually have too much work or not enough. You can develop strategies to help get you through periodic lean times, but what do you do when the entire economy starts to tank?

Predictions about the U.S. economy in 2009 look bleaker by the day. Although the consensus seems to be that IT hasn't been hit badly by the not-technically-a-recession, the forecast for IT in 2009 is stormy with a chance of tears.

Tips for keeping your consulting business afloat

In Steve McKee's BusinessWeek article about marketing in tough times, he offers five good tips on how to hang on to your sanity and your business during a recession (or whatever we're supposed to call it). His tips are mostly aimed at small businesses, but these principles also apply to small consultancies. I'll discuss each of his points with a specific focus on the independent consultant and provide six additional tips of my own.

#1: Be smart and thrifty, but don't panic. This, too, shall pass.

It would be nice if you've thought ahead as Steve suggests and stockpiled some assets to get you through (if you haven't, now may be a good time to start) -- but what if you find yourself running on empty? Here are a few ideas to consider:

  • Decrease expenses. Try to identify ways to reduce your personal budget so you can take less out of the business each month; then look at your business expenses to see what else you can trim. For instance, look for a cheaper phone or Internet plan; drop a few domains or software licenses that you no longer use; or stop buying new gadgets until you really need them. These ideas might seem like dents in the Death Star, but every little bit keeps you that much further from bankruptcy.
  • Take out a business loan. Think this idea through. Unless the interest rate is negligible, you might be digging yourself a deeper hole.
  • Find vendors who will give you terms without interest for necessary equipment and supplies. This could temporarily help your cash flow, but remember that 30 days go by awfully fast when funds are short.

#2: Marketing is muscle, not fat. Be careful about cutting it.

Marketing is usually the first thing businesses cut when they're in trouble. But why? You need more business! Here's how to be smarter about your marketing strategy:

  • Stop spending thousands of dollars on full-page ads in a technical journal.
  • Use your extra time to find new business. Follow up potential leads for new business, ping members of your existing business network, and endear yourself to Google.
  • Comment on related online forums, actively blog about your expertise, and provide free samples (make sure the samples are real content and not a blatant marketing pitch).
  • Learn about SEO and get your pretty Web site on Google's first page of results for your target market.

#3: Don't lose focus by chasing business you wouldn't normally want.

Amen. Consulting is about providing expertise and insight. If you allow yourself to become just another journeyman coder who happens to have a non-employee contract, guess who's the easiest person for your clients to cut when things get tight? Sticking to your strong suit helps to make you less dispensable. Be sure you know the seven reasons to turn down business.

Of course, if you have no business, you're likely to take anything that comes along. But don't let it distract you from pursuing the market that you serve best.

#4: Don't discount

This may sound counterintuitive, but it isn't. As Steve says, "discounting your price discounts your product." If you give special discounts just because you need the business, it paints "Desperate" across your forehead. By contrast, sticking to your consulting fees when times are tough sends a clear message that you value your work, and you expect clients to derive a benefit from it that justifies your price. Now if the entire market goes south, you might need to adjust your regular fee to stay in step.

#5: Don't neglect the elephant in the room

Even though the economic downturn hasn't drastically affected IT yet doesn't mean you shouldn't plan for it. The following six points are my suggested do's and don'ts.

  • Show that you're an asset. You should be able to demonstrate to clients that having you on board saves them money today. In real life, it can be much less tangible than a simple equation. You need to convince clients that your abilities to efficiently deliver solutions, do things the best way, motivate others, and foresee potential problems combine to save more money than they pay you. Your situation will dictate how you'll make this argument.
  • See if some clients will pay in advance. If a client agrees to pay you in advance, try to sock the income (at least some of it) away for the rainy days ahead. This is one instance where you can make an exception to the "Don't discount" rule. A discount is justifiable because of the cash flow advantage your client is providing to you at their expense. You still don't want to cut your fees too deeply. Remember that time paid for today is time you'll have to work later at no additional compensation. You're only moving things around on your balance sheet in order to gain cash now.
  • Save. Even if you're already feeling pinched, save some of your income because the economy will likely get worse. It's tempting to think, "Well, if I need the money for expenses now, I shouldn't try to put money in the bank." The thing is, once you put money away, you can usually find ways to live without it. If you keep money on hand, you will spend it.
  • Don't be expendable. Your clients will be looking for ways to cut back, and you don't want to be on the hit list. You need to demonstrate your key strengths, work well with others, solve problems, and most importantly get the job done right. Use some of your extra time to hone your skills so you'll be even more valuable. If your client thinks you're a key element of their success, it's less likely you'll be let go than if you appear to be holding them hostage. It's never a good idea to try to game your job security by refusing to share information, baking in time bombs, or denigrating the abilities of others. These strategies backfire in the long run.
  • Don't allow clients to slip into late payment. One way businesses can increase their cash flow is to postpone payables. But if clients start paying you late, then guess whose cash flow they're stealing? You've got to put up a big "Do Not Enter" sign on that avenue. If you don't protest a late payment, it says that you don't think you deserve better treatment and that you don't believe in the value of your work. If you let a client slip once, be ready for a bigger slippage next time.
  • Don't make major changes in your strategy (unless your current strategy is dead wrong). Anytime you take a new heading in business, you're going to make mistakes and learn a lot. That's fine when you have enough income to buoy you through the transition; but when money is already scarce, you can sink your entire endeavor. So if you really think that changing course could improve your business, paddle incrementally in that direction rather than jumping out of your life raft and trying to swim for shore.

What tips would you add to the list?

What other strategies do you have for weathering the new economy? Have you felt any effects yet? Post your thoughts and experiences to the discussion.

Related resources for further reading

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About

Chip Camden has been programming since 1978, and he's still not done. An independent consultant since 1991, Chip specializes in software development tools, languages, and migration to new technology. Besides writing for TechRepublic's IT Consultant b...

18 comments
witzend
witzend

I've been in this business for over a dozen years and suddenly am finding myself in unfamiliar territory -- late-paying clients. (thank you, Economy!) I have always had a finance charge on unpaid balances over 30 days but never had to actually charge anyone until this year. Now suddenly I'm charging a large number of customers and when they finally do pay, they're not bothering to pay the finance charge. I've got one guy that's refusing to pay it because he's claiming he didn't get a bill until now (that was 10 months ago and yes he's gotten both email and snail mail billing). Anyone else run into this?

reisen55
reisen55

My father's consulting company, international packaging consulting focused on reducing costs, weathered bad times very well. With a focus on reducing expenses through innovative thought and realy unique ideas, it did best in tough times. Same for us. For the IT consultants who are nimble, fast and can do more for the clients for the same $$ as last year and/or provide additional services AND think of themselves as PART OF THE CLIENT'S BUSINESS and not as an outside consultant = very good results. I like to think of my efforts as being the client's defacto IT DEPARTMENT - AN INTERNAL ONE. That I reside elsewhere and visit the client when needed is no difference. I have worked corporate internal and using that viewpoint helps. DO NOT CONSULT for your clients. WORK AS IF YOU ARE EMPLOYED BY YOUR CLIENT. THINK OF YOURSELF AS INTERNAL STAFF And that is an entirely different game. Do not cut marketing, do more of it. Cold Calling = when passing by business, drop off a card and get a name. Never hurts. Newsletters = best free marketing one can do. Seminars - they are great for getting attention. Do not go to them as an end result but also GIVE THEM.

alex.kashko
alex.kashko

This all makes sense. I Have no problem with discounting, but if I know the client or headhinter is going to try and push my rate down I initially set it higher. One tip involves planning well ahead. It is possible you will owrk in a coutnry where as a contractor you can be paid on a self employed basis. Put aside your estmate of tax due every time you get paid. In good times put aside more. In a high interest account or a very safe investment ( government stocks or similar). If you are lucky and the bad times do not come for a year or two and the tax demand won't come for a year or two the interest on the tax man's money may give you enough to survive that little bit longer.

Sterling chip Camden
Sterling chip Camden

I remember after the dot-com bust, a lot of folks didn't have ready work. I was lucky to have a really specific niche on which I could rely. There was some knock-on effect from my clients not having as much business, but they still needed me. That's one example of how sticking to your strengths can save you. How about you?

Randy Hagan
Randy Hagan

In 20 years, through two mild recessions and literally hundreds of clients, I've only been stiffed twice. Once by a private referral that wrote me a hot check and left the area; the other time by a state agency (ergo, I no longer accept work from state agencies). But late-payment has been a more frequent problem for my practice. Forget about collecting finance charges. If you really want to cover a finance charge, you'll have to find that money in future work. To be honest, I'd be surprised if you were getting anything even approaching pleasant response as you make collection calls for late fees, much less money ... While you can't open your clients' checkbooks and get yourself a check (not without theft charges, anyway) you can do some things to ensure more timely payment from your clients. 1) Bill consistently. Invoices should go out promptly and consistently, on a regular schedule. Your clients should know when to expect an invoice for your work, and when you expect them to pay that invoice. Payment terms should be written on each and every invoice. Over the last year, I've taken to sending client statements on the 5th of every month to clearly define to my clients (and myself) what's due and how long it has been due. This would give you some leverage with folks like that client who says "You never sent me a bill. I'm not payin' interest on nothin'." But it probably won't get you any more cash. 2) Track your clients' payment schedule. You want to know when, how much and how often your clients pay their invoices. If you have a client who regularly pays net 7 days and suddenly goes to net 30, you want to know immediately -- even if it is inside your regular payment terms. Tracking your clients' payment schedule makes it easier to spot changing patterns in your cash flow and adjust your business accordingly before little hassles become big problems. 3) Set up credit card billing. A couple of my corporate clients have gone to charging their work on departmental charge cards, and I got credit card billing for them because it's reduced the billing cycle for these clients from 60-90 days to less than 30 days. While I've bumped my rates slightly to cover half the cost of running charge cards (a stated rate of just over 3%, but by the time fees and the first year's setup charges are considered the final number is closer to 5%), I'm happy to eat the other half of the charge to reduce the billing cycles. But it's also been a bonus for working with some small business clients. I can run a credit card on the spot and know if I've got my money before I get offsite. And unlike running a client's rubber check through the bank, my credit card processor gives me immediate response and doesn't charge anything if the card is declined. It's very easy to set up credit card processing today for a reasonable cost. Be sure to show you accept credit cards on all your print and online collaterals, and you'll have clients offering to pay you by card before you can even ask.

wfreeman
wfreeman

...in this business and this is the first time you've had clients paying late? I guess that also means that you haven't ever been stiffed. Either you have led a charmed life or you're a better man than I. What's your secret?

Sterling chip Camden
Sterling chip Camden

Personally, I find the idea that the client is my customer to be more motivating. If I just thought of them as my employee, then I'd feel somewhat entitled. As my customer, I need to work to make them as successful as possible so they'll keep giving me the business.

Sterling chip Camden
Sterling chip Camden

I wish I were that good about holding out my tax money. That's one bill I always seem to have to scratch for.

Locrian_Lyric
Locrian_Lyric

You have to be VERY careful if you are in a niche. It has to be a small one or you just might get pushed out.

PMPsicle
PMPsicle

Generally I agree with you but there are three problems with niche marketing you need to keep in mind. First, when you select your niche it needs to be small enough for you to dominate and to be seen as "THE EXPERT" but large enough that even if there is a downturn in the economy there will be enough work for the niche players to survive. Secondly, the niche has to be reasonably long-term. There's no point in playing to a niche that only lasts one year. (Well ... actually you can but you need to have a strong exit strategy AND your next niche in play). Third, you need to beware of other forms of niche-ing (so sue me for making up a word :> ). Niche marketing is great ... it allows you to identify your clients clearly, identify their needs clearly and identify how to best connect with them clearly. Niche buying (I only buy from people in my niche) is BAD! Unfortunately, because we're in a headhunter intensive type of market (i.e. a labour reselling market) you are going to find that as an issue. As a result potential clients may reject you for work in their niche because you are seen as being in another niche. (When you see a job ad for a PM with SAP GL experience that's an example of niche buying (a PM who cares which package they are installing is a PM who's lost sight of what's important in their job) ). As a seller you need to be aware of the potential for niche marketing to be reversed and end up biting you. If this is the case, then you need to be extremely strategic in your choice of current niches (yes, more than one) since the life span and extreme cutoff on obsolesence means you can't afford not to be constantly hopping niches (which kind of eliminates the whole point of niche marketing). Glen Ford http://www.TrainingNOW.ca

Sterling chip Camden
Sterling chip Camden

I've never seen late charges motivate anyone. If anything, they'll take it as permission to pay late.

Sterling chip Camden
Sterling chip Camden

Walk away from bad business. I've never been stiffed, but I have had to beg and plead on occasion until I was paid. Just had one of those happen over the last month. I can tell you what I'm going to do about it once I cash their check, though -- I'm putting them on pre-pay only from here on.

PMPsicle
PMPsicle

Take a look at what your services would be worth to a regular employee (i.e. if you had to go out and hire someone). Then calculate the post tax pay (i.e. net salary) as if you had hired yourself. Then pay yourself that amount on a regular basis. The remaining amount stays in the company bank accounts (well, you actually should invest it in a mix of short term investments and cash available accounts). When your accountant closes your books at the end of the year, he can calculate the taxes owing for both of you. The personal taxes then get paid out as a bonus or dividend from the company (at a lower rate). The post-tax profit can then also be distributed as a dividend. I suggest that you consider splitting the amount as (preferred) shareholders' loan and cash payment (i.e. leave a portion in the company). (Why preferred - if there is a lawsuit or bankruptcy you want to draw the money out legally and leave nothing behind). Of course, this only works if you are getting paid full value for your services (or at least more than you'd earn as an employee). If not then you need to readjust your pay quickly. This also has the advantage of controlling your spending habits in case you need to return to employee status. Glen Ford http://www.TrainingNOW.ca

Sterling chip Camden
Sterling chip Camden

... between being so broad that you offer nothing unique and being so narrow that you don't have the demand.

Sterling chip Camden
Sterling chip Camden

I've been lucky to be at the top of the same niche for well over a decade -- and so far, it's been pretty steady even in bad times. But I also do diversify some -- don't want to get caught in a shrinking market if that ever happens. Your PM example is good -- you don't want to limit your specialty to one product.

PMPsicle
PMPsicle

Check with your accountant. I'm in the great white north ... we have different, simpler tax rules. Bonuses are taxed at regular rates (roughly) and dividends at a lower rate up here. However, your accountant needs to set up the best tax method for your pay-out. Having said that the basic concept of pay/draw will work in either country. Glen Ford

Sterling chip Camden
Sterling chip Camden

... you'd have to include them in your taxable income calculation, no matter what the rate.

apotheon
apotheon

"[i]The personal taxes then get paid out as a bonus or dividend from the company (at a lower rate).[/i]" I'm confused. Are you saying that the amount of money you'll pay as taxes should be officially turned into a bonus at the end of the year, paid by the "company" that is your business name? Bonuses are taxed at a higher rate than salaries, and even a higher rate than self-employment taxes, last I checked. . . . or are you just saying to think of it as being paid as a bonus, but held in a separate (personal) account in the interim?

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