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Launching an IT consultancy: What has changed since 2008

Erik Eckel updates his tips about starting an IT consultancy to include some lessons that his office learned in the wake of the financial crisis.

On August 20, 2008, TechRepublic published my list of 10 things to know before launching an IT consultancy. Less than 30 days later Lehman Brothers declared bankruptcy. Although the economy is showing new life, small businesses --including IT consultancies -- must emphasize some different business skills in order to thrive in the turbulent wake of the financial crisis.

Back in the summer of '08, these were the 10 items prospective IT consultants needed to know when launching a computer consulting business:

  1. You need to incorporate.
  2. You need to register for a federal tax ID number (if your business is in the United States).
  3. You need to register for a state sales tax exemption (if your business is in the United States).
  4. You need to register with local authorities (and respective provincial agencies in countries outside of the United States).
  5. QuickBooks is your friend.
  6. Backend systems will make or break you.
  7. Vendor relationships will determine your success.
  8. You must know what you do (and explain it in 10 seconds or less).
  9. It's all about the branding.
  10. A niche is essential.

What hasn't changed since 2008

You still need to incorporate and file the proper business registrations. Federal, state, and local governments need revenue more than ever, and small business payroll, sales, and income taxes are a significant source of that revenue and, it's not optional.

You still need to implement the best back-end systems you can. Ensuring your office leverages integrated payroll, credit card processing, estimating, invoicing, ticketing, and calendaring software is critical. Once deployed, it's much more difficult to change midstream, so choose carefully.

You still need to select cooperative vendors. If you fail to do so, you may find yourself battling other business disrupting issues.

What has changed since 2008

It's more important than ever to ensure the consulting business is properly capitalized, to manage costs efficiently, and to enforce proper payment processes among clients. Strong technical chops, a good business plan, and the right back-end systems are no longer sufficient to guarantee success. Operational processes must be bulletproof during unforgiving times. Cash flow, in particular, is critical in weaker economies when service demand proves more elastic.

Fortunately for technology consultants, IT services demand tends toward inelasticity. Even during the recession's height, our consultancy continued receiving service requests; the difference was the nature of the calls changed. Instead of deploying new systems, maybe we were asked to extend the life of some systems. Maybe instead of deploying four new servers, we were asked to leverage virtualization technology to deploy just two. Maybe instead of maintaining four in-house full-time IT staff, a company had to make do with two and needed to outsource tasks that used to be managed in-house.

Clients also began demanding more timely service. They couldn't wait a day to recover a failed system; they were working with a skeleton staff and had laid off the in-house expert.

In addition, clients began questioning invoices more, even though our billing statements contain specifics about the completed services, including the user's name, the technician's name, the parts that were used, and the date and time the work was done. We continue to hold firm on invoices -- we just make more of an effort at the beginning of a project to put in writing a specific task list. This helps to prevent unintended scope creep and to ensure the client understands the expenses that will be associated with the work we perform.

The most troublesome trend we noticed is that customers began taking longer to pay. Never mind the fact that they demanded we replace the six-year-old Exchange server within a day of its failure with a new chassis and upgraded version -- payment for the hardware, licenses and labor might still prove outstanding 80-, 100- and even 120-days later. That was my consultancy's fault. We no longer enable clients to dig such holes; we now insist on deposits upfront.

Consultants can also help themselves by instituting improved invoicing cycles. Instead of sending major clients a single invoice once a month, consultants should receive deposits for hardware or software purchases immediately and distribute service bills at least twice a month. Payment terms should prove reasonable, too, with entire balances paid within 14 days.

Nonrecurring clients, meanwhile, should pay for services before you or your engineer leaves the client site. Little is as dispiriting in IT consulting as having to rearrange a schedule to accommodate a tough technical task for a one-time client who then drags his feet months in paying the bill. Fortunately, with a few good invoicing habits established from the get-go, these frustrations are avoided, and the consultancy becomes financially sound.

Related IT Consultant resources

About

Erik Eckel owns and operates two technology companies. As a managing partner with Louisville Geek, he works daily as an IT consultant to assist small businesses in overcoming technology challenges and maximizing IT investments. He is also president o...

3 comments
GregMiliates
GregMiliates

Either an LLC or S-Corp will do fine, but you do need a legal business entity to reduce your liability; a legal entity can also give you some great tax breaks. I've found that fear often stops aspiring consultants from starting a consulting business, and on my blog (http://www.StartMyConsultingBusiness.com), I talk about how to overcome those fears. I also talk about practical, concrete things you can do to start and run a successful consulting business, along with tools, tips, tricks, and techniques for automating your business and keeping costs to a minimum. One of the neat things about becoming a consultant is that you DON'T need a pile of cash to start a consulting business. For example, you can create a professional website for under $100--typically in an evening (I have a free ebook that shows you exactly how to do this, even if you're not a techie). Running a successful business on the cheap and avoiding debt reduces your risk, and makes it more likely that your business will succeed. I started my consulting business over 4 years ago as a part-time way to make extra cash, and it's grown into my full-time endeavor, where it's the sole income for my family of 4 for over 2.5 years. I make several times what I used to make at my day job, and have much more flexibility.

Charles Bundy
Charles Bundy

If you are just starting out I would have thought LLC would be the springboard (less red tape.) If you wanted to go S-Corp later that's always an option under the LLC. I wouldn't even bother with C-Corp as a small business.