Why Being A Web Service Company Sucks And What You Can Do About It
Alternate non-catchy title: Why growing a small to medium sized web service business is hard and what we did that we think helped
At its traditional core a service company is a difficult beast. To grow, and thus make more money, you can either work more hours, bill more per hour, or both. There are never the magical infinite returns that a product company, specifically a software product company, can make.
In the mid to late nineties one popular way to get around this was to hire more people and therefore have more billable hours. Some of the major web shops in the late nineties had hundreds or thousands of people working for them (i.e. Razorfish). The problem was that you then got into birthdays every week, gendered bathrooms, sexual harassment seminars, and the ever dreaded “human resources” department. Soon enough you have boring company picnics, stupid unconnected bosses, and a revolving door of staff. Oh, and the quality of the work started to reflect the bureaucracy of the firm.
If you want to grow your business but don’t want to manage a billion web monkeys here are some things we’ve learned over the years that may help.
- Say no. Try not to take on projects that you aren't excited about. If you're not excited about a project you will not be able to do your best work. Unfortunately you do have to make compromises and sometimes projects that look good at the start turn out to suck in the end. By keeping your portfolio full of high quality work you will start to be able to charge by your hour, not an hour. There is a premium to talent and people looking for good work are happy to pay it.
- Don’t bill by the hour. At a minimum bill by the day.
- Get on a plane. This virtual world is great isn’t it? We can run our little design business here in Charlottetown, PEI and do work for people all around the world. Unfortunately if you’re only working remotely you are losing a tremendous amount of insight. Insight that, in the long run, could save you a lot of pain and money. You’ll learn more in one face-to-face meeting with a company and the people in it that than by doing 15 projects with them remotely. Why is this important? To dodge bullets. You should know after a few hours of meeting with someone if they are a good fit for you. Do they appreciate good design? Do they have reasonable expectations? Are they nice? Getting into a project with people who aren’t a good fit with you is a recipe for disaster. You will not do your best work, there will be tension, and the mindshare will be very costly. If the client really wants you to work on their project they will probably pay for you to meet them.
- Don’t bid on projects, respond to Requests For Proposals (RFPs), or do mock ups for free. Number of proposals silverorange has written in nine years: 20-30. Number of projects silverorange has won by writing proposals: 0. Number of projects silverorange has gotten from word of mouth, a quality portfolio, and repeat client work: dozens upon dozens. If someone sends you an RFP it says two things about them: 1) They probably have a restricted budget or are just cheap and/or 2) They most likely have already have picked the firm they want to work with and are just getting bids to qualify the paperwork. Writing proposals is long, hard, and not worth it. You should be building your skills in what you do not in crafting businessspeak.
- Get in on the action. Ask for stocks, a percentage of sales, partial ownership, etc. You will be very surprised at what you’ll hear back. Clients want a partner. They want someone who has a vested interest in their success. Ownership and returns based on success are very good expressions of this.
- Have some downtime? Build something. We didn’t have much to do in our first few years so we built an intranet (warning! old and fugly). That same intranet later threw us into the limelight. Oh yeah, it has also helped us to run and organize our company for nine years.
- Give up on the idea of working for Google or Apple. Sure, it would be great (maybe?) but there are a lot of people with the same dream. What we’ve found is that all of the good designers are focused on the “sexy” companies and forget the rest of the market. There are a million more real-world companies out there that also need good design and development. They’ve often never been approached by a web firm and are thankful when you introduce yourself. Some of these companies even have things called “business models” and actually sell products to what are called “customers” :). Often these companies have more money than web companies. They also seem to be in less of a rush.
- Pay yourself well and invest the rest. Pick something that you are interested in and invest in it. Here at silverorange we like century old homes. We buy them, fix them up, then rent them. It’s a long term growth strategy that puts the money made on the fake internet into things we can see, touch, and have bad plumbing. Real estate isn’t for everyone. Maybe it’s the stock market, maybe it’s a franchise. Whatever you’re into.
- Good staff is better than more staff. Be super picky about who you bring into your company. It is true that one bad apple spoils the whole bunch. Better to have no one in a position than the wrong person.
- Work less. It’s tempting to go flat out and work more hours (and make more $). It is only sustainable in short bursts. If you make it your lifestyle you will burn out, your work will degrade, and you’ll have less demand for your services. By keeping yourself fresh you’ll be able to do better work, bill more for that work, and have a life.
- Stop running the business. As soon as you can afford it, it’s sooner than you think, hire someone for as much time as possible to run the administration of your business. Make them in charge of as much as you are comfortable with and trust them to do it well. You should be concentrating on what your company does, not on what taxes need to be paid when, etc. Very quickly they will become one of the most valuable people in the company. You’ll also find that they not only free up your time but they multiply it by making processes more efficient and dealing with problems before they become issues. After a while they will probably develop a more accurate pulse of the company than you will.
- Go On Retainer. We stumbled on this four or five years ago. Design and development, by their very nature, are needed on an ongoing basis. In many ways it's like legal work. We've found that a lot of our clients prefer the monthly retainer model. We agree to be available X number of days per month if they so need us. They pay for those days if they use them or not and pay for additional time if we go over the amount of allotted time. For this client this guarantees that we're available and their projects need not wait in our general work cue. It guarantees us a monthly cashflow. We have some retainers with clients that are on their third and fourth year. It is a fabulous model for all involved.
The alternative to all of this, and one that works well, is to not want to grow your business. Be content with where you are at and do a good job at what you do. Contrary to what modern business culture says, this is not wrong and there is no shame in doing it. It’s actually quite admirable.
Oh yeah, you could also develop a product and stop being a service company altogether.
If you have any additional hints please feel free to share them.
Comments
Chris Tingom - July 16, 2008 9:49 PM
I'd be interested to hear your philosophy on billing by the hour.
Dan James - July 16, 2008 10:39 PM
Chris,
I guess I didn't elaborate too much on that one. Thanks for pointing it out.
We have a few reasons for not billing by the hour:
1) If you bill by the hour you need to keep track of work by the hour. We've learned that we can't be that fine grained. We're much better, and much more accurate, if we track our days. Not tracking our hours means, for us, that we spend more time working and less time thinking about tracking ourselves.
2) Generally, projects that require billing by the hour are not big enough for us to manage efficiently. We've found that the overhead of projects is the same regardless of the size of the project. You seem to need the same amount of back and forth, meetings, and involvement in a $5,000 project as you do a $50,000.
3) Days are a more flexible unit than hours. A day can be 6 hours or 12 hours depending on what we're up to. This gives us a little more room to meet client's needs, meet our needs, and is easy to account for.
4) We're billing less and less by the day and none by the hour. We're leaning a lot of our business into the "get into the action" category
5) Easier billing. A lot less math at invoice time.
6) Sets the tone. This is probably the most abstract yet most important. By only offering a per diem price we are signalling a certain level of service, quality, and budget. It's a tad on the elitist side but it seems to be working for us.
Dan James - July 16, 2008 10:46 PM
I just added the "Go on retainer" section at the end. I had forgotten to add it.
Marc Musial - July 17, 2008 11:36 AM
Great post, I wish you posted it a month ago though. It made me really think about what I have on the go now (4 freelance sites + plus day job), and how I should have approached these contracts (billing by day instead of by hour). Also saying "no", to certain contracts. But its kind of a double edged sword, you need the contracts to build your portfolio, and pay bills, etc. but by taking on more clients means more work, and a lesser quality of work.
Really good read though.
Thanks!
Jeff Dachis - July 17, 2008 12:51 PM
Dan,
Great post, and some real meaningful ideas. I especially agree with the points about not taking on work that you arent excited about, and being super picky about who you bring into the company.
I'd like to take exception to a few points and add some insight.
1) RFP's are a part of doing business in the big leagues. Most major companies spending north of $ 500,000, not to mention those spending $ 5,000,000 on a serious engagement requiring serious talent to do serious work, will require an RFP. They are useful to weed out the companies that dont have the resources to deliver, that dont have the stability to stay in business and service the engagement, and that dont have the technical capabilities to actually spec, scope, and apply the resources to the engagement. So, despite being tedious and unwieldy, consider RFP's from a company a badge of honor that only those big and strong enough to compete can complete. Separates the boys from the men so to speak. Although I agree 100% on not doing any work for free as part of the process...
2) However you slice it, billable time is the package of units that are being sold in a services company. The only way to sell more inventory (time) is to have more inventory to sell (people). Any services company of scale knows that the only way to ensure profitability is to be able to measure the amount of inventory being delivered to and paid for by clients. If you have too much inventory going unsold, you lose money. If you dont have enough inventory to sell, you miss out on opportunities and dont have resources to bid on and complete projects. A shop of 10 people is easy to see who is doing what and who is on the bench. A shop of 100 is trickier, and a shop of 1000 is difficult. Balancing this (utilization) is a tricky part of being in a services business and scaling it. I think you do your readers a disservice by encouraging them not to track time and ensure that all time is allocated to billable or non-billable project codes. If the goal is to have a simple easy lifestyle business, then perhaps it doesnt matter, but for anyone serious about building and growing a services business, tracking and allocating time is the ONLY way to grow your business... or better yet STAY in business...
3) Being a web services business doesnt suck. Its why some people get up everyday... Its not because they have other interests in real estate, or franchises and are in the fake internet business because they saw the next hot trend... Its because they want to be in the web services business. They want to build stuff, they want to help companies achieve their goals. All businesses are hard to manage, especially people based ones, but most people do this business because it sucks a lot less than anything else...
I like your other points about billing by the day, getting retainers, and exploring alternative compensation methods (although I have always preferred cash).
Its great to hear what other entrepreneurs are thinking.
Best,
Jeff
David - July 17, 2008 12:56 PM
I disagree with your assessment of RFPs and proposals. My firm, and lots of firms that I know, have had success responding to RFPs. I've even managed a few RFP processes for clients. They selected companies they had never worked with before and were not unfairly predisposed to, paid good hourly rates, and signed off on large fixed projects.
Could it be that the reason you have such a bad hit percentage on RFPs is that you're not good at writing proposals?
I can just picture a kid going up to bat, striking out every time, and then claiming:
1) the ball is predisposed against his bat
2) he was predisposed to fail because the pitcher was going to lob an easy one to the batter AFTER him
3) hitting the ball isn't as interesting as its cracked up to be.
Don't follow this path! Go to the RFP Database and only respond to the projects that you feel you have a better than average chance of winning. Be selective, write better proposals, and maybe you'll win won.
Dan James - July 17, 2008 1:44 PM
Jeff:
Thanks for your comments and insights.You bring a an important, and missing, position to this discussion. After reading your response I think my post might have been better titled: "Why growing a small to medium sized web service business is hard and what we did that we think helped". Not as catchy but more accurate.
RFP's north of 500,000 - of course. I think my comments makes it painfully obvious that we don't participate in projects of that size/scale. I think it's safe to say that at that level there are fewer players in the game than at the level we're operating at. Writing a proposal for a 1.3 million dollar project is worth it for the client and the provider. Writing a proposal for a 20,000 project is probably not worth it for either.
"I think you do your readers a disservice by encouraging them not to track time and ensure that all time is allocated to billable or non-billable project codes. If the goal is to have a simple easy lifestyle business, then perhaps it doesnt matter, but for anyone serious about building and growing a services business, tracking and allocating time is the ONLY way to grow your business... or better yet STAY in business..."
I have readers?! :) I agree and disagree. Yes, you need to be able to track time and be able to bill accurately if you are going to be a company that gets into dozens of employees and sell your services. This is a very proven way of doing business and it is, as I'm sure you know, very important and difficult to do well.
My thoughts are based on a shop of 14 people who really don't want to grow in people much more than that. I believe I prefaced my advice with "If you want to grow your business but don’t want to manage a billion web monkeys here are some things we’ve learned over the years that may help." I admit that my advice implicitly limits how far you can grow. Silverorange could never grow to be Razorfish's size. We would collapse under our own policies, shenanigans, and laziness.
Would it be fair to say that growing from a two person shop to a silverorange sized shop is a different beast altogether?
"Being a web services business doesnt suck. Its why some people get up everyday... Its not because they have other interests in real estate, or franchises and are in the fake internet business because they saw the next hot trend... Its because they want to be in the web services business. They want to build stuff, they want to help companies achieve their goals. All businesses are hard to manage, especially people based ones, but most people do this business because it sucks a lot less than anything else..."
Agreed. I was just being cheeky with my title. Obviously it can't suck too bad because I get up everyday and do it as well (and enjoy 99% of it). I think what sucks is what you allude to: Anything to do with people is a little more complex and intricate than with products. It's much more rewarding at a personal level but sometimes I look across the fence at the product companies and envy their green grass.
I didn't mention that we always do a mixture of cash and alternate compensation on a project. We never just do a project for stock. That's too risky. We see the stock like getting a lottery ticket along with the fees. We also always get 50% upfront.
Thanks for your comments Jeff. I really appreciate them. Where are you based out of?
Dan James - July 17, 2008 1:59 PM
David:
Fair enough. We could have just been really bad proposal writers. I'm pretty sure we weren't.
Our proposal writing stage was early on when we had little portfolio work to back up the proposals. That definitely played into our non-success. I'm sure if we were to write proposals now then we would have much better success. The thing is that we now don't have to write proposals. We have more work coming to us than we could possibly do. We get to pick and choose from a variety of great projects. We are in a very lucky position and are not ignorant about that. I like to think that some of the things I listed above got us to this position though.
Who knows - if the economy keeps going the way it is then maybe we'll need to revisit our take on competition . (Before Jeff points out that there IS competition I mean this only in the small to medium sized design shops that I know of and talk to. Which aren't that numerous).
David, for transparency purposes I'd like to point out that you were the developers of the RFP database site you linked to. I don't think it affects your bias too much but it's key to point out so readers understand where you're coming from. Nice work BTW. It looks good. If we did look for RFPs we'd look there.
David - July 17, 2008 2:09 PM
Hi Dan,
I'm more than glad to take credit for the RFP Database, but it is really a side project of our main business which is Confluent Forms. You could say we're a direct competitor to you and probably do similar projects. I'd say that we win about 20% of the RFPs we respond to; initially it wasn't that high a ratio, but once we had a portfolio of projects to demonstrate that illustrated to the client that we had built systems/sites JUST LIKE THEIR PROJECT it became much, much easier.
I guess what I'm saying is that nobody should cut off viable avenues for finding new business, but taking a cue from Jeff, you need to track your time and figure out what your ROI is for each activity. If you find yourself spending more time (and time = money) than it's worth on proposals that don't get you anywhere, change your approach.
Geoff Teehan - July 17, 2008 5:50 PM
Great post Dan.
We've never been crazy about the thought of going on retainer. It becomes difficult to "say no" to projects that aren't a good fit (for whatever reason). Have you guys run into that issue?
Dan James - July 17, 2008 7:05 PM
Geoff,
That's only happened to us a few times. We only go on retainer with clients that we've worked with before and gotten along with well. Generally if you have a good client and you get along well there aren't that many stupid projects that come through. In the years we've been doing retainers that's only happened a few times.
By having the long term relationship of a retainer we've also been able to tell a few clients "that's a stupid idea" and they either cancelled the project or changed the idea.
Alan Houser - July 18, 2008 11:39 AM
Dan, there's so many eye-opening things in this article! I'm in the process of stepping-back and taking my own pulse right now.
I'm re-designing my site in a very public way -- blogging and podcasting my way through it. The podcast has featured interviews with branding and strategy experts, and I can tell you it was the best decision I've made to just un-plug and slow-down.
I've recently lowered my rates to get more outsourced work, and this did bring companies out of the woodwork, but I can definitely see that a daily/weekly rate would work better. These development companies who I've given 'project rates' to really appreciated working under this solid estimate, and I can see why. They have to also quote a project to their client.
Being a solo freelancer, it's not as painful to grossly mis-quote something, as it would be if I had an admin + other designers. Obviously, if I want to grow, I'm going to work on that!
Thanks again for the incredible article!
Ian - August 8, 2008 3:19 AM
Late to the game, but this is a fantastic post. Currently sharing it with folks in H-wood.
dottiesparks - August 8, 2008 3:55 PM
I cannot use by Blue Mountain service which I am paying for because my computer will not accept the cookies. Why? I don't know. It always worked before and I am a computer expert but did try all the recommended remedies and still nothing works. I have Internet Explorer 7 and there are no quick fixes for this. I cannot find anyway to contact the company to get help so this is my only way to show my anger and get some help with this frustrating problem.
Project Management and the Web - September 4, 2008 2:21 PM
Great post and insights into a web service business. I've already bookmarked this page.
I recently created a post on the topic of RFPs and, after playing this game over the years, we too are now very skeptical about the RFP process in general. There are many variables involved with the RFP/Proposal process and, like anything, not all RFP's are bad. Nevertheless, we are learning to spot red flags in proposals. Also, knowing how many RFP's are being sent out is valuable information. And one other thing: if you ask the question, 'Have you sent this RFP to an agency that you are working with or have worked with before' - this can make the decision to create a proposal an easy one. :)
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