Member Paul Finkle Speaks: How to Get to a Recurring Revenue Model
The case at hand was brought by the CEO of a software services company, whose revenue was almost entirely project-based and billed hourly. He was searching for ways to move from a project-oriented structure to a recurring revenue model.
If you were in this situation, what would you do?
If I were at the helm, I would reposition your services firm as a strategic partner to your clients. By recasting yourself as an outsourced strategic IT group, you can offer strategic guidance and appropriate solutions for your clients’ technology needs. Instead of engaging projects as service providers, engage entire companies as strategic partners.
This is the first time we’ve met, but seeing as we both run service-based consulting firms, I think I can offer some helpful advice. Studies show that clients consistently start out with big ideas of how many software modules they can implement — but only 30% are able to do so. This means that most clients need ongoing help. Position your firm as their strategic partner in your area of expertise and organize at least annual strategy meetings to review client data from the previous year (which your team could capture – on say software utilization); then, present best practices of other clients; and finally make customized recommendations for the coming year.
Now that you are offering both strategy and solutions, you can package your services into meticulously scoped, recurring revenue packages on a retainer or per employee per month basis. Model out every service line with estimated hours (fully loaded), and then rigidly track hours based on budget throughout the year. Ideally, your outsourced service should be less than an FTE with a professional firm supporting the model. If a client goes outside of scope, train your team to immediately counsel them on available solutions, including referrals to other companies. Also, make sure to incentivize your team to keep clients in budget. Recurring revenue carries its best momentum when you are running right at — or just under — budget. My own firm was once 90% project-based. Now, having followed the strategy laid out here, we consistently hit 65% recurring revenue.