Do you ever wonder how companies starting from scratch become successful? 1871 member and CEO of Digital Authority Partners Codrin Arsene sheds light on the good, the bad, and the ugly of building a multi-million dollar business. Here's Part 2 of this three-part blog series.
Guest Author: Codrin Arsene, CEO, Digital Authority Partners
If it was easy, everyone would own their own business and be a millionaire. Obviously, it’s not. For every factor that goes well, there are at least two or three others that don’t go as planned. The next sections present the elements not usually discussed in articles about starting a consulting or other type of business. They are painful to write about, and although amusement can be found in reading these lessons, any laughter is likely to be rueful.
We are always short-staffed.
We were short-staffed the day this company was founded with three partners. Today, we are still short staffed even with over three dozen employees! The chances are that we will ALWAYS be short-staffed at any specific time, it is just a question of how short..
Digital strategy / product management, user experience, analytics, development services - these are not consistent company needs throughout the year. January and February are generally dead while companies figure out budgets for the next year (though, strangely, in 2018, we are 85% committed for these two months). Summertime is typically slow while stakeholders and clients go on vacation. The end of the year is crazy busy because some of our enterprise clients need to spend whatever leftover budget they have in order to secure their next year’s budget. The problem with our business is that it’s virtually impossible to prepare for all scenarios. For example, in 2017 we had billable hours ranging from $62,000 per month to $525,000 a month. That is one crazy monthly variation. It is accompanied by a high level human cost.
Naturally, we’re staffed for the lower end of the range but doing half a million dollars work in 30 days, which we were forced to do three times last year, is mentally and emotionally exhausting. It requires everyone who works with us to work around the clock every day, without ceasing.
The difficulty, for every company that’ is not of the size of Deloitte, McKinsey or Accenture, is that one must staff according to the worst case scenario (low monthly revenue) instead of the best case scenario (booming business).
Sometimes the worst thing that can happen is too much business, simply because clients are rarely going to agree to postpone their work. If you can’t deliver, they go elsewhere. So you’re stuck in a paradox - low revenue is bad, but high revenue can also be bad. Large, or well established companies can afford to hire based on forecasts and past business patterns. A new company rising from 0 to $3.5 million in revenue in only three years, does not have enough data for a balanced resource plan.
Gaining brand awareness and public recognition
For many reasons, brand awareness is difficult for any company in this field to achieve, whether large or small. Digital Authority Partners has attempted to increase awareness of our brand by taking on non-lucrative work, a solution that only sometimes works. Often, we are further hampered by performing work that cannot be used for referrals. The next two sections cover these revenue-related problems.
Accepting non-lucrative business
You don’t have to be in consulting to know that from time-to-time you need to take short-term losses for long term gains.
Retailers do it via promotions and discounts to get rid of unwanted inventory. Solution companies give subscription discounts to clients in exchange for stable, long term revenue (monthly subscriptions are more expensive than annual subscriptions).
Consulting firms take business at very low profit margins or, sometimes, even at a loss. This is done for different reasons:
- To get a strong referral opportunity
- To get a strong case study
- In the hope of getting more business from the same client after the original engagement
- To enter a new vertical (we did this for healthcare and financial technologies)
- To get a new partner (we’ve done free or at-cost work for specific strategic partners)
Whatever the reason, taking non-lucrative business can bring great stress to team members with no guarantee their sacrifice will bring profitable work.
Along with all these stressors, any time you get a contract with a new business, despite well-documented deliverables, there are always terms subject to negotiation. As a company, one of our goals is to make our clients happy, others are to stay on time and on budget.
When you’re forced to take on non-lucrative work, you are typically dealing with the most difficult clients. They expect gold spun from straw. That leads to stress and frustration for everyone - the leadership team, the resources assigned to a project and the client himself. It’s bad for business in the short term but potentially good in the long-term. Ultimately, everyone has to find the ability to collectively shrug shoulders, recognize this is a cost of doing business and move on to the next assignment.
Related to the problem of non-lucrative work is that companies can refuse to serve as referrals. Both factors make serious hindrances in the ability of Digital Authority Partners to get new business. Many companies, especially enterprises, do not want to admit they are using another agency for their work. Some specifically state in their terms of service and original contract that they do not agree to having their name or brand associated with an agency.
Earlier I mentioned that the primary strategy employed to grow the team and get business in 2016 and 2017 was by working with other agencies using a white-label model. As a quick reminder, more than 50% of our business today comes from companies we pair with as implementation partners. These are mobile app development companies, media agencies, PR companies, web development agencies and analytics implementation agencies all over the US.
Our partners offer comprehensive solutions to their clients and we get a fairly consistent stream of revenue in this way. Clients get the best of both worlds (awesome strategy and implementation). Upside for us - revenue and clients to whom we would never have had access. Downside for us - over 100 companies use digital strategy, design or analytics work implemented by Digital Authority Partners who have no clue that we are behind their success stories.
As a courtesy to our partners, we never reveal that we are a separate entity with whom work is subcontracted unless given permission to do so. Although some clients learn the source of their success by looking us up and connecting with us on Linkedin (and sometimes even giving us referrals once they know who we are) most clients are completely oblivious to DAP as an entity.
This unfortunately means that when we present our case studies to new potential clients, they may ask for referrals based on specific case studies we share with them and we regretfully must respond that the work is not referenceable.
For the most part that is fine. However, we recently lost a $650,000 deal primarily because the potential client wanted very strong references in a specific vertical. Even though we had worked on six stellar examples clearly showing what we could do for the client in that vertical, since all those case studies were done through our agency partners, none of our contacts could serve as a reference.
Staffing conundrum – billable hours vs. marketing
Here’s a sad truth. We have worked with multiple companies on PR services, influencer outreach and market positioning. We have helped companies get 10x to 30x more visitors to their sites as a result of our contracted work.
In principle, we all agree that, internally, we should institute our own team to focus primarily on doing for Digital Authority Partners what we do for our clients. However, although we publish frequently and seek PR opportunities, the reality is that we have yet to find the time and resources to do as well promoting ourselves as we do promoting our clients and our clients’ clients because the primary focus continues to be on profitability and getting enough capital to hire more billable resources. In our current state, we are the model example of a company utterly failing, so far, to eat its own brand of dog food.
Low predictability for upcoming work
One of the toughest aspects of consulting is the fact that it is very difficult to predict specific times when business will come. Even though, at a monthly level, we can look back at historical records to do some sort of estimate, the reality is that our ability to forecast business is simply not good enough and there is no realistic way to improve the situation in the short term.
We know that June to November is our busiest time of year because all companies have their budgets approved before then. They are ready and eager to execute their strategies. It is not nearly as easy to predict the type and quantity of work we might get for the other half of the year.
Work tends to come in spurts. We were expecting a quiet December. Instead, we were flooded with $750,000 in billable hours across 5 clients who suddenly discovered they had funds that needed to be expended before the end of the year (no extension offered, take it or leave it, scenarios). Of course we executed against it, but not without a real test to our patience and, I dare say, mental capabilities (I personally couldn’t remember what I was talking about minutes before or what day of the week it was after two straight weeks of working 10 am to 1 am each day, Monday to Sunday.)
Of course, people reading this would instinctively say: that’s a good problem to have. Although I am 100% grateful to our clients for the business, as the leader of this company I absolutely know that delivering 3 mobile apps, 2 marketing strategies and one new company website redesign in 18 days was the craziest, most exhausting thing I have ever done.
Worst of all- planning for these scenarios is incredibly difficult to do. We had employees working from a beach in Jamaica, a cabin in upstate New York or ensconced in a ski resort simply because their plans were messed up due to the influx of business. Personally, I’m incredibly grateful to all employees who willingly offered to work during their holidays despite having other plans just so we could deliver to our clients and thereby secure funding for next year. It was not tolerable for any of us.
Amateur back office management
From the outset, back office task management has been accomplished by the three partners in this business. Read: amateurs.
On the bright side, dealing with accounting, billing, payroll, 401k / benefits management, contract signing and more costs money. Quite a lot of it, to be frank. Comparable companies, have at least 3-4 non-billable resources and spend in excess of $150,000 a year on these tasks. By splitting tasks evenly across the management team we save much money. On the dark side, this is time consuming work. A couple of years ago, we were especially prone to mistakes because none of us knew what we were doing. We simply learned on the fly.
Looking back at this issue - as a team - we’ve finally decided to tackle this problem and hire professionals in 2018 because the reality is that having the CEO/President/Head of Strategy deal with back office management tasks is not only bad for business but is, to be blunt, simply nuts. It’s crazy because of the danger of making a mistake. It’s even more crazy because the time spent on these tasks by the top three resources in a company would DEFINITELY be better spent doing other types of work - business development being an obvious example. As professionals in our own field, we also recognized that hiring a professional in office management would be far more efficient than we could be.
Middle Management? Save money and DIY!...Not
Failing to outsource or hire for back office management tasks and instead carrying out such tasks at the executive level was clearly an error in judgment. However, that mistake pales by comparison to our failure to hire middle management.
In 2018, hiring full-time middle management is definitely our top priority across each and every one of our disciplines with the first department head starting in February.
Not doing it sooner took a huge toll on the three of us. Having to manage people, project scope, delivery issues and more became a second job. Although, most of the time, 90% of our employees work 8-9 hours a day, the leadership team pulls in 14-16 hour days. Since we’ve grown significantly year-over-year, those days unfortunately continued to grow longer and more frequent. Even though each of us makes a habit of taking one week of vacation every 4-5 weeks to avoid burning out, it’s been a major problem.
It’s the type of problem virtually every startup experiences in its early days. For us, even though we are no longer a startup, the problem of expecting the top three to take care of the firm as well as the business endures. To a large extent this is rooted in my own fault of hiring ever more billable resources versus investing in support and strategy resources.
Scaling at the right time (Staffing as numbers game)
Every leadership team that manages a company conservatively deals with this fundamental question: What’s the right time to add more resources to the team?
Until recently, our strategy for hiring new resources was tied primarily to having enough cash invoiced at any given time to ensure all our employees could be paid for at least six months to a year.
I’m not saying that’s a good or bad strategy; it just happens to be our strategy.
As a consulting business, we deal with significant variations in our monthly intake of work. Even though we are no longer a startup from any point of view, being in this business for only three years, makes forecasting how many people are necessary at any given time fairly difficult.
To the executive team’s credit, every time lack of resources put undue strain on our company, we took it on ourselves to work harder, longer and, if need be, 7 days a week. That’s not a sustainable solution. The fact that our compensation is tied to profit sharing versus a fixed salary has at least provided a silver lining to us. Even so, money is not a rewarding compensation for a disrupted life.
One day, I am confident my team will have hundreds of employees, if not more. Until we get there, figuring out the best ways to scale our business and attract the right talent will always be top of mind for us.
Check back next week for Part 3: The Ugly.
About the Author
Codrin Arsene runs Digital Authority Partners, a digital strategy and product development company headquartered in Chicago, Il. Originally from Romania, Codrin received a full scholarship to attend the University of Chicago, where he received both his bachelor's degree (with honors) and his master's degree. After working in corporate America for several years, Codrin saw that many companies under delivered on their digital initiatives. He founded Digital Authority Partners to help startups and enterprises adopt new and exciting technologies to solve complex problems. Digital Authority specializes in today's most critical business needs, including: AI, digital strategy, product development, UX/design, and analytics.
As more and more businesses have begun to realize the importance of digital transformation in their quest to stay relevant, Digital Authority Partners has expanded into a multi-million dollar business. Codrin loves helping companies succeed, and lives his life according to Floyd Mayweather's famous quote: "A true champion can adapt to anything."
The opinions expressed here by 1871 guest writers are their own, not those of 1871. To learn more about Digital Authority Partners and how you can build a successful business, follow this link.