There is so much I’ve been wanting to write the past year or so about the business of LeadingAgile. Those of you following our blog for a while will know that it wasn’t all that long ago that I was working at VersionOne, left for Pillar, and then started out as an independent consultant and formed LeadingAgile.
I got really busy really fast and quickly started selling more work than I could do alone. So I began growing the team. Over the past few years we’ve built a really awesome group of consultants and an equally awesome group of support staff to help us run our operations. There are about 40 of us now and we are still growing.
I’ve always felt that our approach was unique enough that we needed a team of dedicated folks that were totally bought into our system, could grow with us as we evolved our understanding of our models, and were readily available when we needed them. For those reasons, we’ve always hired rather than using subcontractors.
People ask me all the time how we hire at LeadingAgile given that many of our contracts are short term and we never quite know where the work is going to come from. Lot’s of companies use subcontractors to mitigate that risk, but since we’ve decided to absorb that risk internally, we have to have a plan.
That’s a little of what I want to share with you today.
We started LeadingAgile with effectively no money in the bank. There was no venture funding, no nest egg to draw on, not even a credit card to live off of when I got this started. Risk management went something like this… how much do I need to pay my bills and where do I think I can go to get that work.
I was fortunate to have friends in the industry that said they could subcontract work to me if I needed it… and that was my safety net. By that time I was pretty well networked here in Atlanta, so I took a chance. Fortunately for my wife and kids… everything worked out. We didn’t go bankrupt.
I started earning more money than we were spending, so we used the extra to get out of debt and build working capital. After about a year and a half, we used some of that working capital to hire our first consultant. Having someone to share the workload allowed me to write more, speak more, and sell more.
As our client list grew, we began hiring more consultants and building our staff. Over time we’ve gotten LeadingAgile to the size it is today, and we’ve built a foundation that can support doubling or tripling our consulting team as demand continues to rise. We’ve learned a lot doing it.
Over time, I’ve learned that we have four major risk areas… variables maybe… that we have to constantly manage in order to successfully run our company.
1. Working Capital – at any given time we need to have sufficient working capital avaiable to weather a storm or to invest in new opportunities. As we make hiring and growth decisions, we never know which of those new opportunities are going to play out. Understanding how long we can maintain the company without having to let anyone go, or adjust our strategy, is a key factor in decision making.
2. Utilization – We always have the choice to deliver work or to hold off. We can often work with our clients to go faster or slower depending on what they are trying to accomplish and the availability of our team. Understanding the rate we want to burn down our backlog of work is critical. Consultants on the bench are like spoiled inventory. Once a day is passed, you can never bill for it.
3. Sales – We are constantly marketing LeadingAgile and our ideas. We are constantly building relationships with people that might buy from us now or someday in the future. We can attempt to accelerate our sales pipeline or slow it down. Sometimes we don’t want a deal to close because we can’t effectively service it. Other times we need deals to close because we have people on the bench.
4. Growth – If we sell more business than we have staff to deliver, then we have to think about growing our team. We can’t grow our team just in time, so we have to invest, bringing people in early, getting them up to speed with our approach, and having them shadow our current consultants, so they are fully prepared to be part of a transformation team if and when the new business gets signed.
If you graph these variables, it looks something like this…
The green line represents the maximum revenue we could realize in a given month. The red line represents our break even revenue for the month. The blue line shows what we are actually expecting to deliver in any given month. The general theory is that if we stay in between the maximum and minimum every month, we are in a good place and can sustain the company.
But here is the deal… we know our fixed cost, we know our variable costs, we sometimes can predict utilization in a given month, but more than a month or two out is a crap shoot. Even within a given month lots of things can happen. We never know exactly what deals are going to sell, what deals or going to continue, or what deals are going to end. The uncertainty at times can be mind-numbing.
One of my folks said yesterday, it feels like we are always on the verge of having 10 people on the bench or hiring 10 people, we just don’t know which.
So here is how we think about managing the company in the face of this kind of extreme uncertainty.
Our job is make sure that we have as many options available as possible at all times to maximize the chances of good stuff happening. We always want to have a fall back plan if something bad happens.
For us that means the following…
1. Working Capital – We always want to have enough working capital to survive if our revenue falls below the break even threshold in a given month. Ideally, I’d like to be able to survive 6-12 months running at a loss. Now granted, if that happened there would be other fundamentals to work on, and maybe we’d have to acknowledge we were spending too hot or had a bad strategy, but having financial safety prevents you from making rash decisions.
2. Utilization – We try to create options with our clients so we have some room on existing engagements in case one clients slows down and another client needs some extra help. We encourage and support our consultants bringing other team members into their engagements whenever possible, even if it’s not in a billable capacity, so that there is greater familiarity with each other and we all know how each other work. The better we work together, the more portable we are between accounts.
3. Sales – We try to maintain about four times the level of active business development than we think we could ever win, or that we think we could even do, because you never know when something is going to fall through. You can never directly influence the buying cycle of a client, so having lots of opportunities in the pipeline at any one time increases the chances that something will work out when you need it. We spend a ton of time educating folks on our approach before the sale, so managing the pipe is a lot of work.
4. Growth – And when we are really good at all this, firing on all cylinders, and everything closes at once, we might find ourselves with more work than we can actually do. We maintain relationships with a ton of great consultants out in the industry, and are always on the lookout for more great people to add to the team. When we need to hire, it’s important that we have a list of folks that are ready to come work for us when we need them. Our people (and our approach) are fundamentally what we sell.
What this basically means is that we are constantly forecasting forward, assessing the probability that utilization is going to be high, that clients are going to continue, or that new deals are going to close. We assess our level of working capital and regularly place bets on future outcomes. We bet on deals, we bet on people, we bet on cash flow. The goal is to manage risk such that we make more good bets than bad.
Our experience has been that if we do the right things with our money, we are constantly doing the right things for our clients, we are super diligent about managing the sales process and making sure we are talking to new companies all the time, and we always have a solid pipeline of great people to come work for us… we have a shot at making all this work. So far, we’ve had a good run.
The key point in all of this, is that nothing in anything we do is actually knowable. We can model it. We can make informed predictions. But we can never know it for sure. We live in a world of creating options, managing risk, making good decisions, and having safety in the bank if things don’t play out like we’ve planned. Having more options than we need is they key to sustaining and growing our company.
As I take a step back and look at where we’ve been over the past five years, it’s a really fascinating journey. Applying concepts like Lean Startup and Real Options when you’ve got the livelihood of forty families, and the trust of a hundred or more clients, riding on your success is pretty sobering. For me it’s a testament to how powerful these concepts are when you strive to authentically apply them to your work.