From Independent Contractor to Business Owner: How to Take the LeapBy Andrew Neitlich
Many independent contractors dream of building a Web Design/Development business that is bigger than a one-person enterprise.
They recognize the obvious benefits of creating an organization that has some scale to it:
- The financial benefits of increased revenues and, eventually, profits
- Building a firm with equity value, that can be sold for substantial rewards
- The status and esteem that comes from owning a "real" business
- Leveraging your time, because other people are doing lots of the work (while you retain the profits)
- The satisfaction of employing and developing other people
- The enjoyment that sometimes comes from spending more time on big-picture, strategic issues, and less time on mundane details and daily "fires"
Unfortunately, many Web design/development professionals are unsure how to take the necessary steps to build a sustainable organization. Here, for instance, are the concerns that a Web Designer recently shared with me:
Clients rave about me, and I know how to make a Website sing. I’m overwhelmed with all the work I can handle, but realize that hourly jobs are not the way to go over the long term. I want to build a company, but I don’t know the first thing about managing a business. For instance, how can I even find time to grow a business if I am overwhelmed as it is? And every time I look for good people to hire, they want a high salary with benefits, and then they often turn out to be ‘flakes.’ What do I do?
Does this sound familiar? The issues that this person raises are quite common.
This article provides a list of questions that the prospective small business owner should consider before they embark on building a business. It then provides a series of frameworks and models to help you take the leap from one-person band to owner of a small enterprise.
Caveat Emptor: Are You Sure You Want To Do This?
First, a few important warnings. Many people would rather dream about building a business than go through the process to actually do it. Put another way, lots of freelancers want to own a big business, but don’t want to endure the pain, frustration, and perseverance that’s often required to build one.
Before you make the choice to build a business, be sure that you understand the following caveats:
- It will be much harder work than you ever imagined, and — at least initially — will increase, rather than decrease, the time you spend working. A business takes on a life of its own, and can often consume you. Be ready to endure sleepless nights and worried weekends as you obsess about how to pay your bills, grow revenues, handle tough employee issues, and deal with immediate crises. Are you sure you want this kind of pressure?
- A common rule of thumb is that it takes twice as long and twice as much money to get a business off the ground as you originally thought it would. There are smart ways to grow that can mitigate this rule of thumb, but it is best to be conservative. If you don’t have a solid cushion of reserves to keep your business and personal needs satisfied (say, for 1-2 years), you should wait until you have a more stable financial base.
- You will have to shift away from work you may love (e.g. building great Websites) and into work that you may find brutally tedious (e.g. bookkeeping, recruiting and managing people, payroll, marketing, human resource issues, legal issues, and putting systems in place) — but this shift is essential if you’re to build a company. Do you really want to spend your time doing this kind of work?
- While many people go into business to satisfy their egos, they often find that the best way to build a business is to get out of the way and put your ego aside. Otherwise, you’ll never "replace yourself." Many would-be entrepreneurs aren’t willing to give up this level of control or credit. Are you building a firm that’s about you, or one that’s about a sustainable organization?
- You’ll need to have incredible patience with other people. It takes time and effort to build and manage a team. Many independent contractors became independent contractors in the first place because they don’t like dealing with other people (except when they are paying clients). If you don’t love working with, negotiating with, resolving conflicts with, and collaborating with others, don’t take this path.
- Those who have families to support may be disappointed to learn that some spouses and parents are not as supportive as you want or need them to be. That’s because many family members don’t know what it takes to run a business, are satisfied with how things are going now, and are afraid to take on new risks. Be ready for some family strife as you get your business going, and don’t rely on family members for support when you hit road bumps — get that support from other business owners.
- There are no guarantees. Most businesses don’t make it past their first year, usually because of inadequate capital and poor planning. Launching a business is very different from creating a successful company that survives and thrives, and there is a chance that you will fail. Of course, the best entrepreneurs handle this issue by jumping into a new venture only when they have eliminated as many risks as possible (e.g. they have a financial cushion, a stable base of clients already in place, etc.). Do you have the stomach to make a leap with no guarantee of success?
- Closely related to #7, there will never be perfect information or certainty when you launch your business. Many independent professionals are analytical by nature — they want to know that a market exists for their services, and intend to plan out exactly what kinds of numbers they can achieve. Planning is good, but you have to be willing to endure ambiguity and incomplete information. That means making decisions and taking action with 60-75% of the information you need, and leaving the rest to your instincts. Lots of people can’t handle this kind of uncertainty. Can you?
- Finally, to build a business, you need to make marketing a priority. Many independent contractors get by on word of mouth, but that’s not enough to grow a substantial enterprise. Are you willing to make marketing a priority?
We all know people who talk constantly about how "someday" they will start their own business. Many of these people never seem to take action. Why? The answer is that they get stuck at one of the above considerations. They like to talk about what’s possible, because that’s a lot easier than taking action and risking failure. While it can be annoying to listen to someone drone on and on about their dreams, at least they’re making the right decision to think hard about these very important issues.
Okay, are you sure you want to do this? If so, read on…
Four Models for Shifting from Contractor to Larger Business
You answered positively to all the questions above, and you know you want to start building a sustainable business. Where do you begin?
Let’s look a four of the most popular models for creating a successful service business â€“ they’re especially useful if you’re starting out as an independent contractor. Two of these models are based on best-selling business books, and two are based on case studies of actual IT service firms that have made the leap. Each of these models overlaps, to some degree, with the others. Some are a bit theoretical, while others are more nuts-and-bolts. It is up to you to identify the elements of each model that best suit your style, comfort level, and ambitions — and then take action.
Model #1: The E-Myth Approach
Michael Gerber’s classic book The E-Myth sets out a series of steps that every contractor needs to take to grow a business. Gerber’s fundamental thesis is that most businesses fail because most business owners are not really entrepreneurs. Instead, they are what he calls "technicians suffering from an entrepreneurial seizure." In other words, they don’t own a business; they own a job.
For that reason, these so-called entrepreneurs start businesses that enslave them, causing them to do every job without a break, 24/7. They move from one project to the next, and make no time to step back and think. Sound familiar?
The way out of this hole is to figure out how to get your business to run without you. That way, you don’t have to worry about being in two different places at once!
Gerber breaks down the following steps for shifting from a technician to a true entrepreneur:
Step 1: Think differently about money.
Money has four aspects in his model:
Most technicians think predominantly about income — the money you get paid for going to work every day. Income is what you get when you operate as a contractor-as-employee. When you want to shift to a contractor-as-owner, income becomes perhaps the least important of the four aspects.
Meanwhile, profit is investment capital that feeds and supports your growth, rewards people, shores up capital shortfalls, and rewards the owner for taking risks. Thinking about profit instead of income is an essential shift you have to make if you are to move from being an independent contractor to a business owner.
Flow is the way money moves through your business; when you manage the flow of money appropriately, you have the power to grow your business more effectively and efficiently. Every entrepreneur needs to control the way money flows in and out of his or her business.
Finally, equity is the value a buyer would place on your business. Entrepreneurs need to think about creating equity in their business by making it a sustainable, valuable operation — with or without the current owner. This means having systems, products, processes, and solid marketing methods.
Step 2: Develop processes so that you replace yourself with others.
You have to stop working in the business and start working on it. The best way to do that is to become aware of when you’re filling an owner’s shoes vs. an employee’s shoes.
For jobs that could be delegated to an employee, your role is to find the best way to do that job, and then document it. Next, replace yourself with someone who (after being trained on the system you’ve just created) can do the job and teach it to others. Finally, manage the system by quantifying its success, and improving upon it. Repeat this process every time you find yourself being an employee rather than an owner.
Step 3: Develop a plan.
Gerber introduces what he calls the Planning Triangle, or three types of plans every entrepreneur needs to have. The first is a business plan, which determines what the business is, including its purpose and vision. The second is a "job plan" that documents everything your employees need to know, have, and do in order to get a job done on time, every time, as promised. This is a detailed set of job/process descriptions that rivals a franchise system like McDonald’s (a company that Gerber refers to often). Finally, you need a "completion plan," which is a set of benchmarks or standards that tells you that you have completed the job with the budget, quality, and time frame promised.
So you need not one, but three plans. The first tells you who you are. The second tells you what you do. The third tells you how you do it.
Step 4: Understand what it means to manage.
Gerber wisely notes that you don’t manage people, but processes. As a business owner, you should develop step-by-step ways of doing things in order to create a consistent system that gets results. As a Web designer/developer, you should have metrics for success and processes for the following tasks, among many others:
- developing proposals
- starting a job
- communicating with customers
- phasing the work
- implementing a new site
- training the customer
- upgrading and following up
- completing the job
A good process allows you to measure whether you’re getting the same results every time and, if not, how to change to process to improve it.
Step 5: Change the way you work with people.
Gerber asserts that, without people, you don’t have a company. You have a job. To effectively work with others, especially employees and sub-contractors, it is essential to add them in a systematic way.
You need a system that explicitly communicates the talent and skills you seek, a system to teach new people so that they know what to do, a set of standards so that you can set expectations, and a process to help them improve over time. Without these systems in place, your people will do more harm than good.
Step 6: Develop a system to understand, communicate with, and delight customers.
Without a marketing system, you won’t be able to grow your business effectively.
Step 7: Keep growing.
According to Gerber, a business that stops growing will die. One of your primary roles as business owner is to infuse your business with purpose, passion, will, belief, personality and method (systems again!).
Gerber’s model is simple, comprehensive and it works. Judging by the success of his books and coaching, you owe it to yourself to learn more about his ideas. Whether you want to grow organically or rapidly, his model is a terrific one to follow.
Model #2: Built to Last
James Collins’ and Jerry Porras’ classic book Built to Last provides sound research about what differentiates companies that last from those that don’t. The authors researched a series of companies that outperformed their rivals, and have been around for at least 50 years. They isolated the things that these companies did, and their rivals didn’t do, in order to create a statistically valid model of tasks a business owner needs to do to create a company that lasts.
Their findings are not so different from Gerber’s, although they are presented in a more academic format, with examples taken from publicly traded companies. But this book is so soundly researched, and so applicable even to fledgling companies, that it is worth my summarizing the findings. Here are the authors’ conclusions:
First, build a clock instead of telling time.
The longest-lasting companies develop systems that are not dependent on any individual. Less successful companies tend to rely on charismatic, egotistical leaders. But when these leaders leave or die, their companies suffer. That’s because there are no systems in place to keep the results going. And one of the most critical jobs of "clock building" for any owner is to develop future leaders. This first finding clearly parallels Gerber’s approach.
Second, focus on "and" instead of "or."
The best companies don’t get stuck in either/or ruts, like "profit or quality," "time and money or growth." Instead, the change the words "or" and "but" to "and." As a result, they are not constrained by limiting beliefs, and achieve remarkable breakthroughs.
Third, develop a "core ideology."
Lasting companies develop a mission, vision, and set of values that drive the company into the future. Hewlett and Packard didn’t just want to create a product and cash out. They wanted to change people’s lives with technology, and that mission led to one of the most successful technology companies ever.
Fourth, drive for progress while preserving the core ideology.
Great companies don’t get stuck in a rut — they keep progressing. They do this in two ways. First, they set what Collins calls "Big Hairy Audacious Goals" (BHAGs). These are huge, ambitious goals (e.g. Fedex’s goal of 100% delivery; General Electric’s goal to be #1 or #2 in every market it serves). Second, they try lots of smaller ideas and see what works. For instance, 3M is famous for constantly testing new ideas, which often result in products like their world-famous Post-It Notes.
Fifth, develop a cult-like culture.
Lasting companies have cultures that resemble cults. These are strong cultures with specific ways of doing things. You immediately know whether you fit into one of these companies or not. For instance, if you are not fanatical about details, you won’t survive long at Disney or the Ritz. If you don’t love the thrill of competition, Nike is unlikely to keep you around. As a business owner, it is your job to nurture and sustain a performance-oriented culture.
Sixth, rely on home grown management.
The authors found that the best companies groom people for leadership roles internally. This finding mirrors Gerber’s ideas about documenting jobs and having employees teach those jobs to others.
Finally, according to the authors, "Good enough never is."
Just as Gerber insists that entrepreneurs measure and improve processes, so Collins and Porras found that the world’s top companies keep raising the bar.
When you compare the E-Myth model and the Built to Last Model, you can’t help but see the similarities. Both models present their information differently, but both are applicable to any Web design or development business.
Model #3: Become a Marketing Expert with Outsourced Talent
Okay, enough theory. Let’s talk about some real companies. This example and the next focus on real companies that have gone from start-up mode to successful company mode.
The owner of the first company started as an independent contractor, who worked with companies in Silicon Valley. He went from job to job, constantly in search of the next gig. He was a classic "technician," to borrow the E-myth term.
After a year or two of this kind of work, he decided to go for it and build a larger organization. Immediately he realized a dilemma: if he stopped working in the business and started working on it, there would be a period of time when his income would drop significantly. In order to equal his salary and make a profit, he would have to have at least four contractors working full time at client organizations.
Here’s what he did.
First, he made sure that he had at least two years of reserve funds in the bank to take care of his family and any emergencies.
Second, he built a database of outsourced talent that he could call upon at any time, for any client situation (e.g. in the case of Web designers, this would include QA, usability, ecommerce, navigation, SEO, Java, .NET, industry, and other experts). That way, when he talked to potential clients, he could immediately respond to their specific needs with specific resources.
Third, he became a marketing expert. He learned everything he could about marketing and sales, until he filled his sales pipeline with highly visible and desirable clients. He essentially sold experts into these companies, taking a nice mark up in exchange for finding great resources and guaranteeing quality.
Fourth, he outsourced his marketing and sales, and his sourcing of talent, to others.
Fifth, he developed processes to track client satisfaction and improve on it. This included processes to carefully screen his virtual talent and ensure that they understood his methodology to delight customers.
After two years, he had a full-fledged company with ten employees earning almost $1 million a year. He even made it to the Inc. 500 Fastest Growing Companies list.
Notice what he did: he gave up his original talent (e.g. Development), and outsourced it completely to virtual experts. He made marketing and sales, and finding great people, the core capabilities of his company. By putting his ego aside, he built a "clock" that has real value (his database of talent, his processes, and his high-profile client base).
Also notice how he was sure to have money in reserve to cover the lean times while he built his business up.
Model #4: Become a Talent Expert with Outsourced Marketing (a la WSI)
The final model is the inverse of Model #3. In this case, the company in question developed in-house Web design/development expertise. Their expertise went deep and broad, so that they could handle everything from simple Website designs to complex ecommerce projects. They also developed methodologies for writing proposals, starting work, phasing work, etc.
Here’s where their model gets interesting: rather than marketing this in-house talent on their own, they developed a franchise system. They marketed their expertise, along with a marketing system, to IT professionals who wanted to augment their capabilities or start their own business. Even better, as a franchise system, they receive tens of thousands of dollars from their franchisees, along with royalties.
I can’t vouch for the satisfaction of the franchisees in this system. But I know that the company, WSI, has over 750 franchisees and operates worldwide.
You could develop a comparable model, starting as a small design shop, and essentially signing on marketing representatives to sell your services for a commission. That will save you the money involved in building a franchise, and allow you to grow with an enormously leveraged model.
To succeed here, you need to have the skills to recruit marketing representatives, develop a system to serve clients, develop ways to keep the marketing representatives engaged and successful, and recruit broad and deep design/development talent that sets you apart. As in the previous example, you could even start out with a virtual on-demand talent pool to keep your overhead low.
Your Future Awaits!
Finding a model by which to shift from being an independent contractor to running a larger business is not hard, if you’re ready to take the leap. You don’t need to get fancy. Just by following the E-myth methodology, you can gradually add talent to your company and grow traditionally and organically.
What is hard is taking effective action, especially in the face of the setbacks and challenges you are likely to encounter along the way.
To give one example, the entrepreneur in Model #3 struggled for two years until he developed traction with his new business model. He essentially landed a very senior executive at a very large and visible company as his client, and that gave him instant credibility. Then, about six months later, he found a terrific salesperson that helped him grow his company exponentially.
Again, it is not easy and, as noted earlier, there are no guarantees. But the opportunity exists and, if you’re prepared to take the leap, the models we’ve discussed here should put you on the right footing to get started.
So, what’s your next step?