In this session we will explore the journey of converting a non-recurring revenue business into a sustainable recurring revenue model. Brick Thompson, Founder & CEO of Blue Margin will share the challenges he faced, the steps taken to implement change, and the benefits realized from establishing a steady, predictable income stream. This session is perfect founders looking to stabilize and grow their revenue.
TRANSCRIPT
Greg Alexander:
Hey, everybody. This is Greg Alexander, founder of Collective. And you’re listening to the ProServe podcast. This show is dedicated to helping leaders of boutique professional services firms make more money, make scaling easier, and make getting to an exit achievable. And on today’s episode, we’re going to talk about going from a services firm that does not have any recurring revenue, the problems and difficulties associated with that, to a services firm that has at least part of their revenue recurring, hopefully someday all of their revenue recurring, and the wonderful things that happen when you finally get there. But going from point A to point B is not always easy. It’s a journey to say the least, but we have a fantastic Collective member with us that is on that journey currently. And he’s agreed to share with us what he’s learned so far. His name is Brick Thompson. So with that, Brick, it’s good. Brick, sorry. That’s my wife’s name.
Brick Thompson:
Yeah, yeah.
Greg Alexander:
It’s good to see you again. And would you please introduce yourself to the audience?
Brick Thompson:
Yeah, yeah. So I’m Brick Thompson. I’m CEO and founder of Blue Margin. We’re about a 30-person company based in Fort Collins, Colorado. We do data and analytics. Basically, our sole function is to help companies put their data to work by building BI dashboards to help them improve profits, operations, those types of things.
Greg Alexander:
And when were you founded, Brick?
Brick Thompson:
August of 2011. So just 13 years.
Greg Alexander:
Yeah. So nice growth story. I mean, 30 people at this stage, that’s a good thing. So I asked you to come on the show because last time we spoke during office hours, you were telling me about what you were doing in recurring revenue. Maybe as a way to get started, why don’t you just give us the context on where you are and how it all got started, etc.?
Brick Thompson:
Yeah. Okay. So it’s been a bit of a journey. I would say for our entire history, we always wanted to figure out how to have a product, have some kind of recurring revenue. But we are very much a project-based company. So for our first 10 years or so, 11 years, we were time and materials. And we grew pretty steadily. It was good. And we just had projects. We sold projects every month. We had customers that would come back. Recurring projects, lots of change orders, lots of little support hours. It was kind of complicated to manage, but pretty profitable. We got to about 5,000,000 in revenue by the end of 2020. But then we started to struggle a bit. We were having trouble figuring out how to scale well. How to keep selling enough deals. And we decided to switch to a fixed-price project model in 2021. And that made our operations a lot easier. And actually, individual projects were more profitable because we really streamlined how we did things. We didn’t have all the change orders. We sort of moved from project to project. It had those good things. But the result was that our revenues fell about seven percent and then flatlined. For two years, we couldn’t figure out how to grow it. And it was sort of that same problem of we have to go out and kill our meal every month. We started each month with zero. And I would look forward on revenue and say, all right, how much backlog do we have? I could sort of see maybe a couple of months ahead and then, you know, it fell off to nothing. And we lost a lot of that recurring, weird little change order business that actually was pretty profitable, but a pain to deliver. And customers didn’t like it. It put us on the opposite side of the table from them. We thought going to fixed price would really help us solve that. Put us on the same side of the table as the customer. We get it done quicker. Customer’s happy. We make more money and so on. But what we were finding was that customers didn’t have a mechanism then to take what we had built, hand it to them, and then we wanted to move to the next project. They didn’t have the ability to manage that. And without us being there with the change orders and the ongoing sort of churn, it didn’t work well. And so we thought about how to change the business to fix that. We looked at the parts of our project that we thought could maybe be more of a recurring type of ongoing thing. And really the iteration of reports and dashboards and the management of the platform were the things we identified that could be. And so in July of last year, 2023, we decided to switch our business to that. And actually, we didn’t decide to switch it all at once, like flipping a switch. We thought that we would still maintain our fixed-price project business while we ramped up this recurring revenue business. But what happened was that about three weeks into that, our entire sales pipeline had switched over to these recurring what we were calling recurring revenue deals. They weren’t really recurring. They were charging a customer a fixed amount per month for us to provide a fractional team to keep working on their backlog. But it was month to month. We wanted to make it really easy to assign customers and so they could turn off at any time. And so to get it to truly recurring, we think we need long-term contracts more working on that. We have longer-term contracts at this point with about two-thirds of our customers. So we made that switch. The pipeline switched over by the end of July 2023. And then we were on this sort of not quite a death march, but we had to cross this desert of, OK, we have a certain amount of cash in our war chest. We no longer have these big meaty projects coming in. We are now getting a much smaller amount per month from our clients. And are we going to get to the other side of the desert before we run out of that cash? So we did that. We made it. It was not a fun third and fourth quarter. I would say it was probably the scariest time in the business and probably the most dangerous time for the business. But we got to where by the end of the first quarter this year, we’ve replaced all of our original 5,000,000 in revenue with this recurring, hopefully truly recurring at some point, but recurring.
Greg Alexander:
Revenue. You know, getting past that point, the valley of death across the desert, as you mentioned, is usually the issue where people struggle. And I just want to spend a moment on that to make sure everybody knows what we’re talking about. You know, when you’re doing projects, cash flow is great because when a new project comes in, you get an injection of a big bunch of cash. When you switch to recurring revenue, it’s just the opposite. You know, you don’t get this massive injection of cash. You get a little bit of cash every month. And that’s a plus for sure. Long term, that’s the way to go. But going from point A to point B, that can be really scary. So how did you do it? Did you tap a line of credit? Did you raise capital? How did you get through it?
Brick Thompson:
We didn’t. I mean, we’ve always kept a pretty good cash reserve, cash and receivables. Our receivables, for some reason, are always very reliable. So we looked at that. We modeled out how many clients we thought we could add. We were adding sort of three new ones a month on average, something like that. And one of those three was always an existing client. And then we’d have two new ones. And that held throughout the whole period. So we just budgeted carefully and we actually went into an austerity mode. We stopped doing extra expenditures. It was challenging. I mean, I had to get the whole team excited for that and ready for that. And it wasn’t great. Like we, you know, we cater lunch every Friday because we want to have the team together. We didn’t do that for that period. I mean, and it turns out we could have done it. We would have made it, but we really clamped down on everything to make sure we could get there.
Greg Alexander:
Yeah. And how long did that period last for?
Brick Thompson:
It was probably four months of, you know, I didn’t sleep well. Yeah. Okay.
Greg Alexander:
Four months. I mean, gosh, I could stand on my head for four months. Four months is nothing, right? And in the scheme of things, I mean, you’ve been in business for 13 years, right? So, yeah. So that’s encouraging to hear. And I want those that are listening to this podcast to realize that, yeah, you got to go through a painful period there. But it’s pretty short in Brick’s case. And it could be pretty short in your case, too. So then that takes me to the next question. So you go through four months of grief. Was it worth it?
Brick Thompson:
Oh, yeah. I mean, by the time we got to the end of Q1, we were cash flow positive, profitable. At the start of every month, we’re sending out invoices for 375 grand. Plus, we knew we had a bunch of additional expansion revenue that was coming with that every month. It was a completely different deal. I mean, our sales team found it easier to sell. Our customers liked it. It was great. So our focus then became expansion revenue, retention, all those things. Yeah.
Greg Alexander:
Now, let’s talk about your team. Yes. Did they embrace this? Did they want to do this or did you have to, you know, drag them along, so to speak?
Brick Thompson:
So that’s a good question. I think, you know, there was some fatigue on the team just from change. You know, we had changed that fixed price model a couple of years before. Now we’re changing again. You know, we’re going into austerity mode. Sounds like things may not be great. There’s a lot of process change. It was tough. And in fact, we had quite a bit of turnover in that period. I don’t know how much of it was related specifically to the switch, but some of it certainly. So it was challenging.
Greg Alexander:
Yeah. Obviously, for you as the owner, this switch has increased the value of your firm dramatically because I think so. Yeah, definitely. I mean, the multiple that gets placed on EBITDA and revenue for a services firm that has recurring revenue is quite a bit higher, maybe two X than a project-based firm. So therefore, slugging through some employee turnover again was probably worth it, correct?
Brick Thompson:
I think it was. Yeah, I think there were people, you know, I love all our employees, even the ones that have left. So it’s hard to go through that. But, you know, people do get tired of change. And it’s funny, you have someone who left with good reasons, maybe they didn’t like it. And then you bring in someone new and they don’t know any different. And you say, OK, that’s good. That’s how we do it. Fine. And it gets a lot easier. So there was a little bit of out with the old, in with the new. Hate to see old colleagues go. But it got easier as we sort of made that transition. And most of the team made it. It was just some of them that didn’t.
Greg Alexander:
You know, there’s a period in my life where I loved peanut butter and jelly. And then I had a tomahawk ribeye and I realized what I was missing. You know what I mean?
Brick Thompson:
Yeah.
Greg Alexander:
Let’s talk about the client. So did you go back to the legacy clients, retroactively apply this, or did you ring-fence them and just say all new clients that come in are going to be in this new format?
Brick Thompson:
Well, we said all new clients will be in this format. And so when existing clients, old clients called us and said, Hey, we have another project we want to do. We said, good news. We got this new program. Here’s how we do it now. And invariably they loved it because they sort of, even though they loved the work we did, they hated the fact that when we finished a project, we were gone doing another project. And now they were able to talk to us every week and keep changing their priorities and change their backlog. And we have a customer client success manager who works with them on that. So they really liked it. It really resonated with them. Yeah.
Greg Alexander:
So your story is so interesting because you went from time and materials, which is how most of us start. And then we wake up one day and say, wow, that’s a crappy business model. Let’s switch. And you go to fixed price. Yeah. You know, more profitable and the clients like it better because of the guarantee on the number and all that kind of stuff. And then you realize the issues with that. And now you’re in the recurring revenue model. So is it fair to say that you’re 100 percent recurring revenue at this point?
Brick Thompson:
Well, so, the definition of recurring revenue is tough because only two-thirds of our clients right now are on longer-term contracts. And they’re not even that long. They range from six months to maybe 30 months is the longest. So a third of them are still month to month. So I don’t know if you can really say we’re fully recurring revenue, but our revenue model is all based on that monthly billing. And I want to correct one thing you said. We got more profitable with fixed price. Our projects, our discrete projects were more profitable. The business was less profitable. We weren’t filling the nooks and crannies with all those little change orders and support. So anyway, I just wanted to clarify.
Greg Alexander:
No, no, that’s a good add actually, I think. Because some of the people that are listening to this are going from time and materials to fixed price. And they got to think about that for sure. Yeah. All right. My last question is to wrap up the podcast here. Now that you’re on the other side of this, you know, what do you know now that you wish you knew then? Good.
Brick Thompson:
Good question. I think I wouldn’t be so afraid to push for contracts immediately. I actually think there’s some credibility with saying, yeah, we need to contract in order to deliver well for you. We were so concerned about selling enough that we wanted to lower every barrier to selling it and probably hurt ourselves a little bit with the contracts. We kept the price really low. We’ve been told by clients, you’re not charging enough. So we hurt our own credibility there. Like, are you guys really experts? And so now we’re having to fix all that. Yeah. Interesting. So I wish I had been a little braver about how we took it to market.
Greg Alexander:
Yeah. You know, I can see that. I had a different experience. So Collective. We’re in the recurring revenue model, of course. And in the early days, we asked everybody to sign a one-year membership agreement. And then there were several members. I was six months into it and I wished they were never members and I wanted to get out of it. So then we switched to month-to-month so that we could get out of it if the member wasn’t behaving properly with the other members. So I guess there are pros and cons. Closing concert, everything, for sure.
Brick Thompson:
Hadn’t thought of that.
Greg Alexander:
All right. Well, let me wrap this up with a few calls to action. So if you’re a member and you don’t have recurring revenue and you want recurring revenue, attend the role model session we’ll have with Brick Thompson, an upcoming Friday session. We’ll get that meeting invite out to you. If you’re not a member, you want to become one, go to collectivefiftyfour.com, fill out an application. We’ll get in contact with you. If you’re not ready for any of that, you just want to learn more, I would direct you to my book, The Boutique, How to Start, Scale, and Sell a Professional Services Firm, written by yours truly. You can find it on amazon.com. But Brick, thank you so much for coming on the show today and sharing your wisdom. Congratulations on pulling off a difficult transition. I’m very impressed.
Brick Thompson:
Thank you. I appreciate that.
Greg Alexander:
Okay, until next time, I wish you the best of luck as you try to grow, scale, and someday exit your boutique.
Note: This transcript was generated by Gong.