When A Quick Comment Is Worth $100 Million

(written by lawrence krubner, however indented passages are often quotes). You can contact lawrence at: lawrence@krubner.com, or follow me on Twitter.

What is the difference between a Fractional CTO who charges $200 an hour versus one who charges $2,000 an hour? Simply a factor of 10. But what is the value of their advice to a small firm versus a large firm? Easily a factor of 1,000. How should this difference affect the behavior of Fractional CTOs? I’ll suggest there is only one happy answer and that is “Not at all.” If you consult with clients who make you happy, you’ll be happy, and if you don’t, you’ll be unhappy. As to the success of your clients, the healthiest attitude is something similar to the proud parent who is happy to see their children thrive. Let’s talk about this.

Small firms need people to do a great many tedious tasks. Even the CEO ends up doing lots of mundane work. Small firms don’t have enough people, so just getting the grunt work done is a challenge.

At very large firms, the CEO can function as a philosopher king (a kind of hedgehog, in Isaiah Berlin’s ontology). All that matters is that they get the top-level strategy right, and they can leave all the grunt work to someone else.

Even the Fractional CTOs who charge $2,000 an hour will never be paid enough to get even a small fraction of the wealth they create when they give a good piece of advice to a large firm. Does that mean the Fractional CTO should ask for some other kind of payment, such as equity or stock options? Maybe. But the thing about good advice is that it’s often not clear that the advice is good until it’s been discussed a bit, at which point it cannot be retracted. A quick comment might be worth $100 million, but you won’t have patent protection for that quick comment. Should you demand equity before you even speak? Unlikely. A company can’t simply give out stock options to everyone who has some advice, because everyone is ready to offer advice. I’d suggest to everyone doing business consulting, of any kind, there will be moments when your best option is to simply offer your best advice, and be remembered for giving good advice. Such moments redound to one’s reputation and presumably that pays off in the long run; indeed, if it didn’t then how could anyone be a consultant?

I’ll share with you a true story.

In 2018 there was a software company (I’ll call them Andromeda) in New York City that sold security-oriented software to other large firms. They had $50 million in annual sales (so they were larger than the small startups I’m normally a consultant for).

Andromeda wanted to go public, but they had calculated that the only way they could get the share price their investors wanted was to grow to $150 million in annual sales while maintaining strong gross margins. The CEO could not think of how to do this, so he went looking for advice.

The CEO invited 20 of the smartest consultants in New York City to come to lunch at a very expensive Brazilian steakhouse, one of those swanky business places where lunch can easily cost $200 per head. Among the invited were two people I’d previously worked for: Jon Williams and Mark Herschberg. Herschberg was unable to attend, so he suggested that I go in his place. I went, and I got to witness the moment when Jon Williams stole the whole show with a short speech so brilliant that I’m still jealous about it.

We all arrived, milled about, and chatted for a while. There were 20 of us among the invited, and there were perhaps 10 people from Andromeda. Finally we all got seated, ordered our lunch, and then listened while the CEO got up and launched into his pitch.

How could he triple sales while keeping strong margins? His customers kept asking for his help, so he knew he could grow total revenue quickly if he was willing to become a service agency that did a lot of unique, one-off customization work. But he also knew that would murder his margins. He’d have to hire an army of staff to handle all the low-level grunt work that came from customizing the software and network setup for each client. While that would allow him to grow the company, his margins would sink so low he probably would not be able to go for an IPO. Even companies like IBM and Oracle had struggled to maintain margins once they expanded too much into custom service work.

We kicked the topic around. Everyone had a few suggestions. Someone said IBM made some good money from certain projects, and Andromeda should try to imitate that. Others warned that agency work can become a quagmire, and pointed to the lawsuit where Oracle had to pay $100 million to Oregon (Oregon had hired Oracle to build a healthcare website, and Oracle billed $130 million for the job, but the website did not work correctly.) With that kind of custom work on big projects, the cost of failure could kill a company.

Other people made some suggestions about security software. Could he take market share away from Norton, on the one side, or Reliaquest on the other? Was there some new avenue he had not yet explored, some new need in the market for which he could develop software?

Considering this crowd was supposed to be the smartest of the smart, much of the conversation was disappointing.

But then Jon Williams started talking.

“Just write a white paper,” he proposed. You could almost see him shrug when he said it.

“What?” asked the CEO.

“Just write a white paper,” repeated Jon. A murmur went through the crowd as people thought about this idea.

Jon Williams continued his thoughts. “Large scale consultancies do it all the time. ThoughtWorks and PricewaterhouseCoopers both produce quite a number of books and white papers. It’s how they attract new business.”

“No, no, no,” said the CEO. He worried that Jon had misunderstood something crucial. “I need easy, recurring revenue.”

“This is easy, recurring revenue,” said Jon, and he went on to explain it in detail:

⬥ Write a white paper. Claim you have a secret process that leads to security, lowered costs, and better productivity. Claim it has a certain number of steps. You can make up any number that you like. It can be a 5-step process, or an 8-step process, or a 23-step process. Claim that every company that implements your secret process ends up in a better place. Even if you’re only repeating basic security advice, most of your customers don’t know what you know, so you might be the first source that’s ever given them this basic advice. Give a unique twist if you actually can think of something unique to say. But no matter what, you should claim it’s a secret process that you’ve invented. And you’re giving away the secret process for free, in this white paper.

⬥ Publish the white paper and promote it. Make sure all of your existing customers see it.

⬥ After a while, companies will be asking for help implementing the process. And then you will offer to monitor their implementation of your white paper. This is not the same as doing custom work, because you won’t do any of the actual work yourself. That is, tell your customer that they have to deal with all of the actual implementation on their own; you’re just there to ensure they are doing it correctly. You monitor what they do, you make sure they are following your advice, that’s it. This avoidance of actual work keeps your gross margins strong.

⬥ Explain that you are willing to check in at a certain interval, maybe once a month, or once a quarter, to make sure that the company is still correctly following your magic process.

⬥ Bill your clients big money for this occasional checkup. Thus, you reap recurring revenue with very strong margins. And you never get stuck in the quagmire of actual implementation, instead, you float above all that, up where the sun is always bright and the future is an infinitely vast vista of prosperity.

It was one of those moments where everyone in the room immediately knew that the speaker was right. Indeed, after he pitched the idea, it seemed so obvious that I was kicking myself for not having thought of it myself. It is, after all, how big consultancies drum up a significant part of their business: write a white paper, claim to have a secret process, then observe the implementation.

All credit to Jon for realizing that this strategy would work for Andromeda. Also, he did a fantastic job of making it sound simple. The last I heard, Andromeda was doing well with a strategy akin to what Jon suggested. (I have not heard a recent post-pandemic update.)

But my point here underscores the ethics of being a Fractional CTO, or any kind of high-level consultant.

The CEO of a small firm suffers a surfeit of advice while they lack the time and money to implement much of it. The CEO of a large firm can take a good idea and turn it into an extra $100 million in sales.

I personally find it more fun to help small startups — it’s more fun because I can feel like an active participant in the combat, that is, closer to the action.

At a large firm, one will feel far away from the action (and I’ve only helped large firms as part of a team, because it often takes a whole team to do any kind of meaningful analysis of a large firm, I was part of a team when I helped one of the world’s largest car rental companies; this current example with Jon Williams is a rare exception).

But in either situation, if you want to be a good consultant — and an ethical consultant — it is crucial that you go into every situation knowing you will offer some key advice and then walk away. Do good, then leave. Ending a contract cleanly is as important as any other activity you engage in. Always think about your reputation, as people will remember your successes, even as I am here remembering one of Jon Williams’ great moments.

Sometimes I see a consultant feeling something that resembles self-pity. A vague sense of being cheated, as well as a desire to find a way to make more money from a situation, is what causes them to think, “Maybe I should try to become the CTO at this company? Maybe I’ll get stock options?”

This is a bit like thinking you wanted a wild night of casual sex but then in the morning you decide you’ve fallen in love and want to get married. Perhaps this scenario can have a happy ending, but sorrow is a lot more common. Don’t be surprised if your one-night lover says, “But I already have a spouse!” (or rather: “But I already have a CTO!”)

Maybe that is slightly more cynical than it needs to be. There are times when a consultant decides to become full-time with a client, and it works out well for everyone involved. Just be careful, because that is a major shift of expectations, on both sides.

This is good life advice, and it also applies in a professional sense to consulting: whatever circumstances you find yourself facing, you must move forward as if you accept where you are without bitterness. (What if you’ve faced a historic injustice? I’d suggest that if you want to get anything done in your life, you need to move forward with the dual awareness that there is an injustice that needs to be addressed, but you can’t let that injustice get between you and your current client.) Specifically, if you’re the consultant for a small firm, don’t feel sorry for yourself because you’re not making as much as when you consult at large firms, and if you’re consulting at a large firm, don’t feel sorry for yourself that your advice is transforming someone else into a multi-millionaire, while you walk away with just a rotten few thousand dollars. Remember that this is what 99% of the world regards as good paying work.

In short, you can create prosperity for yourself while creating great wealth for someone else, but as always, when so much money is on the line, there are ethical concerns, and you need to have the emotional maturity, and even spiritual maturity, to keep yourself on the ethical path.

Regarding some specific rules of ethics that are valid concerns for this work, please see my next essay “The Ethics Of Being A Fractional CTO.”

Post external references

  1. 1
    https://www.foresightguide.com/hedgehogs-and-foxes-two-personality-types
  2. 2
    https://www.linkedin.com/in/jonwill/
  3. 3
    https://www.linkedin.com/in/hershey/
  4. 4
    https://fortune.com/2016/09/15/oracle-oregon-law-suit-settlement/
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