The first (customer) project is usually the first step as a company. One of the most visible parts of that first step is signing the contract with your customer. Typically, this is also the first time that companies will contact us as they like to get advice on the contract: the terms, the pricing, the IP ownership and a slew of other details which are typically heavily dependent on the strategy of the company and the customer it is engaging with.
Often the founders are concerned with the most “visible” parts of the contract such as the pricing. Approaches based on hourly rate versus fixed rate for a delivery are often first on the table for discussion. However, more fundamental are those related to the company’s strategy and the type of customer. It is these fundamentals that drive the resulting pricing strategy and the actual numbers.
From a strategy perspective it is key to determine if the service task at hand is part of the company’s strategic roadmap. In that case, IP retention is fundamental to the company’s future and there should be no agreement where the ownership of the IP would be at stake. A standard “period of exclusivity” for the customer is the proper contractual approach to safeguard your company’s strategic roadmap. Another aspect of this roadmap is the IP protection that needs to be established. With the roadmap comes a strong IP patent portfolio to protect the company’s investment and, at the same time, provide the customer with the “Freedom to Operate” (FTO). Customers will require this and will make their protection against (patent) litigation a part of their agreement with a design services company.
While serving your customer and delivering a quality service is at the foundation of your company (remember, reputation comes by foot but departs by horse), you have to ensure that there is a clear separation between what is contractually agreed upon and what is to be considered additional services (and hence additional charges apply). For this reason, any project accepted needs to include clear terms for “overflow”, not just the pricing but, equally important, identifying it when it occurs.
As a wrap-up: even though your first project is often one that is started under the pressure of setting up the business as well (with all its distractions), do not take shortcuts on the critical building blocks of your company. Lawyers are expensive so use them wisely but do use them as an incomplete setup makes you (and potentially your customer) vulnerable.
One of the challenges that comes with design services is the cyclical nature of the services business. When the economy tightens and corporates are watching their operational expenses, the first step will be to halt any external contracts/contractors which are not deemed absolutely essential.
Whereas the earlier (staircase) model is a good approach in scaling up revenue and creating new revenue streams, the foundation of the company is still based on the service model: headcount continues to be the main driver (typically up to 60-70% of revenue). In terms of (enterprise) valuation the additional revenue streams, however, will already make a significant difference.
Design services companies typically start small (some exceptions when it concerns management buy-outs) and natural growth is a slow process as it requires hiring and training of engineers based on/driven by the revenue stream of the company. Growth of business is tied to growing the team and it is not always easy to find the engineers.