Like with most professional services, software consulting may be offered a la carte or all-in-one. There can be advantages or disadvantages to each model, however, so it is important to understand which models your vendor offers in the early stages of the relationship.

Hourly

Most firms will offer an hourly rate, although this is not always the best value for the client on every consulting engagement. Hourly rates can be subject to cost overruns - especially without dedicated Software Project Management.

Estimates

There are several important things to consider regarding estimates.

Free Estimates

While free estimates on smaller software projects are common, beware of free estimates on larger project scopes. Good estimates require work - usually even requiring multiple disciplines (architecture, implementation, integration, project management, documentation, release management). They are also highly valuable in terms of reducing project delivery risk as well as budget risk. For this reason, they should come at a price and take some time. Expect this from a good software consulting firm.

Paid Estimates

Paid estimates often come in the form of a "scoping exercise" or "scoping project". This project may be offered on the same price basis (e.g. hourly) as the resulting project, or possibly even a different one. It is common practice for attractive clients to underbid the scoping project so that there is an easier "yes" decision on behalf of the buyer. These scoping exercises can also be a great way to "get to know" your potential custom software vendor. However, be sure that there are clearly identified deliverables at the end of this phase. Unscrupulous vendors may "keep" the scope document if you do not approve the resulting project, so that you cannot use their scope to bid the project out.

Estimate Accuracy

As a customer, you should know that hourly projects will tend to run over the estimated budget more often than under. The larger and more experienced the software consulting firm, however, the better the estimation techniques and less likely to see budget overruns for a given scope of work.

Caps

A Cap is an upper limit (sometimes called a "not to exceed" or NTE) of pre-approved hourly spending on behalf of the customer. Especially with newly formed software consulting relationships, putting a "cap" in place is a good idea until you as a customer become comfortable with the time efficiency of the firm and have a good feeling of value for money of the software consultants' time. For example, you might approve $150/hr for a given scope, "not to exceed" $40,000.

Fixed-Fee

Fixed fee projects offer a fixed scope of work to be delivered for a predetermined fee. While it may seem that a fixed fee would be the best option from a customer perspective, it is important to know that an experienced consulting firm will build in a premium over their actual estimated work to account for unforeseen challenges, extra meetings, and various other risks. This means that you will be paying a risk premium for the software consulting firm to shoulder all of the financial project risk.

Up Front Payments

Often, fixed-fee projects will require some amount of up-front payment. This serves several purposes for the consulting firm:

• Engage the client - Once money has changed hands, all parties are engaged and should be actively pursuing results. This helps prevent a casual client from shirking client responsibilities.
• Finance the project - The consulting firm is paying its employees to begin work on your project, and an up-front payment helps offset the ongoing cost of development.
• Demonstrate client's ability to pay - While a contract represents a willingness to pay, a check shows the ability. This can also serve to measure the timeliness of the client's AP department.

Milestones

With larger Fixed Fee projects, Milestones are a common practice. In the Milestone model, a larger project scope is broken down into several smaller sets of deliverables. Some example deliverables might include:

• Develop and Deliver Scope Document
• Design and Document System Architecture
• Deliver Database Schema
• Implement Database Structure
• Deliver Proof of Concept
• Implement Initial set of Features
• Deliver a final product
• Perform software training

Milestones are generally a good idea for both consultant and customer, as they provide for more predictable delivery, as well as enforcement for the proposed project timeline.

Block/Retainer

Block Hours and Retainers are two forms of pre-paid services and are the least common among all the Billing Models in software consulting.

The Block Hour model involves pre-purchasing a set quantity of hours, which are then available to the user in an on-demand model. Block Hours are most commonly found when a software consulting firm does not offer a differentiated rate structure (that is, all services are offered at one rate, rather than an individual rate for each service). For example, you may pre-purchase 200 hours of work @ $100/hr for a total fee of $20,000.

Retainers are similar to Block Hours, but are a pre-purchased dollar amount of work. They are commonly offered when a variety of hourly rates are present, say, for various different skillsets (project management vs. development) or various different levels of seniority (senior software consultant vs. junior software consultant). For example, you may purchase $25,000 of work, equating to 200 hours of a $125/hr Senior Software Consultant or 250 hours of a $100/hr Junior Software Consultant.

Maintenance

Maintenance Agreements are akin to Warranties. In a Maintenance Agreement, a software consulting company will offer a set of guaranteed services in exchange for a fixed periodic payment. For example, Computer Programmers Inc. might promise to fix all bugs related to your custom accounting software for $12,000 per quarter. More often than not, Software Maintenance Agreements offer:

• Service Level Agreement - guarantees on turnaround time, on/off site support, quantities of hours, phone support
• Fixed Price
• Periodic Payment
• Defined Scope of Services - typically will not include any "new" software development 

There is a variety of firm size in the software consulting industry, but it is important to understand the risks associated with firms or various sizes as well as the potential benefits.

Freelancing Software Consultants

Typically working from home, Freelancers are the least likely to be classically trained software engineers. Often coming at the lowest rates, many freelancers are trained in another skillset, but decided at some point to move into software development (almost always in addition to an existing IT or graphic design trade). While lone rangers can be found with this model, continuity of support is one of the top risks, as individuals rarely last the test of time (just ask the small business association for some statistics on small business survival rates). Finally, individuals are going to be the most likely to overstate his or her skillset in hopes of getting a larger project and "stretching" into the new role. Make sure he or she can provide multiple references in your industry and on the proposed platform.

Small Software Consulting Firms

Small firms often are young, both with respect to age of employee and age of the firm itself. Small firms often provide very personalized service, but with only 5-10 consultants, may typically only work for a few clients, or a few projects concurrently. Also, small firms do not typically provide dedicated project management or formal documentation, as they do not have enough work to maintain this skillset in-house. In addition, other types of services are often subcontracted by small firms, which can lead to questions as to vendor accountability if there are issues with a project.

However, small software companies often charge the lowest rates in the industry, so they can offer a savings for budget-sensitive buyers. Also, small firms will typically only have 1-3 customers; you are likely to get dedicated service while your project implementation is underway.

Midsize Software Consulting Firms

Midsized firms often provide a mix of skillset specialization coupled with available dedicated Project Managers and standardized Quality Assurance practices. While midsized software consulting firms may be too large for the smallest projects, they scale well into the lower end of enterprise software implementations. Starting with midsized firms, company-level certification becomes more common.

Another thing that you will begin to see with midsized firms is project methodology. Midsized software consulting firms typically use a more lightweight methodology than the larger firms, often incorporating elements of many "standard" methodologies from software engineering. It is important that you find a firm whose methodology is a good fit for your company in terms of its rigor.

Large Software Consulting Firms

These firms typically offer the widest range of technical expertise and project background. They also will typically use the most formal software project management methodologies, which can lead to billable time bloat on smaller software engagements. An advantage of larger firms is the business continuity you can get from the vendor side of the table - if the lead on your implementation is unavailable for some reason, there is likely a suitable replacement already on-staff. These features combine to produce the highest price, but possibly also the lowest risk project deliverables.

Specialized Software Consultants

These are software developers that work for a particular application vendor, say Schlumberger, for example, and are highly skilled specialists for one particular application and typically that application's problem domain only. Often coming at a premium rate ($2-300/hr and up), they can be a scarce resource, as they typically handle highly specialized problem domains which can be very industry, vendor, and even product-specific. 

Tomorrow I will begin publishing a series on some of the key characteristics that distinguish software consulting firms. These characteristics include, but are not limited to, the size of the firm, billing models offered, technology platforms, age of the firm and its employees, professionalism or formality, and price range.

Stayed tuned!

It is important to distinguish software consulting from other similar service offerings like contract programmers, or staffing agencies that involve software development resources. There are several key factors that differentiate the software consulting firm.

Consulting Business Model

In order for a firm to truly be in the Software Consulting business, it needs to engage clients as a consultant! This seems simple, but in reality, many companies simply provide technical resources for a period of time, many of whom are not employees and may or may not know anything about the customer's business or industry focus.

Rather than being implementation-focused, a consulting business model means that the client has a business problem (rather than a strictly technical one) and is seeking a business solution. Software consultants provide business solutions using relevant software tools.

Unbiased Opinion

This means that the firm will not typically prefer "buy" to "build" and also will not offer only one vendor choice for a given software package. Other firms may have a strong, yet unexplained technology platform bias. In other words, the consultant is working on behalf of the client to find the best solution for that client's particular business challenge. The best software consultants provide the best solutions for the client, rather than the best solutions for their own firm.

Industry Expertise

The best software consulting firms provide higher degrees of industry focus. For example, they may specialize in solutions for the Manufacturing industry, or the Medical services industry. Industry expertise brings additional value to the customer, in that there is less ramp-up on the business problem. Also, industry expertise provides some perspective on your problem, often from similar engagements with peer-level client firms from the same industry. The most skilled software consultants bring to the table a technical mastery that can be applied in the client's business problem domain.