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December 8, 2008

Siphoning Revenues

There is a lot to be said for siphoning revenues from market leaders. This is a strategy that has worked remarkably well for a number of consultancies all over the globe and one that each of us should at least consider.

Sapient  is an IT company with fingers in just about every area of the business. But it started out as an SAP service provider. To this day SAP services makes up a large percentage  of their income stream. They earned $565.99 million in revenues during 2007.

Astadia is another company that has grown through the siphoning model. Formed by a merger of two sales focussed companies, Astadia is the #1 , according to their website, partner for and the dominant player in the world of SaaS VAR's. On October 1 they received $7 million in financing, and continue to grow their practice globally.

In my own history is a company called Mincom, a formerly Australian organization delivering enterprise software to capital intensive industries. They have generated many small to medium sized competitor companies made up of ex-employees or others with experience.

Just in case you think this is all about IT companies - many, many people made money out of Deming's TQM approach. (Or the later TPM approaches) Many people are making money out of Motorola's 6 Sigma. Heck, entire companies and products have been built around the Balanced Scorecard thinking and approach!

Siphoning revenues from existing market leaders is a wise way for a company to establish a beach head in an industry. But it doesn't come without rules and risks of course.

1) The market must be under-serviced. Not a difficult thing to do. Distribution comes at a cost and many, though not all, software companies who are looking to expand need partners to do so cost effectively.

Many clients, with a vendor who does not have the consultants to service them = opportunity!

2) You don't need the vendors permission. The vast majority of consultants out there working on SAP are not officially sanctioned. But they do it anyway, and they are successful at it. Most Oracle consultants are successful at it, though not formerly part of an Oracle network.

3) Be careful of IP laws. If you are going to take on a siphoning model, then be careful. Don't steal anything that doesn't belong to you, use your own stuff. And if possible try first to get permission for things that you are doing. You don't need permission, but things work better when everyone is in a win-win situation.

4) This isn't the only thing you do! Siphoning should not be a business model in itself. Otherwise you are too open to changes in technology, upgrades causing you to be locked out, and restrictions in the knowledge required.

A Siphoning model is a great, and easy, model for establishing a foundation, getting started, and for building the initial revenues to take the company to the next step.

But it is only that - anybody who has achieved long term success in consulting, that started with this model, quickly developed other product and service lines to follow up with.