Last year, Brick Thompson, Founder & CEO of Blue Margin, shared how his firm left behind project work to launch a Managed Data Service and enter the recurring revenue model. At that time, the firm was in the middle of “crossing the desert”—facing cash flow pressures, cultural resistance, and turnover. In this follow-up, Brick returns to discuss life on the other side. He reveals how Blue Margin replaced \$5M in one-time project revenue with recurring contracts, why client satisfaction and expansion revenue have improved, and what challenges remain: churn, short contract lengths, and the need to scale delivery. Founders attending will gain a clear picture of what happens after the leap—how to stabilize and capture the full promise of recurring revenue.
TRANSCRIPT
Greg Alexander: Hey everybody, this is Greg Alexander. You’re listening to the Pro Serv Podcast, brought to you by Collective 54. If you are in the expertise business, this show is for you. We aim to help founders of boutique professional services firms make more money, make scaling easier, and make an exit achievable. Today’s episode is part two of a conversation that I had about a year ago with one of our members, Brick Thompson, from Blue Margin. And in that session, we discussed his early implementation of moving away from time and materials, progressing to fixed-price projects, and ultimately to recurring revenue, which a lot of professional services firms are trying to do, and he shared with us where he was in that transition. But we needed a little time to pass to, you know, let the journey play out a bit, and about a year has passed. If you’re interested in that episode, that was episode 185, but we’re gonna pick up from that conversation, and today is part two of that, so, Brick, if you wouldn’t mind reintroducing yourself to the community.
Brick Thompson: Yeah, you bet. So, Brick Thompson. Founder and CEO of Blue Margin. We’re a company in Fort Collins, Colorado, about an hour north of Denver. We’re in the data and analytics space. We’ve been in business for about 14 years. I like to think we’re in our scale phase, maybe not quite. We’re still kind of just trying to peek at a growth. But I’ve been a Collective 54 member now for a year and a half, and getting a lot of benefit there, and happy to talk to you again, Greg.
Greg Alexander: All right, sounds great. Okay, so again, we’re talking about this transition to recurring revenue. Last year, you described this shift. I re-listened to that podcast as crossing the desert, which I thought was interesting. Can you remind listeners, you know, what that initial stage was like for you and Blue Margin?
Brick Thompson: Yeah, so we had just come off a year and a half, almost two years of no growth, just flat and declining profits as our payroll was going up. We needed to do something different. We had been doing projects for 2 years as fixed price. Prior to that, it had all been time and materials. We didn’t want to go back to time and materials. We thought it was possible that our clients would like to consume our product on an ongoing basis, where they know what the monthly fee was, and we provide a certain amount of capacity to do their data and analytics work, and we were right. So we started selling it in July of 2023. My plan was that we would continue our normal business, our fixed-price projects, alongside that, kind of see how it went. I think by the end of August, our pipeline didn’t have a single project in it. It was all what we called MDS, Managed Data Service. And so we were sort of all in. I didn’t mean to do that. It’s probably worth discussing that at some point if you’re thinking about making this change. I think there are safer ways to do it, but all of a sudden, I was looking at going from having big, chunky projects that I was billing for each month, and keeping the cash flowing that way, to a smaller amount each month for a longer period of time. And so I refer to this period as crossing the desert as sort of like, if you’re walking across a desert, you’ve got the water and food that you can carry on your back. And you gotta make that last till you get to the oasis on the other side. And so, I was projecting it was going to take us about 6 months to recover our revenue that we had been doing, and get back to cash flow break-even. And we did it in about 5, but it was one of the scariest, hardest things I did with the business. There were nights I was pretty sure I had to wrecked the business.
Greg Alexander: So, what was the turning point where you knew the model would work and the worst was behind you?
Brick Thompson: I think pretty early, within 60 days, 60, 90 days, just the uptake of our current existing clients to the new model was way better than I expected. Which made me feel like we probably had a good fit there. People really liked the fact that we weren’t just doing a project and going away, but that we were still there to iterate. They were telling us all the things that we were hoping people would like about it. They were… they were echoing that back to us. And so, I thought it was going to work. I just didn’t know if we could sell it fast enough to get there before I ran out of money. Now, I would have done things, I would have, you know, I would have downsized, I would have figured out how to get there, but I didn’t want to lose really valuable employees and change the complexion of the business completely over that period.
Greg Alexander: Okay. Alright, so you’ve now replaced all this kind of lumpy project revenue, which is really hard to scale a firm when it’s so lumpy like that, with these recurring contracts, so… What does that look like in practice, and how does it feel to start each month with revenue already in place?
Brick Thompson: Well, that’s the best part. So, getting on the other side of the desert… I mean, I still have sleepless nights and worry about stuff. But knowing that you start the month sending out invoices for most of your month is huge. I can tell you, you know, so this last year, we grew… from 2023 to 2024, we grew our revenue by 20%. And this year, through June, we were still up 20% year-over-year from 2024. But in June and July, we didn’t close a single new logo, which is rare for us. So, there’s some sleepless nights there, for sure. In the past, though, that would have meant August was going to be a nightmare, because we didn’t have backlog. But right now, I still had all of that recurring revenue. I didn’t have, all of a sudden, a profitability problem, or… you know, needing to think about my capacity and how I need to manage that. I knew I needed to fix sales, and good news is, in November, we’ve closed 5 new logos so far, and I think we’ll get another one next week, so we seem to be over that dry spell, but that 2 months in the past would have been miserable, ulcer-making time, and now it’s not. Now it’s problem-solving time. Still losing some sleep, but not in the same way. It’s not panicky.
Greg Alexander: Alright. And if you think about this shift from projects to, you know, recurring revenue. The relationship with the client had to have changed. How has it changed, and are they happier, or is it… is it the same? Client sat, it’s just a different contract structure?
Brick Thompson: I think they’re much happier. You know, our retention right now, our annual retention is about 70%, which is low. I’d like it to be 85 or 90, and we’re working on that. So, our average tenure, we’ve only been doing it for 2 years. We don’t know, but, you know, the math says our average tenure is about 3.3 years. We have several customers coming up on 2 years. We have clients that ask us to lock in the same pricing for the next year. That’s not infrequent. You know, so all indications are that customer satisfaction is really good. We have found situations, though, where we forced people into this model when what they really needed was a project. They needed work done over the next 60 days, a slug of work. We were really strict about not doing that when we made the switch. Now we’ll do that in some cases, if the client really needs that, and we think we can convert them to the recurring model afterwards. The reality of that so far has been that we’ve converted maybe less than 25% of those, so we really need to look at that, our methodology of how we do that. So I would say overall clients are quite happy, but we lose clients, so obviously, you know, there are times they go. And I think some of those actually have been clients that really needed a project. So they signed up, they were with us for, you know, 4 or 6 months or whatever, and then they’re gone.
Greg Alexander: Yep. You know, I’d like to send this. To move from… Business to recurring revenue. There’s a new mental model paradigm you need to embrace as a founder. And that is, you think retention first, acquisition second. You’re getting ready to sign a client, and you’re saying to yourself, okay, is this client gonna stay with me 1, 2, 3, 4, 5 years? If I’m not sure, all churn happens at point of sale. If you’re not sure, don’t sign the claim. In the project world, Because… You were so desperate for cash flow, because you had paychecks going out at the end of every month, no matter what, you thought acquisition first. Retention second. When you go to the recurring model, it’s just the opposite. So, remember that phrase, listeners. When you get to recurring revenue, retention first, acquisition second.
Brick Thompson: That’s really good. Sorry, I just had to follow up on that. I appreciate you calling that out, because that’s absolutely right. And we had to change our delivery to be about retention, and in fact, a little over half of our revenue comes from expansion and renewal revenue that our CSM team does. Not from new logos.
Greg Alexander: Yeah, and that’s a whole different motion, right? Yeah. Yeah. You know, what we do here at Collective 54, because of course we’re on the recurring model as a membership business. Is when we’re talking to a new prospect, we say, listen. here is what good looks like. The people that stay with us for years, this is their profile. The people that churn within the first 12 months, which for us is bad, because we don’t break even until month 12, this is what happens. So, do you look like A, or do you look like B? The sales team hated that. Because they wanted to just sell a deal and move on. And we started saying, no, you know, we’re not doing that, because if we don’t keep somebody, what’s the point? So it’s a whole new mental model switch. Alright, speaking of sales, let me ask you this question. Is it… For those that are thinking about making this move and wondering. is the, is crossing the desert worth it? Is it easier to sell these contracts, or harder?
Brick Thompson: I would say… easier. it’s a different mindset, for sure, so our salespeople had to shift to that. At first, they felt like, oh, we could never sell that. And then they felt like, alright, we never want to sell a project again. And then you hit a dry spell on selling recurring, and you’re like, okay, we should do projects again. You know, there’s a… I guess there’s an ebb and flow with it. I would say overall it’s easier, and here’s why, if you sell it right. Here’s why. We’re not looking at trying to sell a very specific scope for a very specific price. and get that done. In our business, and this may be similar for a lot of professional services businesses, but in our business, data and analytics, there’s constant iteration, and it was very frustrating for clients. They didn’t know it would be, and it took us years to learn it, but… you do a project, you get the product you were expecting, and now you’ve been using it for 2 weeks, and now you realize, oh, there’s tweaks I need to make. Or you realize, we need a completely different direction, and you come back to my company, and we say, great, we’ll scope a new project for you. We already spent a fortune on this thing. And so, clients get that, clients who have done BI work and analytics work before get that, and they love the idea that They’re not sort of being pushed to sign the project close document, that they can just keep working on it. And so in that way, it’s easier. But you have to have the right client. Some people don’t… don’t get that, and they just want the project.
Greg Alexander: Yeah, and sometimes you gotta educate the client on the different approaches. You know, this is what it looks like under a project, pluses and minuses. This is what it looks like on an ongoing relationship, pluses and minuses. Mr. Client, as you look at that now, which feels right for you? Again, all churn happens at the point of sale, right? And sometimes you have to educate the customer, because they’ve never been through this before. You know, you have, they haven’t. Alright. Let me switch gears to margin. Sure. So, what I see across Collective 54 is this. Is margins in recurring revenue Double. But, the doubling is delayed. So let me explain the math. So, you have a cost associated with acquiring a client. All the time, money, effort associated in pursuit of a new client. So in the first year, that cost hits your P&L. You have real sales cost. So margins are less in the first year, because the revenue’s now coming in pro-rata, month to month. You know, you’re not offsetting the sales and marketing cost with a big project that hits the P&L instantly. The revenue’s recognized over time. But in year 2, There’s no more any… there’s no sales and marketing cost anymore. You know, the renewal happens almost automatically, so the margin goes through the roof in the second year. And this requires the founder to practice prudence, you know, delay instant gratification for some promise in the future. Was that your experience from a margin perspective, or did something different happen there?
Brick Thompson: I’m not sure it’s been long enough yet. You know, we went… we came out of, as I said, a two-year period where we were sort of breaking even, or a little worse, actually, one of those years. And we’re profitable again, so that feels good. Our gross margin has gone from about 50% to mid to high 50s. So, still got work to do there. That was simply getting a handle on utilization, though. I’m not sure it was the recurring revenue, and going to recurring revenue caused us to look at that a lot more closely, just because of the way we were delivering it, and so that caused that. I’m, you know, in our company right now, I’m investing a lot in sales. We’ve struggled to have a good commercial sales engine. I brought in a consultant last year, spent some money on that. It’s great, helped us a lot, hired a new VP of sales. Turns out a good VP of sales is more expensive than I thought, you know, we’ve hired extra sales AEs just to make sure that we’ve got enough coverage. That will… that cost of sales, which is currently running in the high… mid to high 20%, which just feels terrible, that will come down. I suspect we’ll get under 20%, and so then, yes, you’re right, that’ll go up a lot. The profitability will go up a lot from that, and if we find we are able to keep our retention 70% or higher, actually I want it 85% or higher, yes, it gets massively profitable in year 2, 3, 4. So, yes. I think that’s right, I just don’t have enough… I don’t have enough history and enough, sort of, without other stuff going on to say, yeah, that’s happened for us yet.
Greg Alexander: You know, I think what you’ll experience, and it sounds like you already have to a degree, is that the cost of sale for an expansion sale is much less than the cost of sale for a new logo. Oh, yeah. What happens, and what happened in my experience was, you know, you got a client on recurring contract, and you’re doing really good work for them. And the phone rings, hey, I need to add this, or I need to add that, and there really isn’t any sales expansion. I’m sorry, sales costs. It’s just kind of like adding to the scope, right? And, you know, that requires, when you move to recurring revenue, you gotta be really good at what you do. I mean, if your service delivery suffers, not only are they gonna churn. But even if you’re able to save them, because you have good, you know, kind of client success managers, they’re probably not likely to add services, you know, to the monthly bundle. So you got it really good at delivery. So I hope that you experience that as well. Alright, let me maybe end with this, and we’ll save the rest of it for the private member Q&A session with you. You know, looking back on it now. What advice would you give people that are just starting out on this journey, moving from project-based revenue to recurring revenue.
Brick Thompson: I mean, it’s sort of going to be obvious advice, but I would say this, you’ve got to make sure you actually have product-market fit before you bet the whole business on it. I sort of did, and ended up betting it inadvertently. Be more intentional than I was. I mean, I thought I was being intentional, but I all of a sudden looked at my pipeline and realized, holy crap, we’re in this fully. So… So I would think hard about that. I would, … I would think hard about the fact that if it is working well, there’s gonna be a dip in cash flow, likely. And so you need to plan for that, have that cash, you know, plan, you know, get your team ready. Hey, we’re gonna… we’re gonna do this, it’s gonna be great, but for the next 90 days, 180 days, we’re gonna have true austerity here. We’re gonna be super careful. I’m gonna ask for you to give even more utilization so we don’t have to hire another person. You know, really manage that cash carefully, just in case. And then, I think… I didn’t do this, but I think if you can run your old model in parallel with the new one for even a short period, longer than I did, you know, even for 90, 180 days… that might buy you some insurance in case it’s going wrong. In some respects, we got lucky, like, it worked, our plan worked, but it could have not, and then we would have been scrambling to try to find projects again, reconfiguring the whole business. It wouldn’t have been fun.
Greg Alexander: But, I mean, in general, are you… are you glad you made the move?
Brick Thompson: Yeah, yeah. Yeah. It’s night and day. I mean, if you can do it, if you can see a path to it, I think it’s worth figuring out a path to it. It changes the business. I mean, I went from feeling like I got lucky every month for the last 12 years, making my revenue numbers, to now I have a business that is predictable. I mean, it’s not perfectly predictable, but pretty predictable, and I’m growing 20% year over year. I mean, it’s night and day different.
Greg Alexander: Yeah, yeah, which is fantastic, and congratulations to you for having the courage to make the move. I mean, it’s frightening, but … If you can hold on through those sleepless nights and you get to the other side of it, it’s a whole different business altogether, and it’s much more enjoyable to run, a lot more profitable. And someday, you know, Brick, when you’re getting ready to retire and you want to sell the firm, the firm’s going to be worth a lot more as well.
Brick Thompson: Should be, yeah. I mean, we’ve discussed whether our business is truly recurring or reoccurring, but as I get more of it under my belt, and, you know, I’ve got customers that are mostly there for 2 or 3 years, then yes, I think you’re right, it absolutely will be worth a lot. I would also… one more piece of advice I would say is if you can find someone, a mentor, a coach who has been through this or understands this the way you do. I had a guy, another CEO of a company that had done it 2 years before in a marketing business. Just to provide someone to talk to about some of these things you’re gonna run into, and just to deal with the fact that, you know, you said it’s scary. It is really scary. You’re betting your business, so if you can have someone to bounce some of that off of, I would recommend that, rather than just kind of going it alone and trying to figure it out.
Greg Alexander: There’s probably no better use case for the need for a mentor or role model than as you’re going through that transition, because just for them to keep you in the seat and not, you know, panic is super valuable. Alright, so, we’re gonna leave it here, and we’re gonna save the rest for the private member Q&A, but, Brick, thank you for coming back on and giving us an update on your progress. Congratulations on all your success, and on behalf of the members, thanks for contributing.
Brick Thompson: You bet. Thanks, Greg, and thanks for all your help.
Greg Alexander: All right. Okay, couple calls to action for listeners. So, if you’re a member of Collective 54, and you want to hear more about this, accept the invitation to the private member Q&A, and we’re going to double-click on this, and you can ask Brick questions directly. If you’re not a member, and after listening to this, you want to become one, go to Collective54.com and fill out an application, and we’ll get back in contact with you. But until next time, thank you for listening, and I wish you the best of luck as you try to grow, scale, and someday exit your firm.
Note: This transcript was generated by Zoom.