What happens when you finish a project or task ahead of time and better than what was asked? A "Good work!" from your boss and a new project with less time to do it since you're so efficient? If you're work for a decent company you'll get a raise or a bonus and eventually a promotion, but until then you'll just have to live to the new expectations. The problem with the new expectations is that you don't get to work more comfortably, you get to work faster while keeping the same quality-level.
A consulting company (or a consultant) gets better and better at helping its clients. It develops tools and methodologies that help it finish projects faster. So it starts estimating less hours for projects and the costs for the client goes down, but it doesn't make more money. It can slowly raise its rates, but only until a certain point. What then?
The backup plan
That's where the backup plan comes in and I really like the idea. That's how Joel Spolsky got started on FogBugz:
The Web consulting business was great, but it had one problem: limited margins. You could charge only so much for an hour of some consultant's time -- in those days, maybe $200. Some of that went to overhead (say $20) and some to pay the consultant's salary (maybe $70). That leaves you with a mere $110 per hour in gross profit. That's a lot of money, but it paled in comparison with margins in the software industry, in which you can produce additional copies of an application at virtually no cost.
So this was my business plan: We'd start out as a plain-vanilla Web consulting business. We'd look for situations in which we had several clients asking for the same basic thing. Then, using consultants who weren't currently working on gigs, we'd build an application to suit the group's needs. Over time, this product could be licensed far and wide. Eventually, the software side of the business would eclipse the consulting side of the business. That was the theory. Sounds good, right?
Another popular Web application started that way: Basecamp.
Basecamp was a side project. We were a web design firm at the time. We built Basecamp because our projects and client communications were a mess. We were using email to update our clients.
I talked about the tools and methodologies that a consulting company develops for itself. Why not take one of those tools and turn it into the backup plan (or future plan)? All those by-products help you, why couldn't it help others? They probably need some polishing, but with a little work, many of them could start earning profits for you, giving you room for developing something bigger maybe?
That's something else that 37signals understood, sell your by-products:
Getting Real is a by-product. [...] That by-product has made 37signals over $1,000,000 directly, and probably another $1,000,000+ indirectly.
So if you're a consulting company or a consultant by yourself, think about what you built and see if something in there could be worth selling, you already worked the hours, why not get paid for them?