While I agree with the general "consulting is not the path to riches" tone of the article, I have a small nit.
What the author is doing is adding up all the worst case scenarios into one big ugly pile of bad.
It reminded me of an mp3 player I designed once. I had to allocate z-height for the LCD. An LCD can have a lot of subcomponents (EL Backlight, FPC cable, rear reflective film, glass, front polarizing film, plastic protective lens, etc. All of these have min/max dimensions on the spec sheet. An inexperienced engineer, such as I was, would just add all the max dimensions to get max z-height of the LCD and design for that. But I also needed it not to rattle around, so I needed my design to also work if all the dimensions came in at their minimum. Woops! It's thickness could apparently vary wildly. I didn't want to burden my product with the complexity it would take to handle so much variance in one component.
I then learned that tolerances are never added up "worst case" or you'd never get anything built. Instead, you do a root mean square of them. The chances of every component in your subassembly coming in at it's absolute maximum are minuscule. The root mean square method accounts for this.
Anyway, I felt that the author of this piece was doing a little max tolerance stacking.
I don't think he's presenting worst-case scenarios, he's presenting averages for the often-ignored hidden costs associated with an employee. His estimates for things like taxes, administrative overhead, and bench time are in line with my own experiences in consulting. If someone is thinking about expanding their consulting business by hiring, this is a not a worst-case scenario but rather the everyday conditions you are likely going to face.
Just a note: The RMS method assumes independence (or at least 0 correlation). Often one "worst case" happening might be more likely if another "worst case" happens, because mistakes are often positively correlated.
The RMS approach is a good point, and the OP's argument may have been served up as "worse-case scenarios," but notwithstanding the logic in the article, I'm pretty sure it's a consensus rule-of-thumb that employees generally cost 2x their nominal wage (benes, taxes, etc).
I think the author of this article has no experience with consulting companies. $100/hr is well below what Accenture, IBM Global Services or any of the other big names charge. And clients, by and large, are fine with it; it's just a cost of doing business. And it's hard to argue that any of them haven't "scaled"; Accenture is 200,000 people!
Remember, in business there is no such thing as "cheap" or "expensive". There's "worth the money" or "not". A decision maker has decided that paying a consulting firm $250/hr/consultant is cheaper than it would be to do their own SAP implementation (and in turn, that SAP is worth more than it costs...)
FWIW a consultant as a rule of thumb would probably see 1/5 of his billing rate, tho' I have seen some get 1/3 and some as low as 1/8.
When you pay $250 an hour for a major consulting firm, you get $50 worth of consultant, and $200 worth of "Nobody ever got fired for hiring IBM/Accenture/CGI/Thoughtworks."
This is not a joke. When it isn't your money, your incentive is to make a decision that cannot be second-guessed. Imagine you do five projects. Accenture come in and have a big heavyweight process and they follow the process each time, and four of the projects are ok but cost 2x what they could have cost, and the fifth project is late and over budget. Well, the fault clearly lies somewhere other than your decision to hire Accenture, they have a process and a brand name! So you blamestorm a bit and it turns out that there were unknown unknowns that couldn't have been foreseen and so on, and you keep your job.
But if you decide to hire BoutiqueCo and things go wrong, your head is on the block. If you do this five times and four times you save money but the fifth time things blow up, you're fired. BoutiqueCo don't have any credibility when blaming unknown unknowns with their "agile process" and what-not, and nobody remembers the fact that you saved so much money on the first four projects you could fund the fifth and sixth projects with the savings.
Small boutiques cannot get gigs with the companies that can afford to pay the rates of the big firms unless they manage to create a very unique brand or find other markets.
> I think the author of this article has no experience with consulting companies.
Jason has extensive experience with consulting companies, as you would know had you taken the 20 seconds necessary to read his bio before starting your argument with ad hominem. Congratulations on following it up with a straw man argument that replaces 99% of companies with the 1% that he blatantly wasn't targeting.
And clients, by and large, are fine with it; it's just a cost of doing business.
Only because they don't know better. When I was working for a language/IDE vendor, we saw project after project that was 3 to 10 times larger than it had to be. (The project that actually needs more than 12 people in a language like Smalltalk is very exceptional.) Why is it like this? Because they are structurally motivated to waste the client's money.
Such companies facilitate a transaction. (Charging hourly for a consultant.) They siphon a little money off of this transaction. Naturally, they are motivated to hire as many consultants as possible. Basically, big consulting company sends people who give off the right competent business-suit vibe. They talk their to the customers, who are usually suits themselves and know almost nothing about making software first-hand, into thinking that their problems are deadly rocket-science and that they are just the uber-competent people to solve the super-hard problem. Then, they turn around and hire the cheapest resources they can (often fresh out of school) herded by a few politically adept managers, and hire them out for the highest mark-up possible.
I've also worked at a software product company that actually made most of its money from body-shop consulting. I know it was body shop consulting, because most of their people were hired (by the hundreds and housed in several football-field sized floors) out of local podunk community colleges and didn't know any better than to rewrite doubly linked lists every time they needed a collection. Yes, the product had probably hundreds of doubly linked list implementations in it. It was so bad that one client's IT group wrote what they called "super-link" and heroically rammed it through against amazing amounts of push-back from their management and from the body-shop vendor. What was this controversial thing? A linked list library.
[cue dramatic music]
Paying for junior programmers to fix their newbie linked-list implementation dozens of times -- this is "the cost of doing business?" I think there's opportunity to disrupt an industry here. On the other hand, the fact that it's this bad indicates that there are very powerful forces maintaining the information asymmetry.
EDIT: Let me put it this way -- what if someone tried to bill you big company hourly consulting rates for a dozen newbies repeated debugging their linked-list programming project?
I'm not talking about IBM, I'm talking about most individuals doing consulting.
"Clients by and large are fine with it." --Only big companies are fine with it. If you're a web designer for local business, they would not be fine with it.
I long time ago I was playing bridge with a genius named Arno Hobart. I asked him what he was up to, and he told me he was in the vending machine business. "Oh?" I asked, surprised that such an intelligent man would work with such mundane products.
"One of the things I like about this business," he explained, "Is that I make money while I sleep." Yes, he really is smarter than the average bear.
The examples I use to illustrate situations like these are urinal cake companies, or toilet paper manufacturers. These people are rich. Rich beyond your wildest dot com dreams.
Are these people (who own the above mentioned firms) any less "smart" than the "genius" engineer who sits in a cubicle and makes 100k and is at the mercy of his mortgage banker?
i've grown from 1 (me) to 10 since october. we're trying to scale and it's tough. i'm exhausted. i'm working A LOT. i've got too many clients... but i can see the light toward having a stable set of clients with solid revenues - and i'm creating jobs for 10 people in a developing country, which i'm getting more satisfaction out of than i thought i would.
There is a curious form of homeostatis in consulting, where both "too many clients" and "I'm too tired" are signs that you are not charging enough money. You should charge more until they cease being problems.
The scary part about this advice is how freaking hard it is to actually chase away clients by raising prices, if you have a habit of delivering.
Rand Fishkin, whose SEO consultancy used to get up to $1k per hour (and was almost certainly underpriced given the class of client they worked for by the end), has a very instructive comment on the post about how they kept walking up rates without chasing anyone away. Basically, there is an unknown "true cost figure" in the client's mind which includes both your bill rate and risk of the project going totally haywire. As you lower the client's perception of risk, you can capture more of the "true cost" before getting "ugh, too high" feelings from the client.
I would like very much to go overseas with another competent, unwed developer or two, start a consulting company, and slowly build a good corporate culture by hiring the locals. Have you done a writeup on your experience?
I really like most of Jason Cohen's posts, so this article is especially disappointing.
The most fundamental problem with Cohen's analysis is how he arrives at bill rates. "Everybody knows", he says, "that your consultant isn't worth $100/hr --- you only pay him $30/hr!". Well, no, Jason. Nobody knows that, because it's not true. Companies that engage consultants pay a significant premium to: (a) retain talent for the exact duration that they need them, (b) on often little-to-no notice, (c) with the flexibility of picking and choosing the right consultants for the right jobs (d) with no obligations on benefits and severance. And the consulting market is more liquid than the employment market (full-time jobs are "sticky"), so prices more closely track value.
So it is the case that an hour of Rails/jQ consulting might bill out at $140, while the talent delivering that work might effectively make $40/hr. The talent is, in addition to base comp, also getting a stable job, experience working alongside iPhone developers sharp enough to start a successful consultancy, health, benefits, and all the other things that are the reason that big companies have to pay so much to staff projects.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting. For instance, the very very high end of software security bills north of $400/hr. Even discounting for FTE benefits, nobody can afford that person full-time. This sets up a virtuous cycle whereby consultants amass expertise, drive scarcity in their field, and increase their comp.
It should also go without saying that when your bill rate is very high, you don't need to add consultants to make time for product development. You can work half-time and still beat a bigco salary.
The rest of Cohen's arguments are somewhat blunted by the fact that the underlying economics of consulting are way better than he thinks they are. To wit:
* The cost of fully loading headcount isn't scary when you're priced properly.
* Similarly, if you price with the market, the cost of "scaling" isn't scary. Offices are cheap compared to salaries.
* Most consulting firms deliberately aim to keep utilization below a threshold, and recruit to "cool off" when things get crazy. 40 hours a week, 50 weeks a year isn't desireable even as an owner.
* Lots of consultants have written blog posts about firing dysfunctional bigco clients. Yeah, in the real world, you have to deal with the 25 page MSA contracts; that's what you pay lawyers for. Yes, being in business is annoying. If it wasn't, everyone would do it.
* Yes, it's hard to build and ship products in "off hours". But you don't have to do that. Instead, you can scale to the point where it's cost effective to hire full time developers. Most YC companies get to market with 2-3 team members. It isn't a stretch to scale a consultancy to the point where it can fund 2 developers.
Against all these concerns about consulting is the unbelievably huge upside of bootstrapping a company this way: you get near-unlimited lives. It is the JUSTIN BAILEY of startup plans. In virtually every other model of bringing a product to market, product failure ends the company. That's bad, because most products fail. They really, really do. There is no reason that a product miss should zero out all the hard work you put into building a team and a business.
Jason is getting dinged for describing the challenges a freelancer has in scaling beyond one person, and using the broad term "consultancy" in the title, so everyone's judging his essay against the counter-evidence of huge or highly specialized firms.
Thomas, you didn't even come close to quoting him accurately or in context. Here is the real quote:
If you bill out a so-called “$30/hour” employee at $60/hour, you’ll only break even. You really need to bill out at $100/hour to make any kind of profit.
Which is hard, because the client you’re billing knows this person doesn’t really cost $100/hour. And when that client thinks about what’s “fair,” they won’t go through the computation I just did; they’ll base it on the person’s nominal rate plus a little profit for you. This caps the amount you can actually re-bill before client feels ripped off.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting
If anyone hear ever starts wondering "Why can't I find a full-time dev with SEO experience...", suffice it to say that the reason is quite similar. (With the added wrinkle that pen testers cannot generally lock themselves in a room away from clients and make large amounts of money without running afoul of the law, and good SEOs can.)
At least in my area, it's hard to find clients that are willing to pay even the baseline functional rate of $100/hr. I just took a job well below that, and most clients balk when I suggest it. I just had a guy yell at me earlier this week because he thought $100/hr was outrageous (after repeating several times that the program he wanted was going to be "very complex"), and he said he would go to India before he paid that kind of money. I told him "good luck in India" and to give me a call if it didn't work out; while I need the work, I know better than to take clients like that, especially if I have aspirations of scaling to a reasonably-sized firm one day.
I've found that most medium-sized companies are practically impenetrable for consultants around here; everyone has a contract with Robert Half, or has a policy against contractors, or doesn't want to pay anything above $50/hr, which is barely acceptable for a single developer, and practically useless to someone trying to run a company.
I'd really like to know how I can get my foot in the door somewhere where the client won't balk and I won't feel like I can't charge the full time because the company is always talking about how strapped they are. It seems that nepotism is the only way to get in there without resorting to dirty tricks.
It isn't a stretch to scale a consultancy to the point where it can fund 2 developers
This is actually pretty difficult to do (been there, done that). It is extremely difficult not to polarize the company into the guys building "the product" (who will expect the lion's share of equity) and the guys bringing in the money, who will bitterly resent being "the grunts" while the cool kids get to play with whatever cool tech you all started out to make.
My initial reaction to this article was that I disagreed vehemently with most of his points. Upon further reflection, nothing he's talking about is applicable to anywhere I've worked, or anywhere in the industry I work in; so my disagreement doesn't really matter as I guess "consulting companies" apparently means different things to different people.
The only issue that presents itself in my industry regarding consulting is that it's basically a linear scaling revenue model, and the pitfalls around scheduling engagements.
My company's hourly rates for consulting are now about half of what they were 7 years ago, but it's still both immensely profitable and significantly cheaper than what the client would pay to hire someone to perform the requisite services.
eh, I have done this... contracting paid for prgmr.com. And really, I've had a /whole lot/ more luck renting myself out and paying people to work on my product than renting out my underlings. So yeah, I think he has many good points.
On the other hand, some of the problems of being a contracting company and being a product company cancel themselves out. You have time you can't sell to other people? work on developing new features for the product. Hiring someone new who you aren't sure about or who needs training? Pay them trainee wages while training them up as they work on the product, then as you know their capabilities, rent them out.
But overall, I agree with the "renting yourself out at exorbitant rates is easier than renting out your underlings" advice, though this is at least partially due to a lack of sales skills on my part; but yeah, there are a lot of less obvious costs to renting out an employee.
Ugh, I've seen small-town web development shops charge $130+ an hour for work done by the grunts who get more like $30 an hour.
Some of these shops are very profitable and successful, and some of them aren't.
Either way, the person who's got the most to complain about this situation is the grunt, not the customer who imagines they could get the work for cheaper. The grunt is very aware that he could produce a lot more value for someone, and capture it, if he can get rid of the middleman. Although the work in a consulting shop is varied, and can keep you on your toes, the need to bill 40 hours of project time every week leads to a lack of self-investment and eventual burnout.
$30 vs. $130 might be an extreme case, but remember that you can't easily back out what a consultant should get paid from their bill rate. The bill rate doesn't just pay the consultant; it also pays the firm for shouldering project, schedule, and employee retention risk, and it also compensates the firm for the effort of recruiting and training new consultants.
There clearly is abuse (everything that can be abused in industry will be abused by someone). But you can't necessarily spot it from a simple comparison of bill rates and wages.
The article doesn't say you can't make money. Nor does it say you can't scale. It simply points out that there's no such thing as a free lunch, and that once you start hiring employees you're going to have to charge more, which in turn is going to make sales harder, which in turn means you will need to work more, not less, than you did before you had the employees.
For an absolutely terrible service/product. This will catch up with them eventually. My company is in talks with someone who is experiencing this pain right now actually.
You have to share the upside with your consultants, put a target to bill 1200-1500 hours per year depending on your average engagement length and how much they will have to be on pre-sales work. Then split every hour after that with them 50/50% up to 2000 billed hours and after 2000 hours billed give them 75%, keep 25%.
I know tech folks love to reinvent and learn things on their own and sometimes it yields new and better results but in other cases we'd be better off to look at how BigLaw has been billing out hourly associates for hundreds of years very profitably.
You should look hard at how the Big Law model is doing in 2011. Hint: not awesome.
Instead of setting up business models that encourage people to break their backs finding billable hours, why not the model where consultants have no idea how many "hours" they billed because they don't care? Give people roles where their projects are meaningful and interesting, their comp is stable, and their career paths make sense. Recruit the best people from the vast pool of candidates who want sane jobs with interesting work. Staff them at companies that will pay a premium both for flexible staffing and for top-caliber work. Call it a day.
Thanks for sharing your thoughts. This kind of analysis is required for any service business. Having done so for our company, I have the following observations on 'What to do?":
Scale -- Bingo! The goal is to make the fixed overhead (incl employees) an increasingly smaller percentage of revenue. But to handle the increased revenue (ie, workload) you have to concentrate on increasing efficiency/productivity. This has a lot of influence on decisions about process. Obviously, the more routine those processes are, the cheaper (and more easily replaced) the labor can be. Also, if the work is done under a fixed price contract, you can achieve a greater effective hourly rate if you are efficient and manage risk well.
Charge more -- "charging more pushes away your existing client base". This is not such a bad thing if you have your eye on 'scaling' (ie bigger projects). Bigger clients have deeper pockets (although they also have more unique needs, which introduces more risk).
Build a product -- See Nassim Taleb's discussion about 'scalable work' in "The Black Swan". The odds aren't good that this will pay off.
I still find it weird that people charge an hourly rate. My company has been doing fixed price projects, with changing scope, guaranteed bug fixes & payment on delivery for the last eight years. We regularly beat out the "big boys" and have never lost money on a project, even though some have gone on longer than we planned.
I don't see the value for a customer in an hourly rate. If I am charging you by the hour, I have an incentive to be slow. If I am charging fixed price, I want to be fast, and if we are "liable" for bugs, we have an incentive for bug free code.
I see it as putting our money where our mouth is. I'm confident that even if your scope changes we will still deliver for this fixed price. Why is this not the norm?
Since we're swapping anecdotes: I'd guesstimate 75% of the fixed-bid projects I worked on back when I worked for a consulting shop barely broke even or actively lost money. Estimating the project well enough to make a profitable bid is hard if, like many shops, you work in whatever domain happens to be sending customers your way.
While some of these issues will happen from time to time, all of those exceptions will not occur all the time, so it really isn't an accurate assessment. This is more like the worst possible bounds of a successful consulting company.
While most people disagrees but my experience was different. I used to work with a US firm years ago and my hourly rate was $12 however our company charged $80 to $120/hr to our clients. This is how offshore companies operates...
Not just offshore. I once worked as an employee at a company that was paying me $60k/year (which works out to roughly $30/hr), and billing me out at $250/hr. There was a lot of pressure to work billable overtime, too, and as salaried employees we didn't get paid for it.
This is hard to pull off - but I think part of the solution is in somehow not competing with the average employee that you can get on the street.
For example, you can provide a skill that is not otherwise generally available on the market. Or perhaps by doing consulting but on a closed source product (by doing a per project sale instead). It will be great to brainstorm other such ideas and approaches.
Somebody clarify the tax portion for me on this ...
Don't companies only pay half of social Security and Medicare on each employee? ... plus the employee is also a tax writeoff for them right?
[+] [-] pdx|15 years ago|reply
What the author is doing is adding up all the worst case scenarios into one big ugly pile of bad.
It reminded me of an mp3 player I designed once. I had to allocate z-height for the LCD. An LCD can have a lot of subcomponents (EL Backlight, FPC cable, rear reflective film, glass, front polarizing film, plastic protective lens, etc. All of these have min/max dimensions on the spec sheet. An inexperienced engineer, such as I was, would just add all the max dimensions to get max z-height of the LCD and design for that. But I also needed it not to rattle around, so I needed my design to also work if all the dimensions came in at their minimum. Woops! It's thickness could apparently vary wildly. I didn't want to burden my product with the complexity it would take to handle so much variance in one component.
I then learned that tolerances are never added up "worst case" or you'd never get anything built. Instead, you do a root mean square of them. The chances of every component in your subassembly coming in at it's absolute maximum are minuscule. The root mean square method accounts for this.
Anyway, I felt that the author of this piece was doing a little max tolerance stacking.
[+] [-] vannevar|15 years ago|reply
[+] [-] orijing|15 years ago|reply
[+] [-] rwhitman|15 years ago|reply
[+] [-] hammock|15 years ago|reply
[+] [-] gaius|15 years ago|reply
Remember, in business there is no such thing as "cheap" or "expensive". There's "worth the money" or "not". A decision maker has decided that paying a consulting firm $250/hr/consultant is cheaper than it would be to do their own SAP implementation (and in turn, that SAP is worth more than it costs...)
FWIW a consultant as a rule of thumb would probably see 1/5 of his billing rate, tho' I have seen some get 1/3 and some as low as 1/8.
[+] [-] raganwald|15 years ago|reply
This is not a joke. When it isn't your money, your incentive is to make a decision that cannot be second-guessed. Imagine you do five projects. Accenture come in and have a big heavyweight process and they follow the process each time, and four of the projects are ok but cost 2x what they could have cost, and the fifth project is late and over budget. Well, the fault clearly lies somewhere other than your decision to hire Accenture, they have a process and a brand name! So you blamestorm a bit and it turns out that there were unknown unknowns that couldn't have been foreseen and so on, and you keep your job.
But if you decide to hire BoutiqueCo and things go wrong, your head is on the block. If you do this five times and four times you save money but the fifth time things blow up, you're fired. BoutiqueCo don't have any credibility when blaming unknown unknowns with their "agile process" and what-not, and nobody remembers the fact that you saved so much money on the first four projects you could fund the fifth and sixth projects with the savings.
Small boutiques cannot get gigs with the companies that can afford to pay the rates of the big firms unless they manage to create a very unique brand or find other markets.
[+] [-] tdavis|15 years ago|reply
Jason has extensive experience with consulting companies, as you would know had you taken the 20 seconds necessary to read his bio before starting your argument with ad hominem. Congratulations on following it up with a straw man argument that replaces 99% of companies with the 1% that he blatantly wasn't targeting.
sigh
[+] [-] stcredzero|15 years ago|reply
Only because they don't know better. When I was working for a language/IDE vendor, we saw project after project that was 3 to 10 times larger than it had to be. (The project that actually needs more than 12 people in a language like Smalltalk is very exceptional.) Why is it like this? Because they are structurally motivated to waste the client's money.
Such companies facilitate a transaction. (Charging hourly for a consultant.) They siphon a little money off of this transaction. Naturally, they are motivated to hire as many consultants as possible. Basically, big consulting company sends people who give off the right competent business-suit vibe. They talk their to the customers, who are usually suits themselves and know almost nothing about making software first-hand, into thinking that their problems are deadly rocket-science and that they are just the uber-competent people to solve the super-hard problem. Then, they turn around and hire the cheapest resources they can (often fresh out of school) herded by a few politically adept managers, and hire them out for the highest mark-up possible.
I've also worked at a software product company that actually made most of its money from body-shop consulting. I know it was body shop consulting, because most of their people were hired (by the hundreds and housed in several football-field sized floors) out of local podunk community colleges and didn't know any better than to rewrite doubly linked lists every time they needed a collection. Yes, the product had probably hundreds of doubly linked list implementations in it. It was so bad that one client's IT group wrote what they called "super-link" and heroically rammed it through against amazing amounts of push-back from their management and from the body-shop vendor. What was this controversial thing? A linked list library.
[cue dramatic music]
Paying for junior programmers to fix their newbie linked-list implementation dozens of times -- this is "the cost of doing business?" I think there's opportunity to disrupt an industry here. On the other hand, the fact that it's this bad indicates that there are very powerful forces maintaining the information asymmetry.
EDIT: Let me put it this way -- what if someone tried to bill you big company hourly consulting rates for a dozen newbies repeated debugging their linked-list programming project?
[+] [-] smartbear|15 years ago|reply
"Clients by and large are fine with it." --Only big companies are fine with it. If you're a web designer for local business, they would not be fine with it.
[+] [-] damoncali|15 years ago|reply
[+] [-] thisisfmu|15 years ago|reply
[+] [-] raganwald|15 years ago|reply
"One of the things I like about this business," he explained, "Is that I make money while I sleep." Yes, he really is smarter than the average bear.
[+] [-] rick888|15 years ago|reply
This is why I love software and services. Your time isn't directly related to your money, which is the only way to get rich.
[+] [-] tastybites|15 years ago|reply
Are these people (who own the above mentioned firms) any less "smart" than the "genius" engineer who sits in a cubicle and makes 100k and is at the mercy of his mortgage banker?
[+] [-] rubyrescue|15 years ago|reply
[+] [-] patio11|15 years ago|reply
There is a curious form of homeostatis in consulting, where both "too many clients" and "I'm too tired" are signs that you are not charging enough money. You should charge more until they cease being problems.
The scary part about this advice is how freaking hard it is to actually chase away clients by raising prices, if you have a habit of delivering.
Rand Fishkin, whose SEO consultancy used to get up to $1k per hour (and was almost certainly underpriced given the class of client they worked for by the end), has a very instructive comment on the post about how they kept walking up rates without chasing anyone away. Basically, there is an unknown "true cost figure" in the client's mind which includes both your bill rate and risk of the project going totally haywire. As you lower the client's perception of risk, you can capture more of the "true cost" before getting "ugh, too high" feelings from the client.
[+] [-] presidentender|15 years ago|reply
[+] [-] JoeAltmaier|15 years ago|reply
[+] [-] matthewcford|15 years ago|reply
[+] [-] tptacek|15 years ago|reply
The most fundamental problem with Cohen's analysis is how he arrives at bill rates. "Everybody knows", he says, "that your consultant isn't worth $100/hr --- you only pay him $30/hr!". Well, no, Jason. Nobody knows that, because it's not true. Companies that engage consultants pay a significant premium to: (a) retain talent for the exact duration that they need them, (b) on often little-to-no notice, (c) with the flexibility of picking and choosing the right consultants for the right jobs (d) with no obligations on benefits and severance. And the consulting market is more liquid than the employment market (full-time jobs are "sticky"), so prices more closely track value.
So it is the case that an hour of Rails/jQ consulting might bill out at $140, while the talent delivering that work might effectively make $40/hr. The talent is, in addition to base comp, also getting a stable job, experience working alongside iPhone developers sharp enough to start a successful consultancy, health, benefits, and all the other things that are the reason that big companies have to pay so much to staff projects.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting. For instance, the very very high end of software security bills north of $400/hr. Even discounting for FTE benefits, nobody can afford that person full-time. This sets up a virtuous cycle whereby consultants amass expertise, drive scarcity in their field, and increase their comp.
It should also go without saying that when your bill rate is very high, you don't need to add consultants to make time for product development. You can work half-time and still beat a bigco salary.
The rest of Cohen's arguments are somewhat blunted by the fact that the underlying economics of consulting are way better than he thinks they are. To wit:
* The cost of fully loading headcount isn't scary when you're priced properly.
* Similarly, if you price with the market, the cost of "scaling" isn't scary. Offices are cheap compared to salaries.
* Most consulting firms deliberately aim to keep utilization below a threshold, and recruit to "cool off" when things get crazy. 40 hours a week, 50 weeks a year isn't desireable even as an owner.
* Lots of consultants have written blog posts about firing dysfunctional bigco clients. Yeah, in the real world, you have to deal with the 25 page MSA contracts; that's what you pay lawyers for. Yes, being in business is annoying. If it wasn't, everyone would do it.
* Yes, it's hard to build and ship products in "off hours". But you don't have to do that. Instead, you can scale to the point where it's cost effective to hire full time developers. Most YC companies get to market with 2-3 team members. It isn't a stretch to scale a consultancy to the point where it can fund 2 developers.
Against all these concerns about consulting is the unbelievably huge upside of bootstrapping a company this way: you get near-unlimited lives. It is the JUSTIN BAILEY of startup plans. In virtually every other model of bringing a product to market, product failure ends the company. That's bad, because most products fail. They really, really do. There is no reason that a product miss should zero out all the hard work you put into building a team and a business.
[+] [-] euroclydon|15 years ago|reply
Thomas, you didn't even come close to quoting him accurately or in context. Here is the real quote:
If you bill out a so-called “$30/hour” employee at $60/hour, you’ll only break even. You really need to bill out at $100/hour to make any kind of profit.
Which is hard, because the client you’re billing knows this person doesn’t really cost $100/hour. And when that client thinks about what’s “fair,” they won’t go through the computation I just did; they’ll base it on the person’s nominal rate plus a little profit for you. This caps the amount you can actually re-bill before client feels ripped off.
[+] [-] patio11|15 years ago|reply
If anyone hear ever starts wondering "Why can't I find a full-time dev with SEO experience...", suffice it to say that the reason is quite similar. (With the added wrinkle that pen testers cannot generally lock themselves in a room away from clients and make large amounts of money without running afoul of the law, and good SEOs can.)
[+] [-] cookiecaper|15 years ago|reply
I've found that most medium-sized companies are practically impenetrable for consultants around here; everyone has a contract with Robert Half, or has a policy against contractors, or doesn't want to pay anything above $50/hr, which is barely acceptable for a single developer, and practically useless to someone trying to run a company.
I'd really like to know how I can get my foot in the door somewhere where the client won't balk and I won't feel like I can't charge the full time because the company is always talking about how strapped they are. It seems that nepotism is the only way to get in there without resorting to dirty tricks.
[+] [-] gaius|15 years ago|reply
This is actually pretty difficult to do (been there, done that). It is extremely difficult not to polarize the company into the guys building "the product" (who will expect the lion's share of equity) and the guys bringing in the money, who will bitterly resent being "the grunts" while the cool kids get to play with whatever cool tech you all started out to make.
[+] [-] unknown|15 years ago|reply
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[+] [-] m0nastic|15 years ago|reply
The only issue that presents itself in my industry regarding consulting is that it's basically a linear scaling revenue model, and the pitfalls around scheduling engagements.
My company's hourly rates for consulting are now about half of what they were 7 years ago, but it's still both immensely profitable and significantly cheaper than what the client would pay to hire someone to perform the requisite services.
[+] [-] lsc|15 years ago|reply
On the other hand, some of the problems of being a contracting company and being a product company cancel themselves out. You have time you can't sell to other people? work on developing new features for the product. Hiring someone new who you aren't sure about or who needs training? Pay them trainee wages while training them up as they work on the product, then as you know their capabilities, rent them out.
But overall, I agree with the "renting yourself out at exorbitant rates is easier than renting out your underlings" advice, though this is at least partially due to a lack of sales skills on my part; but yeah, there are a lot of less obvious costs to renting out an employee.
[+] [-] PaulHoule|15 years ago|reply
Some of these shops are very profitable and successful, and some of them aren't.
Either way, the person who's got the most to complain about this situation is the grunt, not the customer who imagines they could get the work for cheaper. The grunt is very aware that he could produce a lot more value for someone, and capture it, if he can get rid of the middleman. Although the work in a consulting shop is varied, and can keep you on your toes, the need to bill 40 hours of project time every week leads to a lack of self-investment and eventual burnout.
[+] [-] tptacek|15 years ago|reply
There clearly is abuse (everything that can be abused in industry will be abused by someone). But you can't necessarily spot it from a simple comparison of bill rates and wages.
[+] [-] sudhirc|15 years ago|reply
[+] [-] vannevar|15 years ago|reply
[+] [-] mbesto|15 years ago|reply
[+] [-] bretpiatt|15 years ago|reply
I know tech folks love to reinvent and learn things on their own and sometimes it yields new and better results but in other cases we'd be better off to look at how BigLaw has been billing out hourly associates for hundreds of years very profitably.
[+] [-] tptacek|15 years ago|reply
Instead of setting up business models that encourage people to break their backs finding billable hours, why not the model where consultants have no idea how many "hours" they billed because they don't care? Give people roles where their projects are meaningful and interesting, their comp is stable, and their career paths make sense. Recruit the best people from the vast pool of candidates who want sane jobs with interesting work. Staff them at companies that will pay a premium both for flexible staffing and for top-caliber work. Call it a day.
[+] [-] zavulon|15 years ago|reply
[+] [-] thinkingeric|15 years ago|reply
Scale -- Bingo! The goal is to make the fixed overhead (incl employees) an increasingly smaller percentage of revenue. But to handle the increased revenue (ie, workload) you have to concentrate on increasing efficiency/productivity. This has a lot of influence on decisions about process. Obviously, the more routine those processes are, the cheaper (and more easily replaced) the labor can be. Also, if the work is done under a fixed price contract, you can achieve a greater effective hourly rate if you are efficient and manage risk well.
Charge more -- "charging more pushes away your existing client base". This is not such a bad thing if you have your eye on 'scaling' (ie bigger projects). Bigger clients have deeper pockets (although they also have more unique needs, which introduces more risk).
Build a product -- See Nassim Taleb's discussion about 'scalable work' in "The Black Swan". The odds aren't good that this will pay off.
[+] [-] sciboy|15 years ago|reply
I don't see the value for a customer in an hourly rate. If I am charging you by the hour, I have an incentive to be slow. If I am charging fixed price, I want to be fast, and if we are "liable" for bugs, we have an incentive for bug free code.
I see it as putting our money where our mouth is. I'm confident that even if your scope changes we will still deliver for this fixed price. Why is this not the norm?
[+] [-] gthank|15 years ago|reply
[+] [-] palehose|15 years ago|reply
[+] [-] jister|15 years ago|reply
[+] [-] tsotha|15 years ago|reply
[+] [-] unknown|15 years ago|reply
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[+] [-] vineet|15 years ago|reply
For example, you can provide a skill that is not otherwise generally available on the market. Or perhaps by doing consulting but on a closed source product (by doing a per project sale instead). It will be great to brainstorm other such ideas and approaches.
[+] [-] trustfundbaby|15 years ago|reply
So is that 15% number accurate?
[+] [-] unknown|15 years ago|reply
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