
Consultants vs. Employees: The Real Costs - nerded
http://www.inthebackforty.com/blog/2013/10/consultants-vs-employees
======
oellegaard
I completely disagree with this article. If you need someone working, lets say
30-40 hours per week and you hire an on-site consultant then the consultant
will also spend some time going to the toilet, talking to people at the office
etc.

To go with the many unscientific formulas used in the article, here is one
more:

consultant_cost = employee_cost + revenue_to_consultant_firm

employee_cost = consultant_cost - revenue_to_consultant_firm

In short: If you actually need a full time developer (and are able to find a
qualified one), you are better off hiring him yourself, if you need him for a
while.

The article is well-written but it's marketing mumbo jumbo for hiring
consultants.

Disclaimer: I work as a consultant, but I'm hired because they don't need my
position full time and they don't have other people in house who have the same
knowledge.

~~~
amplification
I think the premise is that consultants often bill _by the hour_ and don't
include bathroom breaks, screwing around, etc... as billable hours.

~~~
RougeFemme
We use consultants who bill by the hour. They don't charge us for lunch, but
other than that, they are considered on the clock. We don't micromanage, so we
are charged for any screwing around. . .unless we micromanage and they
_really_ overdo the screwing around and as long as they are meeting their
milestones, we rarely - if ever - know if/when they are screwing around. It's
not worth it to us - financially or mentally - you to micromanage to that
level. Ditto for bathroom breaks.

------
j_baker
This is an interesting analysis. My biggest concern about hiring consultants
is that they don't have "skin in the game". Meaning, the typical consultant
isn't going to be around to live with the consequences of their decisions.

Consultants are still very useful for "marginal areas" of your business.
Meaning, consultants are useful for jobs that need to be done, but aren't
significantly time-consuming to hire a full-time employee.

~~~
Iftheshoefits
What consequences did you have in mind? The subjective, arbitrary, and
capricious cover-my-ass politics that their supervisor, and their supervisors'
supervisors will play when something goes awry and they need people to blame?

My opinion is that in-house employees should have "skin in the game"
proportional to the equity they hold in the company and the
authority/responsibility they wield as a result. Most of that time that's a
one-digit, round number. And yet employers think employees should act as if
it's a magnificent act of selflessness and beneficence to deign to acknowledge
the employee's existence and stoop so low as to offer them work.

~~~
j_baker
No. I mean something more along the lines of "Consultant X wrote this
unmaintainable piece of crap a while back, and now we need someone to fix it".

~~~
Iftheshoefits
Ah. Fair enough, and it's a good point since consultants by the nature of
their employment likely don't have to deal with the consequences directly.

Word-of-mouth, though, they may have to deal with. But so does everybody.

------
eCa
Some of the arguments made are not very good.

> Tack on a few free lunches, and your employee costs about 10% more than you
> thought they did.

Only if you can't count. Over in parts of Europe direct employee cost (payroll
tax) can be 20-30% on top of salary, and if you don't factor in that... well.

> rare for someone to show up every week across an entire year.

I would hope _no one_ shows up every week. Again, if you don't factor in
vacations/normal sick days...

> Your employees take an hour to sustain life through bathroom, water cooler,
> and other breaks

I would be surprised if a consultant manages to _not_ charge for every
unproductive break.

> Your employees spend an hour a day meeting with you or someone else,
> conducting pre-work planning

I would hope that consultants also plan their work (and charge for it).
Otherwise -> mess. I know from first hand experience that consultants also do
meetings.

> I can keep an employee busy indefinitely

Yeah. Where I'm working that's true. Or has been for the last several years.

But yes, when used correctly consultants can be a valuable asset. There's no
need to try and make it look like they same hourly cost as an employee.

~~~
walshemj
The rule of thumb I was taught was 2.5 to 3 times the base salary cost for
normal jobs this covers tax social security and infrastructure costs (network
computers buildings etc)

For world class rnd I have seen it go way over 5x but you are buying much much
more expensive and Gucci kit for example a single piece of HP test gear cost
us the same as a small house at BHRA say 1/4 million in today's money

------
LionRoar
I work at a small company as the only software engineer (indeed sofware is not
the core business here). My annual salary is around 40K euro. 3 years ago we
started a huge project and hired extra manpower (4 persons x 3 month). 1
person of that team is still with us today. We are on the moment busy starting
up another big project whereby we hire 5 persons extra for a couple of months.

Without these extra software engineers we could have never reached our
deadline.

However: an external consultant costs us 10K a month. Thus 3 x 3 x 10 = 90K.
And for the new project; 5 x 3 x 10 = 150K. Nothing special but my point is
the 1 person that still hangs around from the first project. That was (almost
exactly) 3 years ago. So 3 x 12 x 10 = 360K euro. (total hiring amount >
600K). My salary in these 3 years would be 120K. I think it would have been
cheaper to have had an extra employee. In fact you could have 3 until this
moment.

So, based on that; hire consultants to have extra manpower in your project.
However, hire them 'too long' and it was smarter to have an extra employee.

------
jacques_chester
Funnily enough, I was just reading a retrospective on Ronald Coase, who asked
the simple question which underlies this discussion: _why do firms exist?_

It turns out that they exist because sometimes the cost of a transaction in
the marketplace is higher than the cost of losses due to internal
inefficiencies.

Employing someone and engaging a contractor lie on different points in that
spectrum. It will simply vary from place to place, from situation to
situation. There is no universal answer, true for all time, valid for all
cases. Just as there is no one universal design for trousers (but many cuts
and sizes), on single identical car used for everything from racing to
commuting to shipping furniture.

Different cases demand different mixes. Each firm will have to decide for
itself the mix of internal costs and external costs.

------
pcurve
Honestly, I thought I was going to see an article arguing for the opposite.

In my experience, management doesn't need convincing when it comes to
replacing employees with consultants, despite higher hourly rates. In
management's quest to shrink SG&A costs, good full time jobs have been being
replaced by long-term consultants who would be placed at the client's location
for years.

And if you're talking about short-term specialist consultants, then you need
even less convincing, because management is already under the impression that
it's often more cost effective to hire a specialist at $200/hour for 3-6 month
gig, rather than to hire someone full time or train existing staff.

------
specialp
It is almost always true that consultants work out cheaper than full-time
employees. However, full-time employees can spend time in your business domain
for a while and develop a product. The examples given like "wire this up to
elastic transcoder" are discrete tasks that someone with very little business
domain knowledge can do. So yes if you happen to book an AWS guru consultant
to do a discrete task like that one given it makes sense, but there is a lot
more to developing products. Also when that AWS transcoder has a problem, it
is good to have someone on hand that can fix it and is familiar with the
workings.

------
fredsanford
This reads like a how-to for killing your business...

Consultant <embezzles $3M/Murders all office workers/Disappears without a
trace> leaving MoronCorp in bankruptcy with no one to continue developing
their software.

A balance is necessary. You need (at least a few) motivated employees with
skin in the game.

You need, at a minimum, a relationship with 1 consulting firm so you have
somewhere to get overflow work done.

You need a competent manager to oversee all this crap. <\--- Most important
part.

Just 10 minutes to think about this shit shoots down the original article...

PS: The business owners also have to understand the meaning of competent. Your
brother's uncle-in-law's grandson is not necessarily your perfect developer
because you can get him for $13 an hour.

wuliwong++.

------
nirmel
I run a YC-backed startup that is comprised of me (a random non-technical
dude) and some 15 contractors scattered around the world. It works amazingly,
and I don't understand why people have employees and co-founders.

~~~
soundoflight
You'll learn why if your startup makes it a few years and you have high
turnover of contractors and hence knowledge. Same goes if you lose a lot of
employees.

I think there's a percentage of employees to contractors that depends on the
project that is the perfect ratio of employees to contractors.

~~~
vdaniuk
I guess you can design your startup where the downsides of using contractors
and consultants will be minimized. It severely limits the choice of industries
but it is interesting nevertheless.

------
sklivvz1971
Besides the many points already mentioned:

* consultants come and go, you can't guarantee that the guy who wrote the code will be back for the next feature. This has a non-irrelevant cost of transitioning.

* consultants are not necessarily _honest_ about estimates and the status of your code base, nor they have any economic incentive to be. Employees have no incentive to cheat you on this - they would have no advantage in doing useless work. How can you make sure that you are not being cheated?

* productivity of employees and consultants is similar, in coding basically no one can get more than 4-6hrs of actual work done on a regular basis. The number of hours actually worked is irrelevant.

* In London an average senior developer makes maybe 55k£ ([http://www.totaljobs.com/salary-checker/average-senior-devel...](http://www.totaljobs.com/salary-checker/average-senior-developer-salary-london)) for an average of 220 work days (44 weeks). An average consultant of similar skill will make around 475£/day ([http://www.itjobswatch.co.uk/contracts/london/senior%20devel...](http://www.itjobswatch.co.uk/contracts/london/senior%20developer.do)). Quick calculation: 55k$ of consultant time are 115 days (23 weeks). How can anyone say that a consultant is cheaper? Even considering perks, etc, it's still basically twice as expensive.

------
donretag
"There are 9 bank holidays a year You offer 20 vacation days a year (we do,
and you should, too) They take an average of 8.5 sick days a year (it
happens)"

Those numbers are incredibly overly ambitious. Very few non-governmental jobs
have all 9 bank holidays off. Not many Americans have 20 days of vacation.
Just because "you do" does not make it the norm. Many companies nowadays have
PTO, which mean sick days simply come out of your vacation day allocation.

~~~
Silhouette
I think it should be noted that all of those things are very US-centric, and
workers in the US generally get a very bad deal compared to almost any other
first world country.

For example, for a full-time employee in Europe, dropping below those levels
wouldn't just be unambitious, it would probably be illegal. In many European
countries, the counts for both bank holidays and vacation days are usually
somewhat higher. Also, if you're sick then for many salaried positions you
would still get paid as normal, though would you probably have to get an
official statement from your doctor for anything non-trivial and different
rules might apply if you needed to take long-term sick leave.

A typical reckoning in Europe is that there are 365 days in the year, but only
a little over 200 working days. Put another way, the fully loaded cost of a
"full-time" employee here is probably 150-200% of their salary, and a
significant chunk of the overhead is paying them for Monday-Friday days when
they won't actually be at work for one reason or another.

------
wuliwong
This article has more hand waving than an orchestral conductor.

------
soundoflight
Almost all of his points are not accurate of FTEs and employees where I live
(Minneapolis). I've been on both sides too.

For instance, 1) Unless I'm a government employee I would work 8 hours +
lunch. 2) Companies usually provide equipment to consultants (unless it's a
small company) because you need to be on their network. 3) I still need leads
and project managers for consultants.

Also, if my employees are only doing 4 hours of work a day I would fire them.

~~~
warcher
Prepare the ax, then. I've been tracking my day to day for several years now,
and four hours of hands on the keyboard coding is a damn good day. Don't take
my word for it--rescue time is free and very enlightening.

~~~
soundoflight
Maybe I read the article wrong, but to me (and the author) coding isn't the
only "work" you do.

~~~
warcher
True. Many days its much, much less. Four hours is a really good day when I
was focused and cranking. Most problems that I can just crank out some code to
solve (without any real thought behind it) I've automated out of existence.

------
nilkn
Is it normal to get 20 vacation days and 8.5 sick days on top of that? That's
nearly 30 days off, not including holidays. Seems really abnormally high to
me, so I'm curious if I'm missing out on something here.

~~~
samastur
Depends on where you live and who you work for. At my current company I have
30 vacation days + 10 days of sick days and that's because I work for a
British instead of a local company.

If I worked for local, then those sick days would be whatever my doctor would
say is needed and I couldn't be fired for having too many.

~~~
nilkn
That's crazy. If I remember correctly, my current company will only offer 29
days of PTO after 10 years of service. PTO includes sick days.

Then again, I frequently hear that the US falls far, far behind in these
matters compared to other countries.

~~~
__chrismc
Sounds like the US lags behind on this, but I'm sure the tradeoffs are made up
elsewhere - for example, it looks to me like salaries for equivalent roles in
IT are often a little higher in the US.

At my current (UK) employer, I get 30 days vacation, 13 days Scottish public
holidays which get added to my vacation (so all paid), and paid sick leave of
no more than 3 "instances" in a year. An "instance" could be 1 day, or it
could be a month... but if it's longer than 5 working days I need to back it
up with a letter from my GP.

The downside is that if I don't use up all that vacation, I lose it - it's not
converted to salary (although some companies do this). This is something I'm
acutely aware of this year, as I'm struggling to find opportunity to take the
remaining 15 days leave I still have to use by Dec 31st.

------
diziet
_Employees work forty hours a week. Come on. You probably don 't; why would
you expect everyone else to? Here's a realistic breakdown of the average
programmer's workday:_

Well, startups & early employees typically work much more than 40 hours a
week.

------
gkop
Yes, consultants aren't really any more expensive than employees, but they're
no substitute: you're still going to want some employees on your team to
impress investors (among other reasons).

~~~
j_baker
If your primary motivation in hiring is to impress investors, I think you're
putting the cart before the horse. You get investors so you can hire
employees. You don't hire employees to get investors.

~~~
Silhouette
I've known small but growing businesses who have missed out on serious M&A
deals because they'd outsourced so much for so long. The arrangement might
have worked well for all concerned, with solid, long-term partnerships between
the key organisations. However, when it came to the commercial crunch, the
incoming suits didn't see effective partnerships, they saw uncontrollable (in
the way they wanted to work) dependencies on key suppliers. It was absurdly
short-sighted in each and every case I'm familiar with, but unfortunately
being the guy who gets a vote on the acquisition and being smart don't seem to
be particularly well correlated.

~~~
j_baker
Well, ok. Sure if you are looking to get acqui-hired, you need people _to_ be
acquihired. That's a completely different situation from trying to convince
investors though.

~~~
Silhouette
I wasn't talking about an acqui-hire, just a business that has outsourced
entire functions to specialists who aren't employees. This is not an unusual
arrangement in small companies.

