Yes. My company bills me out at roughly 3x what I see. And when I do a side project for someone, I bill the same 3x rate - and even though it's more money in my pocket than my day job, it's more hassle and not clearly a better arrangement (which is why I still work a day job).
I'm a part time freelance musician, and oddly enough there's a similar situation in the music business. Bandleaders have to pay the musicians a reasonable cut of the proceeds from gigs, or the musicians will split off and form their own band.
when i work for myself the number of billable hours is cut in half due to the overhead of finding and negotiating new projects. i am in that boat and i have trouble keeping it afloat. i'd rather take a cut and work with an agency or a partner that finds the projects for me.
I've been working on streamlining these things for myself, given the exact same pain points and limitations, and would be happy to share what I've learned. My contact info is in my bio.
I'm not comfortable sharing many specific details about my business publicly, in this forum. But I am comfortable sharing them with people who are where I was and want to get where I am. I'm happy to. I'm sure you understand.
In service of answering your question anyway. I'm a hardware product design engineer. I can take ownership over an entire complex piece of hardware (medical device, IT product, etc) and architect it, design it mechanically, electrically and do the systems engineering. I'm able to deliver entire complex hardware products that work well (more than well), can be mass manufactured, and meet cost targets. I've designed surgical robotics systems, artificial hearts and other class III implanted devices, stuff in the disney parks, times square and even the Smithsonian. I have a website about myself with more information at www.iancollmceachern.com
how does one get started with this? with an agency they already have a track record and they also have multiple people they can draw on so if they have a project they can manage it with low risk.
for an individual partner we need to get to know each other first, and then that person needs to be willing to only get paid when a project is successful, because otherwise i'd face having to pay a full salary from the start before we even have the first project.
Sales people you can pay on a commission basis, which separates the wheat from the chaff pretty quickly. There are companies like Sales Focus that specialize in it.
I agree. In my experience, the company adds a lot of value to me.
They help with writing CV (if not flat out write them) they do cold calling, and set up meetings, meaning when I go interview with a potential client, they are almost already on board to have me. They give me access to knowledge of all my colleagues (“have you worked with using tech X to solve problem Y?”), they handle taxes and billing, office and they pay me when there aren’t any clients.
* The time you spend managing and supervising, including desk-checking the stuff they send out, because it goes out under your name and you are only as good as your last job.
* IT costs, and office space if they aren't working from home.
* Liability insurance in case they screw up. (Not certain about this: maybe you just trust that your company is a sufficient legal firewall because its only asset is you).
I remember back around 1990 hearing that for my big company employer putting a coder in a seat in front of a computer cost roughly twice their salary. That's still true today.
> The time you spend managing and supervising, including desk-checking the stuff they send out, because it goes out under your name and you are only as good as your last job.
The article effectively references this when it starts talking about having to pay for a full-time manager once you have five employees. If you've added only one employee, this is largely a cost that is paid proportional to their billable hours, and you only need to be slightly more diligent than your client, so it's not much of a loss.
> IT costs, and office space if they aren't working from home.
For a small-scale consulting business, usually they're working remote or on-site, so you don't necessarily bear any office space costs. There is, invariably, some IT costs that you bear yourself, but you already have those when you're operating on your own, and the additional cost for your first employee is all but trivial compared to the billables you should be adding.
> Liability insurance in case they screw up. (Not certain about this: maybe you just trust that your company is a sufficient legal firewall because its only asset is you).
More often than not, customers want you to have liability insurance because you don't have a lot of assets they can grab in the event sue you, so the better your legal firewall, the more likely you'll have to pay for liability insurance. Still, it's a 1% cost, so not a big factor.
> I remember back around 1990 hearing that for my big company employer putting a coder in a seat in front of a computer cost roughly twice their salary. That's still true today.
That's what the article says. It actually argues that with consulting businesses, it's more like triple their salary.
And even if they do pay, larger companies often insist on net-60 or even net-90...so you have to wait potentially months after delivering work to get paid. For a small or new shop that alone can put you on the ropes, especially since the companies most likely to do this are likely to be large enough and pay well enough to be the bulk of your inflow.
There are solutions for literally all these problems, you can find banking relationships where they’ll lend on your outstanding invoices, you pass on interest to the client, and everyone gets paid.
I feel compelled to comment because there are all these people who act like running your own business is some impossible task. it really isn’t. The vast majority of business owners aren’t super geniuses, my 60-year-old mother does it, has no formal education and couldn’t write “hello world” if her life depended on it.
The reality is that owning a business is effectively monetizing your creditworthiness (not unlike being a landlord), which is a pretty easy way to make a living, assuming you start out with a decent supply of capital/creditworthiness.
I don't think the problem for tech people is in thinking it's too hard.
I think it's trading working on what they like vs doing admin / sales / marketing.
That said, I wish everybody were a contractor and employees wouldn't exist.
(Good) Contractors are accountable exactly to what they are paid for (no more and no less).
Employees are accountable to drinking coffee and it's a damn pain working around them to try to get something done.
The only exception is people with equities working in startups and dreaming big.
> I think it's trading working on what they like vs doing admin / sales / marketing.
That's certainly one of many good reasons not to run your own consulting business. That said, it's entirely possible to hire/outsource support to do much, if not all, of the admin/sales/marketing work.
> (Good) Contractors are accountable exactly to what they are paid for (no more and no less). Employees are accountable to drinking coffee and it's a damn pain working around them to try to get something done.
In my experience, productivity tends to depend more on the "good", than on the contractor/employee dimension, and a non-trivial part of the "good" stems from how well they are being managed by the business... which yeah, a huge part of being good at managing either contractors or employees is about accountability. Sometimes you get better employees or contractors than you deserve, and that can imbue the contractor/employee characteristic with more causal significance than it deserves, but by and large, you don't.
The article, and much of the commentary here, said exactly the opposite.
It's not that it's too hard; it's consulting businesses aren't very profitable, don't scale well past 1 person, and if you scale, fill the owner's life with way less enjoyable work.
That's pretty simple to manage though. If you're going with say... 2/10 net 60, you charge them at a 3% higher rate. Clients might perceive this as charging interest, which it is, and they'll be perfectly happy with it. If you have cash flow issues, you borrow to cover the float —net 60 billables to large companies tend to make you not a credit risk; even with high interest rates of today, you'll come out net ahead.
It’s only 1% of my gross income (before tax) as a freelancer. I’ve never seen or heard of it being exercised in my sector (management consulting / cyber), but to be honest it’s a small price for peace of mind in case things do go pear shaped.
In the case of the Consulting company I worked for before starting my own, they expect you to get the above stuff done above and beyond your 40 hours of billable work.
Definitely not the norm at the places I've worked. I would even bill for some downtime if the customer was blocking me from getting work done and the contract expected me to work full-time as it was preventing me from taking on other work.
No complaints in over 15 years. Just be good. Keep your customer happy and get stuff done on time and on budget and these sort of things just work themselves out. Much of it relies on setting clear expectations and goals up front.
It depends on the nature of the contract. Certainly that is the norm, partly because the IRS tends to like it that way; but I've seen contracts that explicitly paid for dedicated managers, included IT costs and office space, and even ones that covered liability (usually when your a subcontractor and the contractor with the MSA requires liability insurance so they can sue you if things go sideways).
Me too. I tend to hide that stuff in my overhead so that my proposals and clean. I just bill my time, materials straight through. No more complicated than that.
Then I handle it all on the backend, you just need to make sure you are bidding enough time to get it all done. The client doesn't usually want more granularity, then they feel obliged to review it. Just get the work done, charge them what you agreed to charge them, and be jovial as you do it.
> The client doesn't usually want more granularity, then they feel obliged to review it.
It really doesn't make sense for them to review it anyway. As a general rule in the consulting business, if you don't pay for it with expenses or in the rate, you'll pay for it in the billable hours. A successful consultant will necessarily make sure all their costs are covered, with room for profit... and you want the consultants you hire to be successful.
Tangent but why does so many companies keep hiring consulting companies (a little different) that come in and do nothing but waste everyone's time - is it yet another managerial class excess / nepotism / business theatre or is there some benefit i just don't see?
I've seen this countless times both in both Tech and the NGO world - some roadmap is running pretty good, managers then hire a bunch of "cool looking people that come in with a big old white board to make a cool workshop" then follow the process for a short amount of time, giving extremely shitty advice because they haven't been involved in the process at all and are going to leave soon without delivering anything.
And the fact that they are often paid a higher wage than the people who have to actually clean up after their crap advice is straight up offensive. And it seems everyone i know have this impression in both softer and harder sectors.
I've only met a few "lone wolf" consultants in Tech that were nice, people often with a huge passion and knowledge for something concrete and not "passion for leadership / some bullshit organisational fad".
I understand there's lots of consultants who are paid for giving an opinion in a fancy way, preferrably with slides or on a white board, but there's lots of different kinds of consulting. I've done a lot of it, and for me it usually consists of building a product for the customer, either on-site or remote, usually in close cooperation with the company's own employees. It is a job that is mostly interesting and often challenging, because you're thrown into a completely different project every so often, and are expected to get up to speed asap.
I believe those types of management consultant workshops are some kind of "gotta look like we do something to improve" type of box checking.
My current boss is nice in this regard. He holds the sessions himself at some sort of resort and pocket the money to buy us booze and spa time instead.
Typically, there's some issue that management has found intractable by their usual methods. Not the usual methods, but their usual methods. This is always local. They do not trust the peons. Management beyond them does not want to change anything.
The consultants come in, talk to everyone, get a list of what needs to be done from the peons, reframes that list and presents it to the middle managers, essentially laundering the peon's opinions. "Wow! Great!"
Middle management says to their boss, "Well, the consultant said ..."
It's essentially a ritual in which time is consumed and a sacrifice of cash is made to purify the unclean words of the lowers so that the high priests might hear them.
That's more than a bit unfair. They're generally taking in information from the entire workforce, including management, and they're analyzing the whole picture. Trivializing it by describing it as "purify the unclean words of the lowers so that the high priests might hear them" is not accurate. What they're ostensibly providing is unbiased and potentially more competent judgement/analysis of information that the company already has (and really, it'd be weird if the company didn't already have the information, right?). Sure, in practice the bias and competence aspects deserve an asterisk (by virtue of being compensated by an organization, consultants have many of the same biases of the people who are also compensated by said organization, and there's a Dunning-Kreuger problem with hiring either employees or consultants to compensate for competence), but consultants are absolutely in a position to provide the value they are paid for.
In a long ago job, we had a consultant come in and start talking to us plebs. I later provided a sealed envelope to my peers of my predictions as to what the consultant would recommend.
It's been a while, but something like eight out of my nine items listed were in his recommendations, and not much else. All of the items were things I had said before.
I am sticking with laundering, plus a dash of sunk cost fallacy ("we paid money to hear this advice so we must take it").
When you’re facing critical issues that require specific expertise outside of the current team’s core competencies, bringing in an experienced consultant makes a lot of sense.
Of course finding one you trust is even harder. The vetting process itself is lengthy and tedious, so the natural tendency is to lean towards people/orgs in your trusted circles that your trusted friends can vouch for.
Or, you have one or more management team members who aren’t pulling their weight, what do you do? If there’s a chance spending $50k on a consultant will fix them you try that first before swallowing the $200k hidden cost bill of lost time, training, legal, onboarding, and opportunities costs replacing them.
Management consulting is very much so the blind leading the blind. I would consider it to be a pretty bearish signal for management to be hiring consultants for leadership guidance. Hiring contractors or agencies to deliver actual work is a different matter altogether though. When it costs well over six figures to hire a professional full-time, and you have less than full-time year-round needs, then the economics of contracting may be attractive for both parties.
Sure but the consultant is getting alot a scratched back for not a lot of scratching himself.
But maybe I am looking at this wrong. I.e. the buying manager is fine with getting a future favour or some wine and dine since it is not his money he is using anyways?
Like money loundering. You expect a bad conversation rate.
> I've seen this countless times both in both Tech and the NGO world - some roadmap is running pretty good, managers then hire a bunch of "cool looking people that come in with a big old white board to make a cool workshop" then follow the process for a short amount of time, giving extremely shitty advice because they haven't been involved in the process at all and are going to leave soon without delivering anything.
Management consulting is a specific subset of consulting, and while it does sometimes provide no value or net negative value, even when it seems to provide little to no value from the perspective of other employees, they often just aren't in a context where they could see that value.
I've been through several of these engagements from the inside. They're usually hired so the leader who is about to be fired (whether they know or not). Then when they get fired or it goes south they can just say they were doing what the expert consultants told them to do.
This isn't really all that different from the stated purposes of consulting businesses: they're often hired to be a disinterested third party with relevant expertise to make decisions/take actions that whomever hired them might be deemed too biased and/or too incompetent (in the relevant area of expertise) to make.
one reason this happens is Executive A needs to justify a non-obvious decision to other executives (or perhaps it's not in their interests) so A dresses up the decision in status credentials and money to get the others will respect it. A can shift culpability off themselves in this way as well.
I have a company that includes consulting offerings and while the article points resonate with me and know that real consulting is complex and a craft, the article is too general and more oriented to personal consulting that a business around that.
For example, in our case, several consulting work could be seen as presales for other services and/or products while other companies take it as business marketing and sale expenses. If you see consulting in this way, the picture changes dramatically and from the finances/accounting point of view you are converting expenses into income.
Yea, but that type of consulting is typically billed as professional services(or similar), not advisory work.
If product companies are smart, they might put this role under costs to acquire customer vs services and then have it as a fee for onboarding. I can’t remember the details, but I’ve been told having really profitable services can really complicate VC/fundraising.
Sorry, I didn't understand what is the argument bhind your first paragraph: advisory vs. consulting.
Regarding your second paragraph, investors looking for the the YC startup definition don't like services companies because they couldn't scale at the pace of product companies but they are specific investors oriented to these companies because they have a more secured cashflow.
BTW, some people like Michael Cusumano [1] argued about hybrid companies to better handling economic cycles.
> Sorry, I didn't understand what is the argument bhind your first paragraph: advisory vs. consulting.
It was more to clarify it was proserv work than anything.
In the context of SaaS/tech, typically professional services is implementation, maintenance or break/fix of specific products or technology. Advisory work is supposed to be independent work where you are being paid for (what is supposed to be) unbiased opinions and strategy.
It's the difference between staff augmentation / project work and strategic / planning work.
You could read his arguments reading and watching his papers and videos. This is not an endorsement but worked on my business.
Basically the argument is that there are business cycles when companies are spending more money on products and less on services and in some crisis with services you can compensate that. There is no general advice for all companies.
Yes, I am confident that if I read/heard his arguments, it'd be even harder for me to argue with the idea that a diverse set of revenue streams provides more revenue stability.
I understand your argument from the point of view of laser focus for startups but not from the point of view of conglomerates such as Samsung, Sony, Fujitsu, Amazon. In the middle there are zillions of organizations.
Wow, this is a pretty good summary of what I saw during my 15 or so years at "design services" companies.
One way around some of these issues is to pay employees by the hour. At the places I worked, there was a large pool of folks who loved that arrangement because of the ability to work in bursts and take more time off in between. The problem then became scaling beyond that pool of labor (many of whom were independent contractors with other commitments).
This math is also why, for years, I've recommended people avoid investing in companies like Palantir. Sure, they can be successful companies, but they'll never achieve the sort of hypergrowth that companies like Google or Meta can due to the scaling issues.
Overall, I loved my time in the services industry. It had the dynamic quality of being a consultant (except for one 5 year long, mostly continuous project where I was staff augmentation for a large company) but someone else handled the sales and negotiations for me.
Palantir has three products: Palantir Gotham, Palantir Apollo, and Palantir Foundry. The professional services are more in support of those sales than anything else. They have achieved periods of hypergrowth that fit the scale of that space. The reasons not to invest in them are far more complicated than that. ;-)
No, Accenture is big because consulting is not very profitable and it's easy for Accenture to accumulate smaller shops for the bodies. Sooner or later, people running smaller shops get bored and sell to companies like Accenture. Big companies can also more easily leverage foreign, low-cost labor and provide a complete solution. It's hard to provide a complete solution, including QA/testing, test writing, documentation, etc if you are a small body shop with 10x engineers that you need to bill out at $400/hr.
Accenture will never come close to the profit per employee of a company like Google or Meta due to the poor scaling.
I'm always confused by the different properties people imbue with the term "scale". Accenture is an example that consulting does scale by definition, because it's a profitable business that is operating at a much larger scale. It just that when it scales, the profit tends to grow linearly, or even sub linearly. This is in contrast with businesses like Google or Meta where the expectation is that they'll scale exponentially —though you'll notice that once they reach a certain size, they tend to shift back to more linear or sub linear profit growth... That's a niggly detail best left ignored by investors. ;-)
It depends on the context. In all of the discussions I've had on this topic, the quality people are concerned with is the performance of a company as an investment. In that sense, consulting does not scale. Sure, you can build a big, mildly profitable, consulting company, but that isn't very interesting to most folks.
Again, I believe you are presuming an exponential scale. Yes, if you invest in a consulting business, the rate of return isn't likely to grow exponentially, but it will grow, and it's entirely possible profits will grow proportionately with the investment.
Saying a business doesn't scale, from an investment perspective, means that the business can't leverage the investment to increase profits. That's certainly true of some businesses, and certainly true of some consulting businesses, but observably not true for any sector Fortune 500's are in.
We’ve assumed an 8-hour work day, but any owner of a consulting company will tell you this rarely happens. Oh sure, founders work 60-80-hour weeks, but not employees.
Ok a) 8*5=40<60, b) how can anyone read this and not think “jeez this whole owner-employee system sure seems broken”. Imagine how much easier it would be to motivate people if they also had a stake in the profits
no all employees are solving for max pay though (whether through salary or profits). for many, maximizing utility is maximizing leisure... ie if you pay more / give folks more profits, they may very well choose to work less.
You can be maximizing your hourly rate AND maximizing leisure at the same time.
You're confusing max pay with working more hours, whereas in reality no one actually wants to put in more hours, and in many cases those employees that put in most time is a negative signal showing their inefficiency.
Meh. Big valley companies isn't the right criteria. There are "lifestyle businesses", and then there are other businesses. People do tend to make a conscious choice between the two.
I read it and didn't think that, because the article mentions you can indeed incentivize employees to work longer hours by splitting the excess proceeds with them.
The only way to do it is to be more efficient than the others. You need to be able to do in 20 hours takes others 40. If you can do the work in 20, with a high level of quality, they won't mind paying the 40 hours they have budgeted. If you say it'll take 40 and then bill them for 60, or bill them for 40 but are a week late, they'll be upset.
If you can do that you can be very successful. If you can't, don't try, get good first on someone else's dime.
- Having better than average engineers. Not "10x", just better than average.
- Having a project manager required for nearly all projects. The customer was billed for this and it was worth it. The PM managed a Gantt chart and periodically chatted with the engineers to keep the schedule accurate and the project on track. No daily standups. No agile.
- Unless the project was for staff augmentation, the project had a clear set of goals and success criteria was defined up front. Feature creep was strongly discouraged.
Is this a business model that will scale to billions of dollars? Most likely not. But it can be a good business that provides you with enjoyable work. Consulting companies are the first to be fired in a downturn, but they're the first to be hired when things get going again because companies are short-staffed and need to react quickly.
Efficiency in consulting takes many forms. Yes, there's getting the work done more efficiently, but there's also ensuring you've got a deep pipeline so you have fewer idle hours, billing meticulously for every single expense, having commission/kick-back deals for referrals (ideally you're transparent about this with your clients, but they generally don't mind), and squeezing your employees wages (often structured as paying them a cut of their billables, and a bonus if they go in to overtime)... and that's just the obvious stuff.
Consulting businesses are generally seen as "sweatshops" because they are really more a like a logistics business, where your profit comes from the marginal efficiencies.
I've found they're great things when they're run like studios, with one or a handful of principles at the top that are there for the long haul and then folks that come in and out as needed and available working for them. This is what I've modeled my product design consultancy around. Then there are the other ones that are often owned by private equity folks, or run by manager types that can't do the work themselves. These in my experience are not built around passion for the craft like the first bucket. These usually end up being sweatshops.
My advice- hire a firm that you know the owner(s), and they're people, not a board. It's the same for Vets, doctors offices, hardware stores, etc.
my boss got his small company bought out by private equity masquerading as typical consulting firm. it took me a beat to recognize what was happening but in short, they pushed admin/management down. it didn't matter what the apparent client hierarchy looked like, they're allergic to the actual work.
Suffice to say, they constantly wanted to push me towards managing without offering any of the value.
This is a refreshing article and I wish that I had read it when it was written.
I did this math back in 2001 when I was moving furniture to support my side business making shareware games. The warehouse charged $34/hr and paid us $10/hr. For the life of me, I couldn't figure out where the other $24/hr was going, because that's more like $50/hr in today's money. Even though I was doing literally all of the work with the other lumpers, someone else was basically making $100k/yr for standing on my back. Especially considering that the warehouse and trucks had been paid off for decades so fuel was probably the next most expensive overhead!
I later realized that the profit went to the office staff and salespeople who landed the moving contracts. And the owner (who was a millionaire) skimmed the rest.
That experience shaped me into the antiestablishmenter I am today. Because that pattern repeats across all industries. Loosely the harder someone works, the less they keep of the gross vs the time and effort they put in. And digging into the history of that reveals how the concept of the corporation evolved during colonialism and slavery to extract as much capital as possible from workers and investors. Leaving us with the capitalist system we have today where one guy can extract most of the wealth from thousands of employees as majority shareholder or CEO.
We can get into the virtues of capitalism vs socialism and communism, but I feel that those are red herring arguments post-pandemic and with the return of labor unions. What this is really all about is whether workers, owners or society should keep the lion's share of the fruits of their labors. The US currently gives the most to owners. Europe arguably pays a large amount into its societies (its commons). No country has ever given the most to workers, although Central America and Southeast Asia tried it after WWII, so the West blew them up for trying to go "socialist".
In my own life, I've found it basically impossible to get ahead working a job and making side projects after trying for almost 25 years. And for every success story, we don't hear about the 9 out of 10 businesses that failed their first year. To a first order approximation, success is simply not attainable now outside of roughly the top 10% of income earners. The US is on the verge of losing its middle class.
You can probably see where I'm going with this. If the status quo can no longer provide the essential infrastructure and policies for the people to sustain themselves, then it becomes something to be challenged by the majority. When The Conservative Mind was written in the early 1950s, there was a fear that when the US middle class reached 50% of the population, pure democracy would kick in and voters would pass socialist policies (reparations) to reclaim the profit that had been stripped from them. Which could align them with communists in the East to form a dystopian New World Order.
To stop that, wealthy financiers installed Reagan in 1981 to dismantle unions and collapse the middle class back below 50%, which succeeded beyond their wildest dreams by the end of Bush Sr's administration. Clinton frayed the last of the social safety net to close the hatch and lock in the new normal. Post 9/11 has been an experiment in social engineering to see how long people will put up with living under a captured government that only passes legislation popular with a wide majority 10% of the time.
The fallout from that is that blue collar workers now blame liberal elites for their problems instead of white collar workers and company owners. Because conservative elites ARE white collar workers and company owners ("job creators"). This misdirected rage is so high that the next election is still very much in contention despite what everyone saw with their own eyes in the capitol deaths last time.
The really crazy thing is that the harder the wealthy and powerful close their grip on the rest of us, the more likely a violent revolution becomes. That's been proven time and again throughout history, even today with the two main proxy wars happening, which I won't get into because they're just too sad.
To me, the answer to all this is fairly obvious. If it takes such an enormous expenditure of time and effort over many years to maybe kinda sorta squeak by, even when charging $100/hr, then maybe we can justify trying anything else at all. My heart is with solarpunk and shifting the focus from capital to resource production. In literal terms, that looks like energy-positive solar homes and vehicles for everyone on the planet, along with hydroponic and community gardens creating an excess of food to collapse the price towards free. More self-sufficiency for individuals equals less leverage for corporate price gouging and inflation. With the eventual goal of automating all essential labor with AI and robots so that it can be taxed to pay for UBI. Returning leisure time to humanity so that it can explore human endeavors like art, philosophy and creating heaven on Earth as it ventures out into the stars.
For what it's worth, the wealthy and powerful can continue making huge profits alongside UBI. The only difference is that we'd have a healthy and happy populace instead of one endlessly struggling to survive. Which is why I think that this is something that red and blue can agree on, with the main barrier being the two entrenched political parties.
Sounds about right...? End of November 2023 the average German worker hat 20 sick days already. Add 2 for December and 2 for good measure and you're at 2/month.
