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The Big Conundrum: Grow or No Grow?

By crooky | February 8, 2008

Big disappointment - this isn’t a posting about marijuana. What I’m talking about is when you, as a consultant, reach that point where the amount of work that you’ve got coming through the doors is outstripping your capacity to deliver it. I’m at that stage right now. Some of you are probably thinking “I wish I had his problems” but if you’ve been there already, you know how stressful it can be. Taking on employees or even sub-contractors can be very stressful. You’re responsible for making sure that you keep them busy with billable hours (in the case of employees) or making sure they get paid for their portion of a contract in a reasonable amount of time (in the case of sub-contractors). If your business is relatively seasonal (like mine) it’s even more stressful because you might need two full-time sub-contractors for a couple of months and then poof! Business dries up again for six months. It’s really hard to find good help that’s available on short notice for a burst of activities and then is happy to go away at the end of the job.

The upshot is that if you’re managing people, you’re making more money than you could ever do on your own. Let’s say for the sake of argument that your day rate works out to about $100/hour. Let’s say that you work 40 billable hours a week at that rate for 50 weeks a year - not that this is a realistic expectation for most of us. The absolute most you can ever make is $200,000. I am going to suggest that making that kind of money on your own is virtually impossible because you need to market your business at least 30% of the time to keep that pipeline of projects coming. Realistically, I’d say the average mid-range consultant has a maximum earning potential of $125,000 per year. That’s if everything goes really, really well. Most consultants are happy with $75,000 per year.

There’s two reasons why trying to hit over $100K per year as a mid-market sole proprietor sucks:

1. You’ll work yourself to death trying to do it.
2. Once you get to $100K, you realize it isn’t all that much money and that you would have been happier with $25K less and spent more time with your kids.

The real secret to consulting wealth is to outsource anything that is low-value work for your daily rate. You can find good research assistants for your next consulting project that are happy to work for $30. At that rate, you usually don’t have to train them too much and they work fast. Since you have to supervise/vet their output before it reaches your client, it’s not unreasonable to mark up their working rate by as much as 30% to cover your time. If you have extremely talented sub-contractors like I do, you’ll barely have to do any work to earn your cut and it becomes more like a spec fee for giving that business to the sub-contractor.

Is there anything unethical about marking up sub-contractors’ fees? Absolutely not. Consulting is a strange niche business but it still operates in the realm of services and goods where logic dictates that the price you charge reflects [the cost of labour + the cost of materials x profit margin]. In this case, the cost of materials (electricity, phone service, computer depreciation) are expenses borne by the sub-contractor but the cost of their labour is an expense for you. If companies making computers only charged consumers the cost of parts and labour, they’d go out of business in no time. Why should consultants not mark up their expenses to turn a profit? As long as the client agrees to the stated rates for the sub-contractor (negotiated between the principal and the client) and the sub-contractor agrees to the rate they will be paid, there should be no problem ethically.

Most consulting agencies and large consulting firms mark up their labour costs on a regular basis. I’ve heard anecdotally from friends of mine who work for large consulting firms that they get paid $40/hour and they get billed out at $80. Some of that money has to cover overhead (they actually have a desk and a phone provided by their firm) but if they don’t have benefits, at least part of that markup is going to be profit for the firm.

So let’s say that you take on four full-time subcontractors that can do portions of the work that you currently do for clients. Before, you could only realistically produce about 1200 people hours of billable work per year as a sole proprietor to make $125,000. Now let’s say that you double the amount of time you spend marketing your business and triple the amount of people so you’re now spending 400 hours a year on billable work but your firm is producing 8500 hours per year of billable people hours. Assuming you spend $30/hour on four full-time subcontractors and bill them out at $40/hour, your gross income stays the same but you’re only working one day a week on billable project work. I estimate that you would need to spend about two hours a week supervising a good quality sub-contractor and they could put $20,000/year in your pocket. That means when you’re supervising them, you’re working for what is essentially $200/hour. Put another way, if your current rate is $100/hour, you’re marking up your supervisory time by 100%.

Additionally, extra bodies on your team give you the ability to bring in bigger jobs, bigger clients and to grow your business. As your business grows and gains a reputation, you can start to charge more for your time. Your billable hours may stay the same but your value will grow. However, you still have the responsibility for people other than yourself. That can be stressful. Food for thought, in any case.

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Aaron “Crooky” Cruikshank is the Principal and Founder of Friuch Consulting. He has written professionally about science and technology for ten years.

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Topics: Business of Consulting |

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