Consultants vs. Employees: The Real Costs(inthebackforty.com)
inthebackforty.com
Consultants vs. Employees: The Real Costs
http://www.inthebackforty.com/blog/2013/10/consultants-vs-employees
16 comments
I think the premise is that consultants often bill by the hour and don't include bathroom breaks, screwing around, etc... as billable hours.
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.
I think that indeed is the case if you use them for an hour or two. If you have them hanging around full time at the office, I doubt they would pause it for a 5-10 min bathroom break.
I have never worked with any consultants like that. The ones I have worked with count hours almost the same way as normal employees.
We have some excellent consultants. They bill in 15min increments. So I assume we don't pay them for dicking around if they do partake (and they do, as they're human). They're still 100% utilization.
Assumptions... Most consultants charge for total time on-site. Not just at their desk working on your project. I think you're confusing consultants with Freelancers.
What is the difference between Consultant and Freelancer? Coming from the UK I'd call myself a Freelancer. I work on-site, paid by the hour, but I do invoice for toilet breaks, lunch, and so on. A Consultant in my mind is someone who comes in and advises on projects, and a Freelancer is someone who sits at a desk and performs skill-based tasks.
What is the difference between Consultant and Freelancer?
The former has better marketing (and a commensurate increase in rates, naturally).
But seriously, given the breadth of roles that could reasonably be described as freelance, there's little meaningful or objective distinction between freelancers and consultants. I don't think the distinction between freelancing and contracting is particularly relevant today either, though some would strongly disagree.
The former has better marketing (and a commensurate increase in rates, naturally).
But seriously, given the breadth of roles that could reasonably be described as freelance, there's little meaningful or objective distinction between freelancers and consultants. I don't think the distinction between freelancing and contracting is particularly relevant today either, though some would strongly disagree.
IR35 :-)
For non UK folk IR35 is a rule brought in to penalize self employed IT people of course self employed lawyers and accountants don't have this problem.
For non UK folk IR35 is a rule brought in to penalize self employed IT people of course self employed lawyers and accountants don't have this problem.
As a Brit interviewing to work remote for a SV company (as a contractor, due to residence) IR35 is something I really need to wrap my head around.
At first glance, it's a bit scary.
At first glance, it's a bit scary.
Consultants usually provide advice/strategy, whereas contractors, which may be freelancers, do the work. Often these roles may exist under the same umbrella with a firm recommending a direction and assisting with hiring or staffing to execute the plan.
I share these definitions.
What do you think, regular employees work 100% of the time?
That varies from consultant to consultant. I work full-time on one client site as a consultant and I include time where the client is having casual conversation with me, time in the restroom, etc., in the time that is billed. But I am also expected to be there 40 hours a week. Part-time consultants may differ in policy.
Except you are 'hiring' a person you do not get to interview. Most consultant's I've worked with come with a less than desirable level of expertise. In which case you burn several weeks finding suitable replacements to do the work.
I guess it depends on the consulting/contracting model, you use, but we get to interview our consultants, so it's easier for us to determine if they have the expertise we need - or we think/hope we need.
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.
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.
I agree, but to rephrase:
You want your company to be the expert in what makes your products and services great. If your differentiators are all created by consultants, once the consultants move on, you lose that expertise.
By all means, hire consultants to set up version control servers, build board support packages, improve the UX of your webapp, or even take care of HR paperwork. But the thing that makes you money (the search engine, the historical database, the business logic) needs to yours.
Anything less can work, but you'll be dangerously close to creating a commodity product. What's to stop someone else from hiring similar (or the same) consultants to clone your product?
Of course, all this assumes the value of your product is your differentiator, not inside knowledge of how to get contracts from a particular bureaucracy.
You want your company to be the expert in what makes your products and services great. If your differentiators are all created by consultants, once the consultants move on, you lose that expertise.
By all means, hire consultants to set up version control servers, build board support packages, improve the UX of your webapp, or even take care of HR paperwork. But the thing that makes you money (the search engine, the historical database, the business logic) needs to yours.
Anything less can work, but you'll be dangerously close to creating a commodity product. What's to stop someone else from hiring similar (or the same) consultants to clone your product?
Of course, all this assumes the value of your product is your differentiator, not inside knowledge of how to get contracts from a particular bureaucracy.
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.
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.
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".
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.
Word-of-mouth, though, they may have to deal with. But so does everybody.
Argh, you are both right and I actually must think about subject to reach a conclusion. What a novel experience.
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.
> 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.
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
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
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.
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.
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.
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.
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.
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.
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.
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++.
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++.
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.
You appear to be running something that is basically a simple appointment app, directory, and profile service.
No shit you don't need real talent on the payroll--I don't think you're ever going to hit any really hard technical problems that would benefit from that.
It's not a bad model, but it also doesn't apply to everyone--especially folks bootstrapping without funding.
No shit you don't need real talent on the payroll--I don't think you're ever going to hit any really hard technical problems that would benefit from that.
It's not a bad model, but it also doesn't apply to everyone--especially folks bootstrapping without funding.
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.
I think there's a percentage of employees to contractors that depends on the project that is the perfect ratio of employees to contractors.
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.
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...) 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...). 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.
* 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...) 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...). 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.
"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.
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.
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.
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.
Wow. As an European I just can't wrap my head around this. I'm currently working in London, and our firm has a policy that for up to 7 days of sick leave you don't even need to prove that you were sick, anything over that you need a letter from your GP.
America, fuck yeah?
ps: he didn't say it is the norm, he said it's a good idea to do it.
America, fuck yeah?
ps: he didn't say it is the norm, he said it's a good idea to do it.
This article has more hand waving than an orchestral conductor.
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.
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.
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.
Maybe I read the article wrong, but to me (and the author) coding isn't the only "work" you do.
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.
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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.
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.
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.
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.
Then again, I frequently hear that the US falls far, far behind in these matters compared to other countries.
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.
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.
While a lot of crappy, and especially non-professional, entry level jobs offer less time, it is not atypical for a professional job to offer 4 weeks paid vacation and 10-12 sick days a year.
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That's what it is at my company, it's not very strictly enforced though. I don think that the average is lower for most jobs however.
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.
Well, startups & early employees typically work much more than 40 hours a week.
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).
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.
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.
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.
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.
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For example, employees are typically more committed to the project.
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.