10 ms·

The unfortunate math behind consulting companies

259 points by thomas11 16y ago

JoeAltmaier 16y ago
There's no leverage in consulting. Granted. Doing it anyway - as long as I'm working for the man, I want to be the man.
- matthewcford 16y ago
  Instead of one man, you have many they're called clients.
  - JoeAltmaier 16y ago
    To clarify: there are only 24 hours in the day. One man can do one man-year of work in one year. That would be you, the consultant. Regardless of how many clients you sign up. Thus the lack of leverage - there is an absolute cap on what you can bill per year.
    - rick888 16y ago
      This is exactly why I got out of consulting. I also don't like working for consulting companies (even if I am a full-time employee there). To many times, the company takes on too much work for the number of employees, and the employee ends up suffering (tons of overtime..usually unpaid, pissed off customers, etc). One of the worst place charged companies a flat-fee per month for tech support (some had 300 or 400 employees). There were about 10 of us that had to take on everything. It resulted in customers calling us up for things that weren't even really problems..mostly just preference (IE: location of icons on the desktop).
gaius 16y ago
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.
- smartbear 16y ago
  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.
  - deleted 16y ago
    [deleted]
  - jbellis 16y ago
    "If you're a web designer for local business, they would not be fine with it." That's kind of the definition of "clients that are not worth having."
    - euroclydon 16y ago
      I think that "web designer for local business" has finally become doable. I have a few customers where I just resell Wufoo + Weebly or Word Press, at a 25-50% markup. There's no custom code to maintain on my part, and if they ask for features which these platforms can't do, I just say no.
    - stcredzero 16y ago
      So "clients worth having" = big companies managed by people who don't have the expertise to judge your work who also act as if they're sitting on top of an endless pool of money which they sprinkle around freely because it's not even theirs. I can see the attraction in that. I've seen it up close. It's not worth selling your soul for. Broken systems that lack accountability will destroy your soul, one way or another. You might even be warm, fat, and happy all the while it's happening.
      - patio11 16y ago
        There are a huge, huge number of clients who are neither sclerotic BigCo nor the corner bakery. My typical client has less than 30 employees, the ability to react to issues fairly quickly by the standards of large corporations (i.e. squash a consequential bug in minutes, do a complete site revamp in weeks), more than enough money to pay any conceivable consulting rate for something with predictable ROI.
rubyrescue 16y ago
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.
- patio11 16y ago
  i've got too many clients 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.
  - thinkingeric 16y ago
    "lower the client's perception of risk" That is a profound way to put it and certainly accounts for a lot of the premium that clients are willing to pay.
  - rubyrescue 16y ago
    great points - I totally know this. it's very helpful to hear. but... we've been growing so fast i haven't yet had a chance yet to raise them, and i'm paying the price of a fixed bid prjoject we took that was underpriced by about 50%. yet i don't regret the fixed bid because it helped us launch and we now have a killer client project to show for it.
    - 16y ago
pdx 16y ago
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.
- vannevar 16y ago
  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.
  - mikeryan 16y ago
    So I'll run through a few cases where he's looking at worse case scenarios. 1. He's losing 32 hours a month (almost a week a month) because people work "less" then 8 hour days or take personal time. This is true perhaps on some months. But most consulting teams will work long hours come crunch time. Salaried employees make that time back when they do overtime to get a project done. I know a lot of interactive shops who burn through talent because they are working 60 hour weeks. This extends to the lost days 2. Then there's lost time to due to down time between projects AND time put into 10% time. Don't do this, this is a worse case scenario he just killed 4 days a month with this (or 48 days a year, really?). If you want 10% time and have down time between projects then use the down time between projects for 10% time. Most folks I know hire when they can keep someone busy full time and then back fill with contract help.
vineet 16y ago
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.
raganwald 16y ago
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.
- rick888 16y ago
  In every one of my business ideas, I look at the bottlenecks. IE: What will prevent me from making more money (my time, etc). 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 16y ago
  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?
  - raganwald 16y ago
    Paul put it well when quoting the aphorism: "Where there's muck, there's brass."
sudhirc 16y ago
This article generalizes too much. Top Indian IT giants are consulting companies and they are making a ton of money.
- vannevar 16y ago
  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.
- mbesto 16y ago
  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.
zavulon 16y ago
This just made me very depressed. Very, very depressed, because it hit so close to home.
thinkingeric 16y ago
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.
tptacek 16y ago
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.
PaulHoule 16y ago
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.
- tptacek 16y ago
  $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.
  - clistctrl 16y ago
    not at all, the shop I worked at charged $250 an hour. When we charged $130 it was a discount hoping for more work. I was paid very nicely in terms of salary + bonuses, but I ended up working so much overtime, i would doubt my hourly wage was anywhere near $30/hr. I saw the firm rapidly expand, we went from 15 people to 50. At first it was fun, and games. Some pizza + beer here, and some ping pong there. Bam we're working until 9 or 10 at night. But after a few years, I was burned. You can't work a person that hard for a long period of time. I'm almost better now, but in terms of energy, I'm NO WHERE near where I was when I first started. The abuse is not in how much we make per hour, its in how we're worked.
    - wallflower 16y ago
      Most of my friends that I knew from volunteering have left. Non-profit administration is another high turn over industry. They are always working on the next fund-raising campaign, donor push.
bretpiatt 16y ago
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.
- tptacek 16y ago
  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.
  - gaius 16y ago
    But you kinda have to know (and care); the Agile words for this are "calibration" and "velocity".
m0nastic 16y ago
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.
jister 16y ago
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...
- tsotha 16y ago
  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.
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palehose 16y ago
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.
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lsc 16y ago
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.
sciboy 16y ago
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?
- gthank 16y ago
  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.
trustfundbaby 16y ago
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? So is that 15% number accurate?

259 points by thomas11 16y ago

JoeAltmaier 16y ago

There's no leverage in consulting. Granted. Doing it anyway - as long as I'm working for the man, I want to be the man.

matthewcford 16y ago
Instead of one man, you have many they're called clients.
- JoeAltmaier 16y ago
  To clarify: there are only 24 hours in the day. One man can do one man-year of work in one year. That would be you, the consultant. Regardless of how many clients you sign up. Thus the lack of leverage - there is an absolute cap on what you can bill per year.
  - rick888 16y ago
    This is exactly why I got out of consulting. I also don't like working for consulting companies (even if I am a full-time employee there). To many times, the company takes on too much work for the number of employees, and the employee ends up suffering (tons of overtime..usually unpaid, pissed off customers, etc). One of the worst place charged companies a flat-fee per month for tech support (some had 300 or 400 employees). There were about 10 of us that had to take on everything. It resulted in customers calling us up for things that weren't even really problems..mostly just preference (IE: location of icons on the desktop).

gaius 16y ago

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.

smartbear 16y ago
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.
- deleted 16y ago
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- jbellis 16y ago
  "If you're a web designer for local business, they would not be fine with it." That's kind of the definition of "clients that are not worth having."
  - euroclydon 16y ago
    I think that "web designer for local business" has finally become doable. I have a few customers where I just resell Wufoo + Weebly or Word Press, at a 25-50% markup. There's no custom code to maintain on my part, and if they ask for features which these platforms can't do, I just say no.
  - stcredzero 16y ago
    So "clients worth having" = big companies managed by people who don't have the expertise to judge your work who also act as if they're sitting on top of an endless pool of money which they sprinkle around freely because it's not even theirs. I can see the attraction in that. I've seen it up close. It's not worth selling your soul for. Broken systems that lack accountability will destroy your soul, one way or another. You might even be warm, fat, and happy all the while it's happening.
    - patio11 16y ago
      There are a huge, huge number of clients who are neither sclerotic BigCo nor the corner bakery. My typical client has less than 30 employees, the ability to react to issues fairly quickly by the standards of large corporations (i.e. squash a consequential bug in minutes, do a complete site revamp in weeks), more than enough money to pay any conceivable consulting rate for something with predictable ROI.

rubyrescue 16y ago

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.

patio11 16y ago
i've got too many clients 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.
- thinkingeric 16y ago
  "lower the client's perception of risk" That is a profound way to put it and certainly accounts for a lot of the premium that clients are willing to pay.
- rubyrescue 16y ago
  great points - I totally know this. it's very helpful to hear. but... we've been growing so fast i haven't yet had a chance yet to raise them, and i'm paying the price of a fixed bid prjoject we took that was underpriced by about 50%. yet i don't regret the fixed bid because it helped us launch and we now have a killer client project to show for it.
  - 16y ago

pdx 16y ago

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.

vannevar 16y ago
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.
- mikeryan 16y ago
  So I'll run through a few cases where he's looking at worse case scenarios. 1. He's losing 32 hours a month (almost a week a month) because people work "less" then 8 hour days or take personal time. This is true perhaps on some months. But most consulting teams will work long hours come crunch time. Salaried employees make that time back when they do overtime to get a project done. I know a lot of interactive shops who burn through talent because they are working 60 hour weeks. This extends to the lost days 2. Then there's lost time to due to down time between projects AND time put into 10% time. Don't do this, this is a worse case scenario he just killed 4 days a month with this (or 48 days a year, really?). If you want 10% time and have down time between projects then use the down time between projects for 10% time. Most folks I know hire when they can keep someone busy full time and then back fill with contract help.

vineet 16y ago

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.

raganwald 16y ago

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.

rick888 16y ago
In every one of my business ideas, I look at the bottlenecks. IE: What will prevent me from making more money (my time, etc). 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 16y ago
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?
- raganwald 16y ago
  Paul put it well when quoting the aphorism: "Where there's muck, there's brass."

sudhirc 16y ago

This article generalizes too much. Top Indian IT giants are consulting companies and they are making a ton of money.

vannevar 16y ago
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.
mbesto 16y ago
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.

zavulon 16y ago

This just made me very depressed. Very, very depressed, because it hit so close to home.

thinkingeric 16y ago

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.

tptacek 16y ago

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.

PaulHoule 16y ago

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.

tptacek 16y ago
$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.
- clistctrl 16y ago
  not at all, the shop I worked at charged $250 an hour. When we charged $130 it was a discount hoping for more work. I was paid very nicely in terms of salary + bonuses, but I ended up working so much overtime, i would doubt my hourly wage was anywhere near $30/hr. I saw the firm rapidly expand, we went from 15 people to 50. At first it was fun, and games. Some pizza + beer here, and some ping pong there. Bam we're working until 9 or 10 at night. But after a few years, I was burned. You can't work a person that hard for a long period of time. I'm almost better now, but in terms of energy, I'm NO WHERE near where I was when I first started. The abuse is not in how much we make per hour, its in how we're worked.
  - wallflower 16y ago
    Most of my friends that I knew from volunteering have left. Non-profit administration is another high turn over industry. They are always working on the next fund-raising campaign, donor push.

bretpiatt 16y ago

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.

tptacek 16y ago
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.
- gaius 16y ago
  But you kinda have to know (and care); the Agile words for this are "calibration" and "velocity".

m0nastic 16y ago

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.

jister 16y ago

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...

tsotha 16y ago
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.

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palehose 16y ago

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.

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lsc 16y ago

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.

sciboy 16y ago

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?

gthank 16y ago
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.

trustfundbaby 16y ago

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? So is that 15% number accurate?