This originally appeared in multiple parts on my LinkedIn blog, June/July 2014.
PART 1 — 2014 06 26
So you want to be a consultant...
I want to share with you the mindset of a consultant (me), so that you can determine if this is what you actually want to do.
The problem with consulting is that it looks easier from the outside than it actually is. Until you get really good at it — and then it's merely difficult :-)
People sometimes latch on to “I want to be a consultant” because of various factors — they don't like their current jobs, they think they can make tons of money being a consultant, they want to travel, and so on.
So let's first talk about the benefits and drawbacks of consulting.
For some, the benefits can indeed be monetary (in terms of remuneration, write-offs, taxes, etc.). For me, however, the greatest benefit is that I get to do something different every 3 weeks, 6 months, 18 months — however long the contract lasts.
You can also work multiple contracts at the same time — something that's hard to do if you're a full time employee. As of this writing, I'm working one “full time” (37.5 to 40 hours per week, physically at an office) contract, and have two other “side” contracts on the go. These side contracts are sporadic — 5 hours here, 1 month spread over 3 physical months there, that kind of thing. I'm currently negotiating a fourth side contract.
The other advantage is that you can negotiate pretty much any term of the contract. We'll discuss negotiating contracts later.
So what are the disadvantages?
The exact same things: your contract may only last 3 weeks, you may need to take on multiple simultaneous contracts in order to survive the “lean” times, and you have to be able to negotiate a legal contract.
Some people just aren't cut out for this.
Are you the kind of person who loves interviewing for jobs and finding work? Are you the kind of person who can juggle multiple jobs at the same time? Can you read legalese, and do you have what it takes to bargain and negotiate?
Let's look at some of the myths surrounding consulting.
Myth #1: People are dying to hire you
Yeah — that doesn't happen. You need to build up a network of people you know, and who know you and your work. LinkedIn is awesome for this. But you have to, as my wife calls it, “schmooze” with people — keep in touch, stay abreast of the projects that are coming down the pipe, and so on. Believe it or not, this is actually work.
Myth #2: You will automatically get the highest rate possible
Ummm, no. You will get the lowest rate possible. You, and only you, need to go out there, figure out what you're worth, and then stick to it. I get told I'm “too expensive” all the time, and yet I'm working. This reminds me of people who, when asked how much they want for something, say “I was hoping to get maybe around $200-$300 for it.” Fine, how about $150? Why would any company pay more than necessary?
Myth #3: The customer is in a hurry so you must sign the contract as is
We'll talk more about negotiating contracts later, but wow — this one is really bad. A lot of people will sign anything that's put in front of them, and this includes a lot of consultants. As a consultant, you are entering a business to business relationship; you work for your consulting company, and your company provides services to the client. Therefore, your company needs to negotiate a contract whose terms serve your interests as well.
Myth #4: You need to use the services of a head hunter; finding work on your own is impossible
Head hunters would like you to believe that. The truth is, apart from my second contract, all of my work I found on my own. Can a head hunter help? Yes, absolutely — but remember, they're in it to make money; they're not in it to look out for you.
Still want to be a consultant?
If the above hasn't scared you off — great!
PART 2 — 2014 06 29
Show me the money!
Everyone is curious about money. So let's look at how you go about setting your rate.
How much should I charge?
The tongue in cheek answer is, “as much as you can get away with.” A friend of mine who is a long time consultant says, “if you can look yourself in the mirror after you've negotiated your rate, then you've left money on the table.”
Well, ok, maybe that sounds more like being a sea pirate than a consultant; but like lawyers, consultants get a bad rap when it comes to the amount of money they charge. (And, like lawyers, you need to develop a thick skin.) But fear not; my point here isn't to outrageously over-inflate the consultant's rate, but rather demonstrate its derivation.
Obviously, your rate will be a function of your skill level, the amount of competition in the marketplace for your particular skills, and how much the client needs you. Just like how an employee's salary is determined.Since I don't know how much you make as an employee, let's assume for easy calculations it's $100k/year.
There are two ways to determine your rate — the easy way and the hard way.
The easy way (apart from talking to your consultant friends and seeing what they make), is to take your salary and restate it as an hourly number.
So, our $100k/y magically turns into $100/hour. While this isn't perfect, it's generally a good ballpark figure. You can then set your rate at some percentage +/- relative to the number you calculate (say +/- 15%). (If you find you can't get work even at the -15% discount level, then you need to re-evaluate your rate; conversely, if you are easily getting work at the +15% premium level, you might increase your rate.)
In order to understand why this is a good ballpark, let's look at the hard way — calculating the values. There are a number of variables, so I'll just use some average figures; tweak them as your situation warrants.
The main thing to consider is, what is the employer currently paying for each employee? (This helps establish what their budget is.)
The Internet is full of calculations indicating just how much each employee costs an employer, so you can get a pretty good feel for the actual costs.
If you want to run the numbers yourself, then figure out how many hours are worked per year (taking into account vacation, statutory holidays, and sick time, and how many hours per day you work). On the cost side, take the yearly salary, and add in bonuses, benefits (e.g., healthcare, retirement contributions), office space, equipment purchases, and “overhead” (management, human resources, legal, accounting).
I used the following: 6 weeks off, 7.5 hours per day, bonus + benefits = $12k/y, salary = $100k/y, and overhead of 50% (this number is on the low side). This gave a total cost of $168k/year, and 1,725 hours worked per year, resulting in an hourly rate of $97.39.
As it turns out, the simple way works pretty well :-)
Given that you now have a rate in mind, why would the client pay you consulting rates rather than hire an employee? Aren't they “double paying” some of the overhead (i.e., you will still occupy their office space, probably use their computing infrastructure, and so on)?
For the client, the major trade-offs between a regular full time employee and a consultant are:
- a consultant can be terminated immediately (depending on the contract).
- a consultant is brought in for a specific task; there's no long-term relationship,
- the consultant doesn't get benefits, bonuses, or severance.
- the consultant is brought in because of their particular skill set, not as a general resource, so there's little or no “ramp up” time lost.
It's up to you, as a consultant, to ensure that you bring the value that the client is looking for to the relationship. When that happens, the client will be happy to engage you and your company to provide the services requested.
So how much does that leave me?
Assuming you could get work for all of your 1,725 hours per year, this would bring in $100 x 1725 = $172,500/y.
That sounds like a lot more than the $100k/y you're making, right?
Well... you have expenses (lawyers, accountants, employer-portions of taxes, benefits, pension amounts, equipment, space, and so on). And, we're also assuming that you won't be able to find 1,725 hours worth of work per year.
If we assume that you run a “leaner” shop than a large corporation, you're still probably looking at around $6k/y in professional services (legal, accounting), $12k/y in benefits, and somewhere around $12k/y in expenses (equipment, software, entertaining).
This brings us down to $142k/y.
If you are able to keep yourself busy for only 70% of the year, this will bring you back to the $100k/y range quickly.
Since you probably didn't decide to become a consultant so that you could get a pay cut, there are a number of ways of increasing the amount of money that you can bring in:
- find work to occupy 100% of your 1,725 hours per year (or more, if you like),
- find other revenue streams to bring in additional money,
- find ways of increasing your value to the client
The first point above is scary, salient and controversial.
It's scary because now you have to think like a business. How long will the current contract last? Do I have anything lined up after this? What other projects are there out there now that I should be looking at? What's Bob up to?
It's salient because, as an employee, you would get the same amount per year regardless of the number of hours worked. (Sure, more work may get you a (bigger) bonus, less work may get you fired.) As a consultant, however, you get paid for every hour you work. Newbie consultants have a hard time with this concept, but it sinks in after a few billing cycles.
And it's controversial because it does have a tendency to cause one to become a workaholic. So if you have a predilection for that, this may not be the right career choice for you, your addiction to work is linearly rewarded with money! To be honest, there are times when I look at a vacation and work out the loss of billable hours and think, “hmmm... that's a really expensive trip”
PART 3 — 2014 07 02
Let's turn our focus to the contract negotiation side of things.
I'm assuming that you've set up a corporation (or other appropriate entity on the advice of your legal and accounting professionals), and that you are an employee (and officer / director) of that corporation. This is done for both tax reasons and legal reasons.
The first and foremost thing to remember is that when you were an employee, you were negotiating your employment contract with your employer. However, as a consultant, it's your company that's negotiating the contract with the client company. It's a business-to-business negotiation.
I'm going to present this section as a set of rules.
Rule #1: Your company is the one negotiating the contract
I've run into cases where the purchasing agent or human resources person (whoever negotiates contracts at the client company, we'll just use “contract agent”) writes the contract so that it's between me (personally) and the client company. This is wrong for a number of reasons. First of all, your company is structured to give you certain legal protections, and therefore your company is the preferred party in the negotiations. Secondly, your company is ultimately the one to which payments will be made — therefore, it has to be the one that's on the contract.
Also, this should help to give you at least some sense of detachment about the negotiations — paraphrasing Gordon Gecko, “Never get emotional about a contract, pal.”
Rule #2: Never sign a contract without reading the entire thing.
It amazes me the number of consultants (even seasoned ones!) who just skim through the pages, and blindly sign at the bottom. While there are certain protections when people do this as employees on an employment contract, those protections do not apply when a corporation is signing a contract with another corporation. (The law assumes both parties are “big boys and girls” and don't need mommy watching over them.) Always have your lawyer check the contract — this is why you retain a lawyer in the first place. As you get more experience with contracts, you'll be able to save time and money by reading it yourself first, spotting things that you know your lawyer won't like, and getting them changed. And then have your lawyer read the contract. Which brings us to rule 3.
Rule #3: Don't expect a contract to be signed immediately
Generally, when I'm presented with a contract, it can take anywhere from a few days to six months (yes, that one was painful!) before all of the terms and conditions are settled and agreed. The process is generally that you receive a draft of a contract, and there are a whole bunch of terms and conditions that you and your lawyer won't like. You'll raise this with the contract agent and they'll take it to legal, who will give them an opinion, and they'll change some of the terms. Not all of the terms will be changed the way you want, so you'll have to negotiate, back and forth. Patience is key here — you have multiple “irons in the fire” right? So you're not desperate for this particular contract, right?
Rule #4: Don't lie
Your mother probably told you this. But at times, it may look like an expedient solution. The contract that took me 6 months to negotiate had such terms in it as “Consultant hereby affirms that they are ISO14001 certified.” It would have been expedient to just sign the contract, but knowing that I was not ISO14001 certified meant that I had to take it back to their legal team, and get a waiver. They wouldn't remove that clause from the contract, but they did say, in writing, that they would not enforce that clause.
Rule #5: Get it in writing
Sometimes, negotiating contracts is like dealing with sketchy used-car salesmen. There might be serious clauses in the contract like “you may not terminate the contract for any reason.” When you talk to the contract agent, they may tell you over the phone “oh yeah, but we never enforce that.” There are two responses to this:
“Since you never enforce it, then you'll have no problem removing that clause from the contract, right?”
“Please give me, in writing and signed by an appropriate officer of your company, an exemption from that clause, specifically stating that it does not apply to this agreement.”
I've had those situations go either way — sometimes the agent is not authorized to modify the contract, but can find someone to generate an exemption. In other cases they simply remove the clause themselves.
Rule #6: Value must be symmetrical
This is a biggie, so pay attention!
You may see a clause in a contract that would cause a significant burden to you, but not see any compensation associated with it. For example, the client's contract may state that they own all intellectual property associated with everything that you do for them, have ever done, or may ever do in the future. (I call these “rabid lawyer” clauses — obviously, the client's lawyers were bitten by rabies-carrying vermin). In negotiating with the client, you point out that they are getting (or trying to get) a whole lot of value for very little consideration. The key is: if they perceive it as having some value, then they should pay you for it. If they don't perceive any value in it, then remove the clause and continue on. This is what I mean by “value must be symmetrical.”
On hearing the client's “oh yes, of course we own that, but we're not very interested in paying you for it” my response is, “and I'm not very interested in giving it to you for free” — very symmetrical.
(What this prevents is any attempt to hide something of value within the contract.)
Another way of summarizing this aspect of negotiations is to realize that ultimately, the client would like you to work for free, and ultimately, you would like to retire after completing the first day of the contract. Reality lies in between.
One last comment on rule #6; not only value, but the terms and conditions need to be symmetrical. If the client can terminate the contract on 2 minutes notice, and you must give 6 months notice, that's not symmetrical. Always ask yourself the following questions:
- Why is this clause here?
- What purpose does it serve?
- Whom does it serve?
- What am I giving up, and what am I getting in return?
Rule #7: Limit your liability
Beware of terms like “unlimited” and “warrants.” They are generally bad signs (and your lawyer will find them anyway and tell you to get rid of them). Often contracts (rabid lawyer ones, especially) will have clauses that effectively state that if you breach a term or condition, then you are liable for unlimited damages.
Pass, no thanks.
I have business liability insurance for this purpose (you should too, BTW!); when push comes to shove I will reword that as something along the lines of “liability limited to what the insurance pays.” (Your lawyer can help you with the exact wording). In other cases, I've changed the wording to “limited to the total value of the contract paid by the Client.” Under no circumstances do I want to be on the hook for “unlimited” damages. That sounds like way more money than what I have.
Same thing with the word “warrants.” It often shows up in the context of “Consultant hereby warrants that any Work produced will not infringe on any patents held by any party.”
Nope; not gonna happen.
There are over 8 million patents in the USPTO. I'm not intimately familiar with more than a dozen of them. Therefore, I can't “warrant” anything in that regard. I usually change those clauses to “... will not knowingly infringe on ...” Another fun phrase to watch for is “knows, or should have known” — these are just more rabid lawyers. Strike those clauses out, and challenge them on the basis of common sense.
Rule #8: Everything is negotiable
This one is hard for newbie consultants to wrap their minds around. In the employee world, almost nothing is negotiable except maybe your salary and the amount of vacation time you get.
It's not often that I run into rule #8, it's more of an exception. Usually, the contract is pretty straight up — your rate is $X/h, you will perform the following things, and invoice at the end of the month, and the client will pay net 30 (oh yes: you remembered to negotiate net 30, and not net 60, right? :-))
Rule #8 comes into effect when, for example, you're working outside your “zone” (e.g., you may be a systems architect who's writing some technical documentation as a filler project). In such a case, you may not be able to charge system architect rates for technical writing. Sometimes the client will understand that they are getting an enlightened technical writer, and pay you system architect rates anyway (thanks, BTW!), but usually they will say that it's not in their budget. That's fine, we can, and love to, negotiate!
So, what are your choices when the client doesn't have the budget? Absolutely anything you like — all that needs to happen is that you and the client need to find a win-win situation. Remember, you are the business owner — you decide what your company can and cannot do.
For example, you might reduce your rate in exchange for:
- being identified as the author of the work,
- being given internal training on the client's up-and-coming technology,
- future work,
- being introduced by the client to their clients, and getting more work that way,
- an asymmetric contract (e.g., “filler/retainer work,” where the client provides a long term work contract, but doesn't expect more than a certain number of hours (say 10 for example) per week on it),
- revenue sharing, or
- IP ownership / licensing.
PSST: Hey clients; this sword cuts both ways — offer the consultant some of the above :-)
The commonality of the above is that you are finding creative solutions that meet the client's requirements and have a net benefit to you. The net benefit of, for example, being identified as the author, is that now you are steering business your way — after all, you're the expert that wrote “that brilliant article.”
When you leave employment and choose consulting, it's a brave new world out there. You need to be careful. But, if you have an entrepreneurial spirit, you'll do perfectly fine!