Consulting (Part 1) — The Case for Consulting

September 11, 2011

Hal Pomeranz, Deer Run Associates

Introduction

January 2012 will mark the 15th anniversary of the founding of the consulting business I run with my wife.  Lately I’ve had a number of people asking me questions about consulting– how to get started, how it works, pitfalls, etc.  I’m more than happy to answer these sorts of questions because I’m still “paying it forward” for all of the great advice I received when I was just starting out.

However, in an effort to reach a larger audience and to not have to repeat myself as much, I’ve decided to devote some blog space to the basic advice that I cover in my usual consulting talks.  This is a huge topic area, and I’m expecting to write several posts to cover just the foundational stuff.  I’ll crank them out as time allows.  If there’s anything you’re particularly curious about, be sure to leave a comment and I’ll try to address questions as the series rolls along.

In this first installment, I wanted to talk about some of the basic pro/con arguments you hear about being a consultant, and give you the view from where I sit.  Let’s call this installment…

The Case for Consulting

Pro: Consultants Make a Lot of Money

This is definitely one of the first items that piques people’s interest in becoming a consultant.  You hear about consultants making hundreds of dollars per hour, divide your annual salary by 2000 hrs/yr, and start thinking the grass is greener on the consulting side of the fence.

Yes, top consultants bill at hundreds of dollars per hour.  But guess what?  We don’t get to bill 2000 hours per year.  There are all sorts of unbillable “overhead” tasks that take away from our billable time:

  • Marketing, finding new clients
  • Invoicing, collections, time and expense reporting
  • Taxes and other official paperwork
  • Arranging insurance and other benefits
  • Continuing education, training

The list goes on, but the point is that when you become a consultant you’re really working two jobs: the work you’re doing for your client that you get paid for, and the work you do to keep your own business running which you do as “overhead”.

Also, there are costs that you pay when you’re on your own that you never see as a full-time employee (FTE, for short).  Normally your employer covers a portion of your healthcare and other benefits and sometimes contributes to a retirement account on your behalf, as well as paying the employer’s share of taxes.  If you talk to your employer, you’ll find that they typically figure these costs as being 50-100% of the employees’ base salary (you’ll hear this referred to as an employee’s “loaded salary”).  So you have to factor in these costs when trying to figure the net take home pay as a consultant.

The compensation discussion is a huge topic in itself, and will be covered in detail in a later post in this series.  Yes, if you have financial discipline and a clear understanding of your costs, you can make a lot of money as a consultant.  But be wary of straight “apples to apples” comparisons between full-time employees and consultants, because things are never that simple.

Con: Consulting is “Risky”

People ask me all the time if I’m worried about where my next job is coming from.  In fifteen years, I’ve lived through two major downturns.  Yes, there have been times when consulting work has been scarce.  This is another reason that consultants bill at such high hourly rates– we’re factoring the inevitable cost of being out of work.  Sometimes this is just a brief period while were transitioning from one contract to the next, and sometimes there’s a protracted drought.

The difference between a successful consultant and somebody who’s going hungry is an understanding that downturns happen and preparing for them.  The best advice I ever got when I was first starting out what to make sure I had six months of expenses (rent/mortgage, utilities, car/insurance payments, food, medical, etc) in the bank before I started my consulting business.  I’m going to come back to this point over and over because it’s important in lots of ways, but at its most basic your “six months in the bank” is shelter against bad times.

What fascinates me, however, is the belief that a lot of people seem to have that as a FTE they somehow have more job security than your average consultant.  In practice, I believe these people couldn’t be more wrong.  At least here in the United States, most people are “at will” employees and they can be let go at any time at the complete discretion of their employers and with little or no notice.  So really we’re all what the HR types like to refer to as “contingent employees”.  Why shouldn’t you be compensated like one?

I know that many people can understand this argument intellectually and still have a hard time with the notion of going out their own.  Sometimes our gut overrules our brain and makes the consulting lifestyle untenable.  But even if you don’t end up as a consultant, I recommend you think about putting some money away for the rainy day when you might be out of work.

Pro: Consultants Have “Freedom”

I usually hear this one from folks who are unhappy with their current job duties and are envious of my ability to “pick and choose” the work that I take on.  During good economic times, I do have a certain amount of leeway on the jobs I decide to take on and can optimize for more interesting assignments.  But during the bad times, you take whatever you can get.

Also, having taken on an assignment, you have to see it through to the end.  As an independent consultant, I have a limited of “bandwidth” and can typically only support one or two major clients at a time.  If a really interesting project comes along when I’m busy with other work, I have to let it go by or risk alienating my current clients.  In this business your reputation is the key to your success.  Doing a bad or incomplete job because you let yourself be distracted by the new, shiny contract is a sure path to the end of your consulting career.

Another consulting freedom that I hear FTEs envy is the ability for consultants to take time off “whenever they feel like it”.  Sure, if a client is not expecting me on-site and I don’t have any pressing deadlines, I can take time off whenever I feel like it.  It’s definitely a benefit of my lifestyle.

But you have to understand that I don’t get paid during this time.  Vacation, medical leave, and all other periods of “downtime” that are necessary to ensure your health/sanity and prevent burn-out are all part of that unbillable “overhead” I talked about earlier.  So a better way to talk about this freedom is to say consultants can take time off whenever they can afford to.

One more consulting freedom I wanted to mention is the freedom from a certain amount of organizational politics.  Normally, by the time an organization has made the choice to hire a high-priced expert, they’ve already realized that they have a significant problem and have “cleared the decks” of the typical political impediments to making the problem go away.  This is a wonderful thing.

In Summation

I love the consulting lifestyle, but recognize that it’s not for everybody.  There is substantial risk and you spend a lot of time working on mundane aspects of running your business.  But you can earn good money and enjoy substantial freedoms unavailable to FTEs.  I hope you’ll join me for future articles in this series when I drill down on specific details like figuring your billing rate and managing your cash flow, finding and managing clients, and classic blunders that all new consultants commit.

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8 Responses to “Consulting (Part 1) — The Case for Consulting”

  1. Shack said

    Great post, Hal. Echoes many sentiments I’ve expressed over the years, too.

  2. mike brooks said

    Great reading!

  3. Rahul said

    Hal you continue to inspire me whether its through the ‘commandlinekingfu’ blog or this excellent post or just your geeky UNIXy humor. I can certainly identify with you. Thanks and keep posting.

  4. Ken Pryor said

    Very interesting post, Hal. Did you or your wife have previous experience consulting or otherwise running a business? I’ve always wanted to work for myself, but honestly know very little about running a business.
    KP

  5. My wife has previous experience managing a small consulting shop, as well as a background in HR and benefits. This has been a huge help.

    But when I first started out, Laura was working full-time for a high tech firm in the Bay Area. She didn’t join up with Deer Run until late in the first year of the company (after it was clear we were going to be able to make a go of it). For setting up the business initially, I mostly got help from my accountant/attorney and advice from friends who were consulting at the time.

  6. […] likely to run into and have to address if you go out on your own.  Take a look at part 1, 2, 3, and 4.  Hal’s provided a lot of great insight, all of which comes from […]

  7. Misa said

    I just finished from a 3 months contract. they client wanted me to work remotely and be there once every month.

    Of course the project was remote and I had the chance to work at home anytime I liked but there were weeks that I didn’t get to sleep because of their deadlines.

    I don’t know I should call it a pro or con :P but it sure was enjoyable

  8. […] I’d post my thoughts here on Righteous IT to save time (at the risk of turning this into a career advice […]

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