That is a question every successful independent consultant faces. When business is good, work starts to accumulate, and new contracts start to show the need for growth, it is normal to think you need more employees. I have felt that. And I may need to hire employees at some point. I do, however, think that the question needs careful consideration. After all, there are other options besides hiring.
There is that point where you know you need to grow. Your clients ask for it. Your pocket asks for it.
If you employ someone, you have to keep and pay that person when ether you make money or not. Sure, you can fire that person when things go sour, but not without hurting your relationship with that person and not having him/her available when things get better. Plus, local government laws may be in his/her favor, and you may have to be careful about firing him/her (there may be protections to which he/her may be entitled). Employees have administrative costs, training costs, health insurance costs and even the hassle of managing them is a cost. There is also the upredictability of vacations, medical and family leaves which may create a dent in a small business.
There are times when employees are the right choice. But first, you have to study your options. You can:
* Subcontract - Sure, it is expensive. Certainly, you loose a share of your revenue. But it may make sense if you want to grow your business. It frees up time to find new business. It allows you to work on what you are best and where you are needed the most. It allows you to subcontract those tasks that you know you can do but are too simple – would you rather work on a task that costs $50/hr or one that costs $100/hr? It also allows you to let an expert do something where you lack expertise: don't pass a $100,000 project because you lack $5,000 worth of expertise which can be easily subcontracted.
Pro: Once it is over, it is over. No leftover payments to do.
Con: Expensive as hell. You may not get any margin on it, or it may be very low. Your contractor's terms may not be as flexible as your customer's terms.
* Partner Temporarily - My favorite. If client pays, you both benefit. If client doesn't you both loose. And it is temporary: no permanent relationship like the one an employee or full partner has. This option may allow to get into bigger business, but it doesn't increase your margin that much.
Pro: Less risk.
Con: No margin on services rendered by partner.
* Partner Long Term – I am very hesitant to suggest this here. I think you should partner when you have identified that merging two practices will bring more revenue than being having separate practices – not just the combination of both revenues. Remember that you can share office space and still be two different business. There has to be real synergy between the partners before you do so. And you have to enter into a very well written and understood partnership agreement.
Pro: No cash investment into it. You may get some stability from the partner.
Con: You are not assuring yourself a higher margin. You may have to sustain the other partner if business goes bad. You may loose control.
* Pass – Yes, pass the business on. Some business just have too low margins. Bring a mentee or young professional with you to the negotiation table. Pass some of the easier, less rewarding business to someone who is just starting. He/she will be grateful. Your client will be grateful. You may get a commission, but ask for it (there are better ways to return the favor). You can keep the relationship with the client as well, but you establish yourself as a vendor for a different, more difficult, higher margin service.
Pro: You can dedicate your time to bigger deals and higher margins. You establish strong friendships with colleagues that can help you in the future.
Con: You pass business -- hopefully you will find better ones.
So when should we employ then? I think we should employ when we know we can keep the person busy for most of the year doing something that produces revenue for the business at a higher margin than sub-contracting. I think we should avoid hiring employees which functions are ancillary to the main business: accountants, lawyers, cleaning, etc. are best sub-contracted. (At least at the small business scale).
The main point is: don't grow just for growing. Grow to increase your net earnings.
To learn more about this author, visit Jose Anes's Website.
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