[samstave]

So, I've never run my own company - but I have always been suspicious of this.

I was working as a consultant for small firms I have a salary of X - my billable rate was ~3X.

The company had shitty insurance of which I was paying a large % of my check each month to cover my end.

I absolutely refuse to believe it "costs" a small consulting company several hundred thousand dollars per year to employ a person making 100K per year.

[patio11]

Here's the math. I'm going to arbitrarily assign a typical intermediate Rubyist's salary for your X, to make it feel concrete for people.

Employee thinks: "I make $8,000 per month. My chargeout rate is $6,000 per week. What gives?"

Consultancy thinks:

Gross revenue of this employee is $18,000 per month, not $24,000. We only count on sustaining a 75% utilization rate. We can burst to higher numbers for short periods of time, but overhead, scheduling issues, breaks/vacation/etc, and productivity counsels us to shoot for 75%.

A salary of $8,000 per month costs us +/- $12,000 for direct costs of employment. This includes healthcare, our portion of payroll taxes, 401k contribution, and the usual perk suite.

We further incur overhead, which we estimate as approximately 20% of our gross revenue. This includes rent, capital expenses (laptops/etc), professional services (accountants/lawyers/etc), marketing and sales, the fully-loaded cost of non-billable employees like our office manager, recruiting fees, etc etc. Allocating this overhead on a dollar-per-dollar basis to the gross revenue you're producing, we come up with $3,600.

This means that our anticipated profit, pre-tax, on your services is approximately $2,400 per month. The economic justification for this is that it is a premium you essentially pay for insulating you from scheduling risk, non-paymen risk, market risk, and all the other forms of risk which we absorb on your behalf. [+]

If you would like to capture the risk premium for yourself, you have a simple option to do so: quit. Hang out your own shingle. Start charging $6k per week, or more, for your services. Many former consultants have done this, and many will in the future. It's probably how we got started, too. You may find after starting the firm that the math was very different from what you had anticipated. It probably happened to us, too.

[+] Weird thing about starting consultancies: the type of people who can successfully manage a consultancy take a pay cut when starting a multi-member consultancy, since it cuts into their billing efficiency. You can model an employed consultant at 75% efficiency, but principals rarely get above 50%, and in many cases they're totally unbilled (100% utilization on business management, rainmaking, etc). This results in employees #1 through #4ish actually being a net drain on the principals' income as compared to just solo-consulting. After roughly employee #5 it starts getting really, really lucrative again.

[samstave]

OK, so that's a great explanation made on some assumptions; let me give you some actual experience though which is what gives me my bias:

I worked for a company that was already established as a design consultancy... so all the above that you lay out was already calc'd in their overhead...

They went after a contract for a large project and they didn't have the expertise in house to land the project.

They poached me to be able to gain the contract. They made several million on this contract, which they would have been incapable of getting without me joining and actually doing the work.

They billed me out for exceedingly profitable work; I did 100% of the work, their overhead for all the shit you mention did not increase, and they piled more work onto my efforts which they billed for.

they promised me a multi-tens-of-thousands bonus based on all this work and met with me on five separate occasions to go over documented revenue/bonus projections and confirm this amount (this was with the CEO) -- then when it came time to pay; they paid me 8% of the promised, documented bonus. and made excuses that "they weren't being paid by the client" -- and later had a seperate manager (known as "the snake") come in and tell me "tough luck - the CEO's calcs were wrong"

So, While your story sounds all nice and whatever... I can guarantee that it is not true in all cases.

David Marks; if you read this - Fuck you.

[grey-area]

so all the above that you lay out was already calc'd in their overhead...

The cost per employee is not just salary, no matter how many employees you add. Taxes, healthcare, pension, equipment all scale linearly with employee count.

Of course the company then wants to make a profit on top, or they'd be better off just shutting down. Companies extract extra value from their employees, in exchange for taking on risk and providing funding and stability. In some cases that's justified, in some cases they're not adding much while extracting most of the value - as an employee that's a judgement call you make - as patio11 says above, you can always choose to start on own, and usually you'll make more money doing so.

You may well have been cheated by your former employer (we can't possibly comment sensibly on that), but there are high overheads associated with each additional employee.

[djt]

There are a few things here that I can see are overhead.

- It was an established design consultancy, that takes time and money to create.

- They charge the customer 3x what they paid you, but you dont know if the customer paid up. The had a contract, but then so did you, and you only got 8% of the bonus. You got pad your wage regardless of if they got paid.

- The pulled in the big client, this is almost important as a solo contractor, its their reputation on the line if you mess up. Its really hard to get those contracts or you need to have a contact. It's not uncommon for sales people to make 30% on big sales to land the contract on good terms.

- You did all the work, but could they have employed someone else, or are you the only person that could do it?

- Did they pay for health insurance, sick days etc?

- Have you thought about suing for your bonus?

[danielweber]

> Its really hard to get those contracts or you need to have a contact.

Tech people often view this almost as an abstraction problem, or one that rightly wouldn't/shouldn't exist if nerds ran the world. I don't know if it would or wouldn't if us nerds ran the world, but in our actual world, finding and maintaining those relationships is very hard and very valuable.

[gaius]

If they have breached their contract with you, then you want to get a lawyer onto that.

[ChuckMcM]

I was thinking the same thing, if they paid 8% that means 92% was left, and half of that might entice a lawyer to do it on a contingency basis, at least in the US. You would only net about half of the promised bonus, and probably not work for any agency again, but it would be much more than the 8% you did get paid.

[tptacek]

... yup.

[samstave]

Read my reply - your, and the GP's position is "good on paper" but there are outliers, like my situation, which completely invalidate what you state.

[tptacek]

Patrick's description isn't "good on paper"; it is a spookily accurate reflection of reality thorough enough that I, the Cliff Clavin of Hacker News, was unable to come up with a single thing to add to it, despite the fact that he is explaining my business model (I co-founded, co-managed, and co-scaled the consultancy I co-operate today).

The basic exchange between consulting management and labor is one of risk for upside. The returns from a consulting business can get very lumpy. An employee's income cannot be. They're promised a salary, presumably at market rate (else why take the job), and everything else is the company's problem. Hit a dry spell, employees keep getting paid, and principals don't.

At a well-run consultancy in a hot market (say, software security), there's not much incentive to squeeze employees, because recruiting and retention are expensive and because when you lose a consulting employee, it's often to companies that happen to be fierce competitors. So for instance, if you were instrumental to a deal here, you'd be eligible for the same kind of bonus compensation that the sales guy who closed the deal would be eligible for.

There's room in every business model for unscrupulous managers to somehow cheat employees. But if this million dollar contract you talk about was so clearly the product of your ability and execution, why did you need to be employed by design agency to deliver it? Why did you settle for the promise of a "bonus"? Or is it that, if not for you, some other consultancy would have won the deal, and also not given any of their employees a million dollars as a result?

We've lost team members who moved on to start their own firms. Chris Rohlf, now of LeafSR, was one of our all-time best consultants (and is one of the all-time great vulnerability researchers). With a few years experience running his own shop successfully, and dealing with all that entailed, I know what he'd tell you about whether he had a square deal at Matasano.

Not for nothing, but: if you're at a point in your career where you feel like you're make-or-break for million dollar deals that you yourself could close, maybe you shouldn't be working for a consultancy, and instead be running one.

[bane]

An easy estimate to use when making back of the envelope staffing decisions (with the hopes of having a viable company) is assume each employee costs about $250k/yr to keep employed. This is all the insurance, plus various other costs that are direct to the employee.

But, you also have to add in all the staff costs of various overhead employees that support the money making employees, all the cleaning staff, HR, receptionist + senior management.

[wglb]

So, I've never run my own company

But you do sound pretty talented from other posts in this thread. As someone who has run his own company in several different lifetimes, and as someone who, perhaps like you, doesn't like having a boss, I can't recommend it highly enough.

But sadly, the numbers as patrick and tqbf are saying are unfortunately true.

[fbags]

I've run a consultancy. They're not making anywhere near the money you likely imagine. There are several major sets of costs to consider.

One set is costs directly related to employing you. Benefits, employer paid taxes, equipment, insurance, office space, a fraction of your manager, and so on. These alone are hefty.

A second set is buffer to pay you when you aren't being utilized. A well-run consulting company might expect 80% utilization, so 20% of the time you're incurring salary plus all the above costs and they are receiving absolutely nothing for it. A more typical consultancy might have even lower utilization rates.

A third set is the costs of customer acquisition and account development. There are expensive staff who do a lot of expensive things solely to get the contracts signed in the first place. And if a consultancy stops attempting to grow, it's at grave risk that a few existing customers will leave for one reason or another, and they'll be left in a terrible spot.

A fourth is the cost of finding somebody like you in the first place. If I'm hiring a junior employee it might be something like $10k direct, plus the time associated with sourcing, vetting, and interviewing candidates. For a senior employee, it could be a lot more than that.

Put all of these factors together, and the profits simply aren't nearly as hefty as you'd imagine.

[moron4hire]

Every consultancy I've ever worked at started threatening to fire me whenever I dipped under 95% billable time for more than... a day.

[adrianpike]

Yikes. My friend, you're working for the wrong consultancies. They're not all like that.

[moron4hire]

I'd be curious to check out the places that you think don't act that way. I like to think I can tell the nature of a place by the corporate bullshit they put on their website. Care to make a wager?

[moron4hire]

That would be why I don't work in those places anymore. My choice.

[Retric]

Depends on where your working, I have been on the bench for 3 months in a row without issue.

[chucknelson]

I think it's highly dependent on the firm. In my experience, some of the larger ones will tolerate people at 3-6 months (or more) of "bench" time. I would think it's because of the size and they can't babysit everyone, but automated reporting sure helps catch these instances (and mid-year or annual review time too).

[reeses]

We decided to view it from the opposite direction. 'Bench' time means lab bench, which works well as most of our actual employees[1] are grad students and postdocs. We support their research and have a publication policy that puts their dissertation work first.

When we have interesting RFPs from consulting clients, then we pull people away from the bench.

It's a great way to retain people, have flexibility in the projects we take, and have significant depth and breadth for a small firm.

[1] we also very heavily draw from a pool of highly trusted subcontractors, many of whom are former employees. Because of our experiences with them, we go to them first and they all give us first crack at their availability.