Today I pose a couple of questions for you, dear reader, to ponder and comment on; are companies/organizations more reluctant to retain consultants rather than hire employees? If so, why? What are they afraid of?
Are they afraid a consultant will abandon them before a project is complete? Truth is, a good freelancer won’t abandon a good client. It’s more likely that a freelancer will be more loyal and go above and beyond for a client, because consulting engagements are not always easy to find. Consulting gigs can be more difficult to find than a job because they tend to be hidden opportunities, not advertised on some job board. (That’s a good question for another blog post; why don’t more companies advertise contract/consulting jobs?)
Client engagements typically come from word of mouth, networking and referrals, all of which require significant upfront investment of business development time. I’m extremely dedicated to my clients because I worked hard to find them in the first place and I don’t take them for granted. I worked more than two years for one of my recent clients. In today’s economy many employees change jobs every couple of years, so it turns out that I worked for that one client for about the same length of time as most employees work for their employers. In fact, I worked for that client before and after one of their full-time employees came and went (she worked 19 months for the company).
Or perhaps companies are afraid of paying too much for a consultant’s fees? (It’s a myth that consultants always charge high fees.) Before they jump to any conclusions they may want to calculate the true costs of employee vs. consultant, because in some cases it makes good economic sense to hire a consultant.
I’ve come up with a list of six great reasons to engage with a consultant rather than hire an employee:
#1 (This one’s obvious!) The company doesn’t have to pay benefits such as vacation time, health/dental insurance, life insurance, long/short-term disability insurance, workers compensation, 401K plan perks, benefits management, HR costs, etc. (Not to mention the Keurig coffee.) Employee benefits for a private sector employee typically comprise 30.5% of the total employee compensation, according to the September 9, 2015 report from the U.S. Department of Labor Bureau of Labor Statistics. For additional basic facts and figures, see this MIT article about the cost of an employee, written by Joseph Hadzima, Jr., a Senior Lecturer at the MIT Sloan School of Management.
#2 It’s risky to hire an employee because it’s harder to terminate them if they don’t perform as expected, or lay them off if revenues decrease. Firing or laying off an employee is usually a hassle that comes at great cost, emotionally and financially. The company may have to pay unemployment taxes, hire a lawyer to negotiate a severance agreement (or at least make the HR staff create termination paperwork), and deal with the potential of lower department/company morale. In contrast, a consultant agreement can be ended with relatively short notice, no harm, no foul.
#3 Companies don’t have to pay payroll taxes for consultants.
#4 Companies don’t have to pay for the consultant’s office space or supplies: internet, phone, desk, laptop, photocopier, IT support, etc.
#5 Companies can’t predict future revenue with 100% certainty. If company revenue is declining, inconsistent or seasonal, it’s much easier and less expensive to cancel a consultant contract rather than layoff an employee.
#6 Sometimes companies may have enough budget, but not enough work to fill a 40-hour workweek, or even a 20-hour workweek. Why commit to paying an employee 20 or 40 hours every week, when you know the workload won’t be consistent?
There will always be a need for companies to hire employees; I’m not suggesting that we destroy the traditional business model. Some people want a job, and the financial and emotional benefits that come with it, and some companies definitely need a structured, 40-hour per week employee on premises. However, for some positions it makes perfect sense to hire a consultant.