I really like most of Jason Cohen's posts, so this article is especially disappointing.
The most fundamental problem with Cohen's analysis is how he arrives at bill rates. "Everybody knows", he says, "that your consultant isn't worth $100/hr --- you only pay him $30/hr!". Well, no, Jason. Nobody knows that, because it's not true. Companies that engage consultants pay a significant premium to: (a) retain talent for the exact duration that they need them, (b) on often little-to-no notice, (c) with the flexibility of picking and choosing the right consultants for the right jobs (d) with no obligations on benefits and severance. And the consulting market is more liquid than the employment market (full-time jobs are "sticky"), so prices more closely track value.
So it is the case that an hour of Rails/jQ consulting might bill out at $140, while the talent delivering that work might effectively make $40/hr. The talent is, in addition to base comp, also getting a stable job, experience working alongside iPhone developers sharp enough to start a successful consultancy, health, benefits, and all the other things that are the reason that big companies have to pay so much to staff projects.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting. For instance, the very very high end of software security bills north of $400/hr. Even discounting for FTE benefits, nobody can afford that person full-time. This sets up a virtuous cycle whereby consultants amass expertise, drive scarcity in their field, and increase their comp.
It should also go without saying that when your bill rate is very high, you don't need to add consultants to make time for product development. You can work half-time and still beat a bigco salary.
The rest of Cohen's arguments are somewhat blunted by the fact that the underlying economics of consulting are way better than he thinks they are. To wit:
* The cost of fully loading headcount isn't scary when you're priced properly.
* Similarly, if you price with the market, the cost of "scaling" isn't scary. Offices are cheap compared to salaries.
* Most consulting firms deliberately aim to keep utilization below a threshold, and recruit to "cool off" when things get crazy. 40 hours a week, 50 weeks a year isn't desireable even as an owner.
* Lots of consultants have written blog posts about firing dysfunctional bigco clients. Yeah, in the real world, you have to deal with the 25 page MSA contracts; that's what you pay lawyers for. Yes, being in business is annoying. If it wasn't, everyone would do it.
* Yes, it's hard to build and ship products in "off hours". But you don't have to do that. Instead, you can scale to the point where it's cost effective to hire full time developers. Most YC companies get to market with 2-3 team members. It isn't a stretch to scale a consultancy to the point where it can fund 2 developers.
Against all these concerns about consulting is the unbelievably huge upside of bootstrapping a company this way: you get near-unlimited lives. It is the JUSTIN BAILEY of startup plans. In virtually every other model of bringing a product to market, product failure ends the company. That's bad, because most products fail. They really, really do. There is no reason that a product miss should zero out all the hard work you put into building a team and a business.
Jason is getting dinged for describing the challenges a freelancer has in scaling beyond one person, and using the broad term "consultancy" in the title, so everyone's judging his essay against the counter-evidence of huge or highly specialized firms.
Thomas, you didn't even come close to quoting him accurately or in context. Here is the real quote:
If you bill out a so-called “$30/hour” employee at $60/hour, you’ll only break even. You really need to bill out at $100/hour to make any kind of profit.
Which is hard, because the client you’re billing knows this person doesn’t really cost $100/hour. And when that client thinks about what’s “fair,” they won’t go through the computation I just did; they’ll base it on the person’s nominal rate plus a little profit for you. This caps the amount you can actually re-bill before client feels ripped off.
I think we all know that Jason is using nice round numbers to make the article read better. I'm not attacking him for saying that bill rates are $100 when they're really $150. I'm dinging him for suggesting that bill rates have anything at all to do with full-time rates; the two are only partially related.
You are also right (I considered editing my comment to reflect it) that there is a huge market of sweatshop commodity consultants for whom this analysis is completely true. Yes. Avoid this work. The nice thing about being the kind of person who participates in online forums where every other week there's a thread like "Ask HN: What New Technology Should I Learn This Month" is that you tend to be flexible enough not to fall into that trap.
> I'm dinging him for suggesting that bill rates have anything at all to do with full-time rates; the two are only partially related.
Huh? You just said you are dinging him for making a relationship but then admitting that there is a relationship (albeit partially).
Let's pretend a consultancy is the equivalent of rent-a-center and an individual consultant is a rented out TV. I'm a consumer and I want to rent the TV. I know the TV cost (I searched it on Amazon) and I know I'm just renting it for x amount of days. I know exactly what I'm getting for the price I pay; I get to watch TV for a certain period of time. When building a consulting practice this concept is a bit harder to achieve because the customer has no idea what they will get for $150/hr or $400/hr. They may get a TV that only works for half of the day or for a quarter of the day or half the screen only works sometimes. If it was that easy to assess a person's talent then the customer would just hire single contractors out.
I don't think Jason articulated what he meant by "worth" correctly. You're right in saying there are other values (hence worth) attributed to paying for consultants. However, I think what he is addressing is the fact that potential customers have a very hard time deciding what value your second, or third or fourth consultant is in your newly established consultancy practice. Who are you (as the consulting director) to tell the potential customer that your employee is worth $X/hr? Doesn't the customer ultimately assess the value of what they are buying?
Yes, that was an inartfully constructed sentence. No, consultancies are not like "rent-a-centers". The fallacy here is that the fundamental unit of commerce here is "talent/hour". Here's a sampling of all the things that have value in these transactions:
* An hour of talent
* A committed hour of talent a week from now
* A committed hour of talent a year from now
* Any number of commited hours of talent from the same person
* An hour of talent on 1 month's notice
* An hour of talent on 1 day's notice
* An hour of talent from a problem domain specialist
* An hour of talent from someone intimately familiar with your company's business processes
* Hours of talent rotated through a small group of people to keep them fresh, at less than 3x the cost of a single person
* Total scheduling flexibility over talent/hours
* A candidate for internal career development (management, architecture, etc)
* An A-player who poses no political threat to the company's org chart
Some of these are benefits of full-time employees and some of them are benefits of contractors. Some are benefits of staff-aug contracts and some are benefits of project-based consulting and some are benefits of transactional one-shot consulting/advisory gigs. It's naive to suggest that only a raw hour of exercised talent is worth money.
I deal with consultant price negotiations all the time and quite frankly it's one of the hardest challenges that consulting companies face. I think I might have lost you with my rent-a-center analogy; my point actually was to say that they aren't like rent-a-centers. In the case of a consultancy assessing the value of these transactions is extremely difficult do as a customer and more importantly as the owner of a newly established consultancy owner. Not to mentioned some of those transactions hold more value (and thus price/hr) to different sets of customers. This is really where the unfortunate math behind a starting a consultancy lies. At maturity (i.e. when you have consistent client pipeline) these are much easier to decipher.
EDIT: I just realized I did actually say "let's pretend a consultancy is a rent-a-center". I should have probably worded that differently - hence the confusion.
FYI, I find the conversation fruitful! The criticism is much appreciated, and readers will do well to hear your counter arguments.
I very much agree with your points, especially that "billable hours" is not the point, that expediency or rarity of talent can easily be more important.
A fuller, more accurate treatment of the concept has to include that. Perhaps it's still useful for folks to (sometimes!) think about optimizing the person/hour, since that is of course an important part of the equation, and optimizing it does help.
>Which is hard, because the client you’re billing knows this person doesn’t really cost $100/hour.
This is also not exactly correct. The client probably knows the person they're getting doesn't get exactly $100/hr but they probably don't know what they do get. There are usually agreements in place where the firm will not tell the person what rate is being paid for them and the firm can't ask what rate the person is actually getting. The only person in this Ménage à trois who knows what everything costs in the consulting firm, and they make their money by keeping both parties in the dark as much as possible.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting
If anyone hear ever starts wondering "Why can't I find a full-time dev with SEO experience...", suffice it to say that the reason is quite similar. (With the added wrinkle that pen testers cannot generally lock themselves in a room away from clients and make large amounts of money without running afoul of the law, and good SEOs can.)
I was going to say I do full time dev and know SEO but then I realized I'm technically a 'consultant'. I've differentiated my offering a lot by doing conversion optimization. When you explain all the things you're doing for a customer it's pretty easy to justify a price that will put food on the table, especially when you compare their outlay to what it would cost to get on AdWords (search volume * 50% CTR * avg CPC) vs. a #1 rank on a SERP. I also do a lot of AdWords work.
I basically do a work up where I put together a bunch of SEO landing pages and then optimize the landing page to get the customer to a conversion page which will actually convert them.
The basic process is like this:
Install Google Analytics
Install Google Website Optimizer
Install Google Webmaster Tools
Establish baselines for metrics
Optimize SERPs and ensure targetted SERPs are bringing high quality traffic (or volume)
Create landing pages or buy keyword domains and establish landing pages.
Optimize landing page conversion rate to a conversion page
Optimize conversion pages (funnels)
Rinse wash repeat.
One of the best things about doing SEO is that you get to know a lot of great people in the industry, designers, copywriters, etc. You also meet people from all walks of life and learn a lot about the inner workings of a lot of businesses. It's a very black art combining so many disciplines that it provides huge insight into both technology and the human psyche (the one thing that does well for both esp. Google is page speed, if your page loads fast it converts better and ranks higher on SERPs). If you're a nerd who likes interacting with people I can't recommend SEO enough. It's simply amazing to see the smiles on people's faces when you've doubled their traffic in a fortnight. Or when they type common searches and see their webpage.
I think the most important thing I stumbled upon is the separation of concerns between landing pages and conversion pages. High conversion pages usually don't rank well, but high SERP pages don't convert well so you have to separate them so each can do it's job most effectively. I have this feeling and idea that clicking on more links somehow establishes trust between the customer and the vendor. The more pages a person views the more likely they are to buy, and having a lot of pages allows you to slowly sell them on the idea.
I also evaluate options like building forums, wikis or other properties that are good for lead gen.
I was interested in reaching out to you for a possible engagement, but I couldn't find anything in your profile or your product webpage that would help me contact you and learn more. sachin@blueleaf if you're available and interested.
(Please, freelancers: have something in your profile that helps people hire you. HN is teeming with VCs, founders, and other people who want to hire you but you make it so damn hard.)
Is there any resource you would recommend to someone interested in learning more? I'm just branching out past core dev and building something where I would like to know more about SEO without having to wade through the piles of garbage out there on the net....some really shady SEO people/information/portals out there!
There isn't, even the stuff that is out there is highly relevant to some clients and highly not relevant to other clients.
Example: Duplicate content is bad.
Truth: If you're copying wikipedia it probably is, if you're optimizing a local company that serves multiple areas, it's probably best to duplicate that page and change the location name. If that company serves a thousand areas it might be bad.
eg. areas-served/mission-district is better than the dup content penalty because you get your keywords in the URL.
SEO is like Kenny Rogers in the gambler, every hands a winner and every hands a loser. It's all in how and when. Sometimes putting a sales pitch in your description is better than putting the keywords in. Sometimes jamming your description with keywords is better. And it varies from page to page even on the same site.
I'd actually say that you have a better chance not knowing anything, take ideas, try them out, see how they do. You'll do better figuring out your own stuff because you'll be optimizing in ways that others aren't. When Google changes their algorithms to defeat what everyone else who reads SEOmoz is doing then you may get better rankings. Also, you'll have the edge for 12 months while SEOmoz figures out what Google did.
If you want to learn SEO, find a bunch of terms, use a difficulty ranking to find the easy ones, and then try to rank on it. If you figure it out, put AdSense on the page. Also, don't try to rank on it with just one page, use multiple domains, etc. And it's not just ranking, use the tools to optimize your AdSense revenue. Also, don't confuse optimizing AdSense with conversions for a product you're selling. It's a different approach.
SEO is a little bit zen, it's not something you learn, it's something you practice.
It also seems to be nearly the same case for the top tier of mobile developers ("nearly" because the Apples and Twitters of the world can still pick them up.)
At least in my area, it's hard to find clients that are willing to pay even the baseline functional rate of $100/hr. I just took a job well below that, and most clients balk when I suggest it. I just had a guy yell at me earlier this week because he thought $100/hr was outrageous (after repeating several times that the program he wanted was going to be "very complex"), and he said he would go to India before he paid that kind of money. I told him "good luck in India" and to give me a call if it didn't work out; while I need the work, I know better than to take clients like that, especially if I have aspirations of scaling to a reasonably-sized firm one day.
I've found that most medium-sized companies are practically impenetrable for consultants around here; everyone has a contract with Robert Half, or has a policy against contractors, or doesn't want to pay anything above $50/hr, which is barely acceptable for a single developer, and practically useless to someone trying to run a company.
I'd really like to know how I can get my foot in the door somewhere where the client won't balk and I won't feel like I can't charge the full time because the company is always talking about how strapped they are. It seems that nepotism is the only way to get in there without resorting to dirty tricks.
It isn't a stretch to scale a consultancy to the point where it can fund 2 developers
This is actually pretty difficult to do (been there, done that). It is extremely difficult not to polarize the company into the guys building "the product" (who will expect the lion's share of equity) and the guys bringing in the money, who will bitterly resent being "the grunts" while the cool kids get to play with whatever cool tech you all started out to make.
We did this and have not seen the problem you're talking about. If your services team is so unhappy doing services that they're jealous of the people building product, you may be doing the wrong services.
The most fundamental problem with Cohen's analysis is how he arrives at bill rates. "Everybody knows", he says, "that your consultant isn't worth $100/hr --- you only pay him $30/hr!". Well, no, Jason. Nobody knows that, because it's not true. Companies that engage consultants pay a significant premium to: (a) retain talent for the exact duration that they need them, (b) on often little-to-no notice, (c) with the flexibility of picking and choosing the right consultants for the right jobs (d) with no obligations on benefits and severance. And the consulting market is more liquid than the employment market (full-time jobs are "sticky"), so prices more closely track value.
So it is the case that an hour of Rails/jQ consulting might bill out at $140, while the talent delivering that work might effectively make $40/hr. The talent is, in addition to base comp, also getting a stable job, experience working alongside iPhone developers sharp enough to start a successful consultancy, health, benefits, and all the other things that are the reason that big companies have to pay so much to staff projects.
This model works so well that there are branches of the industry that are difficult to staff outside of consulting. For instance, the very very high end of software security bills north of $400/hr. Even discounting for FTE benefits, nobody can afford that person full-time. This sets up a virtuous cycle whereby consultants amass expertise, drive scarcity in their field, and increase their comp.
It should also go without saying that when your bill rate is very high, you don't need to add consultants to make time for product development. You can work half-time and still beat a bigco salary.
The rest of Cohen's arguments are somewhat blunted by the fact that the underlying economics of consulting are way better than he thinks they are. To wit:
* The cost of fully loading headcount isn't scary when you're priced properly.
* Similarly, if you price with the market, the cost of "scaling" isn't scary. Offices are cheap compared to salaries.
* Most consulting firms deliberately aim to keep utilization below a threshold, and recruit to "cool off" when things get crazy. 40 hours a week, 50 weeks a year isn't desireable even as an owner.
* Lots of consultants have written blog posts about firing dysfunctional bigco clients. Yeah, in the real world, you have to deal with the 25 page MSA contracts; that's what you pay lawyers for. Yes, being in business is annoying. If it wasn't, everyone would do it.
* Yes, it's hard to build and ship products in "off hours". But you don't have to do that. Instead, you can scale to the point where it's cost effective to hire full time developers. Most YC companies get to market with 2-3 team members. It isn't a stretch to scale a consultancy to the point where it can fund 2 developers.
Against all these concerns about consulting is the unbelievably huge upside of bootstrapping a company this way: you get near-unlimited lives. It is the JUSTIN BAILEY of startup plans. In virtually every other model of bringing a product to market, product failure ends the company. That's bad, because most products fail. They really, really do. There is no reason that a product miss should zero out all the hard work you put into building a team and a business.