Starting a Professional Services Firm: The Contractor Trap

In my many conversations with consulting firm founders I have identified a common problem that leaves even the owners of successful businesses trapped with no way out.

They may have a great portfolio of clients, an ability to sell work, and a reputation for producing results, but what they don’t have is people that are committed to the long-term success of the firm. That’s because these founders are either exclusively or very frequently relying on independent contractors to deliver client work.

While working with contractors has the advantage of creating a highly variable cost structure, it significantly inhibits the creation of enduring value in the business.

Using contractors leaves the firm completely dependent on the founder for its continued existence.

Human Resource Models

In my previous firm we used independent contractors in our first year as we were growing the client base and building a working capital cushion. Some of those people elected to become employees and ultimately became foundational members of the firm. Others remained independent and became less and less relevant to our ability to deliver.

Beginning in year two, we only used independent contractors when an engagement required highly specialized skills that we did not possess and did not want to build into our model.

We became 100% committed to building a values-based firm comprised of ambitious professionals that saw a career opportunity for themselves in the future of the organization.

Don’t Bet Against Yourself

The human resources model you select for your business has a profound effect on the economic structure of the firm, the way you create value for yourself, and the options you have to monetize the business upon exit (and we all exit one way or another.)

Contractors can be reliable providers of niche skill sets or a quick capacity boost to help you get through a period of abnormally high demand, but don’t be surprised if they possess a mercenary mentality and refuse to help you do anything to grow the business. The worst among them may try to sell themselves into your clients independently and undermine the credibility of your firm.

There are financial pros and cons. Contractors are more expensive on a day rate basis – probably twice as much as a full-time employee – but eliminate concerns around resource utilization. Ultimately, the net income line may not look terribly different. If you can sell new work, you can make a great living as the hub of a merry band of independents.

The problem comes when you want to exit the business either through a sale or a leadership transition. There is no value in the business without you and there is no pipeline of talent preparing to take the reins (and keep paying you.)

I understand the allure of a completely variable cost structure, but ultimately going the way of the independent contractor is a bet against yourself.

The Benefit of Enduring Value

If you have the ability to sell a consistent book of business, then you have the opportunity to create a team of professionals that are committed to successfully growing the firm into something that has enduring value beyond yourself.

The most successful consultants I have ever met get as much personal gratification from the development of talent as they do from delivering great results for clients. A full-time, employee-based model gives you access to all the joy of being in the profession.

A group of highly motivated employees with a deep belief in the purpose and mission of your firm will go the extra mile to ensure client success and your success.

Building a workforce motivated by a strong sense of higher purpose is essential to engagement. A recent survey found that working for an organization with a clearly defined purpose is second only to pay and benefits in importance for employees and ranks ahead of promotion opportunities and job responsibilities. Two-thirds said a higher purpose would motivate them to go the extra mile in their jobs.

Develop a strong set of values and clearly define the mission of the organization to incorporate an inspiring purpose, then hire people that are maniacally committed to the team. Every role on every client engagement is a precious opportunity to build the team. Don’t waste them on contractors.  Create something that has enduring value.