I'm Setting Up a Loosely-Coupled Consultancy
I’m setting up a consultancy, a team of highly skilled people who’ll work together on client projects. This team will have more skills than just me. And they’ll have more manpower to take on bigger projects than me alone 1.
But they won’t be my employees, as with a traditional agency. Instead, they’ll be subcontractors. They’re paid only when they’re working on a project, they have the freedom to set their own prices, to refuse a project I bring them for any reason, and to get projects from elsewhere.
What are the benefits of this model?
• Employees want to work for product companies, not services. If I’m running an agency, I’ll get the second tier of employees. Even if they join, they’ll move to a product company when they get a chance. I don’t want to work with people who’d rather be doing something else.
I myself would never work for a services company. It’s the worst of both worlds: if you want to be an employee at a product company, it has its pros and cons. If you want to freelance, that has its own pros and cons. But if you’re an employee at a services company, it has the cons of both the above.
By working with subcontractors, I work with people who’re doing what they want to be doing, and that’s always a better position to be in. My clients would also prefer to work with people who are committed to what they’re doing.
• When I hire an employee, I have to pay him his salary whether or not I have revenue coming in. This is a major source of stress. I’m not big enough to absorb this. A company of a certain scale can take it in their stride. Not me. I’m not in the business of taking over other people’s risks. In fact, I pay others to reduce risk for me, such as by buying insurance. I don’t sell insurance to my other people by taking on their risks. My goal in life is to reduce stress, not increase it. So I’m hiring subcontractors, not employees.
• Salaries have exploded. I know a Software Engineer (not Senior) who earns 40 lpa! This person wanted to work with me, but his salary is way beyond my ability as an individual to pay, even before considering a raise. Now, assuming that there are 2000 working hours in a year, this amounts to ₹2000/hour. I’m fine with him charging ₹2000/hour, because it’s coming out of the client’s pocket, not mine. Mathematically ₹2000 x 200 = 40 lpa, but in real life, it’s not!
• Employees expect a raise at least once every year, which adds further stress. With a subcontractor, this is not a problem for me, because he can quote whatever he wants for each project. He does not need to wait a year for a raise! And he does not need to stop working with me to earn what he thinks he deserves. He can set his rate, and deal directly with the market.
• Employees come up with a whole set of hidden costs: equipment like laptops, a coworking space if you’re working locally. Provident fund, pension and professional tax, which are both a financial cost and a hassle. Even when you decide to no longer work with an employee, you have to pay for a notice period. There will be some expenses to reimburse, like an internet connection, books, or software.
• Employees sometimes act entitled, whether demanding a raise every quarter, insisting on working only on certain technology, having unreasonable expectations, being disloyal, and more. Only some are this way, and there are some excellent employees who I’m happy to work with, but the bad ones cause a disproportionate amount of drama, effort, time and pain.
• Given all this, I have to think carefully about hiring a new employee. I can’t have many on the bench, earning a salary but doing nothing. In fact, I heard from an owner of an agency that when he expanded his team, he didn’t make any profit for the next whole year! Whereas, with subcontractors, I can say yes to everyone who applies 2. If an applicant has a skill that I wasn’t considering, like game development, I can default to saying yes. Whereas, for an employee, I need to think twice about whether I’ll have enough work in this area. Or if I’ll have to do something different to get game development work if I hire this person. But now that I’m running a loosely-coupled agency, there’s no cost to saying yes to a game developer, an audio processing engineer, or a Windows client app developer. If we get a project in this area, we’re well-positioned to take it up. The agency can expand in this way rather than being limited by my vision.
In addition to area of specialisation is numbers: I can say yes to an iOS engineer even if I already have three on staff 3.
In addition to area of specialisation and numbers is cost: When hiring employees at an agency, I have to think about cost. Some clients have asked me for more senior people than I have. Others asked for cheaper people, cheaper either because they’re earlier in their career or because they’re not as good4. Many agencies are caught in a depressing treadmill where they keep hiring an endless stream of freshers every year, running to stay still, rather than running to making progress.
A traditional agency that says yes to every skilled applicant will go bust. A loosely-coupled agency can do that to have a greater variety of specialisations, seniorities, skill levels and prices in the team, overcoming all the negative dynamics I mentioned above.
• I have to train employees at my cost, while I can train subcontractors at the client’s cost.
• I’ve asked employees to do things like set up a website for our agency. Ideally I’d like to upskill myself doing what will take time rather than delegating it. This doesn’t work out with employees because I’m paying them anyway, so if they’re idle, I’ll give them some work. On the other hand, if I ask a subcontractor to build a web site (in this example), I’ll have to pay him for it, so I won’t ask him. I’ll do it myself and learn.
• If a financial crisis hits, I don’t have to lay off subcontractors, since they don’t incur a fixed cost. If anything, people at other companies will lose their jobs, and some of them will take up contracting, and some of them will choose to work with me, helping me grow. A loosely-coupled agency is antifragile. Things that kill other agencies will make mine stronger.
• A CEO of a consulting company becomes a salesperson first, project manager second. Neither of these are interesting to me. With a loosely-coupled agency, if a client can’t afford or doesn’t want to pay me my fee, I’ll introduce them to my teammates, who’ll work directly with the client as contractors rather than subcontractors. They’ll sign a contract between each other, they’ll invoice the client, and get paid directly by the client. I won’t be involved as a project manager or in any other way. On the other hand, having employees forces to do sales for them to keep them occupied. With subcontractors, I have no such compulsion.
In summary, setting up a loosely-coupled agency is the right call for me.
Companies will also be able to save cost by having me delegate some work to people who charge less.
Assuming, of course, they’re skilled, have the right attitude and motivation, have reasonable expectations etc.
Maybe one day we’ll have a project that requires all three.
Or if one of the iOS engineers also has some experience with (say) e-commerce experience, that might come in handy for an iOS e-commerce project.
I work only with the top 2% of engineers. So when I say “not as good”, I’m referring to the difference between the 98th percentile and the 99.5th percentile.