Mar

15

No Shortage of Salespeople: Of Workers Maybe

March 15, 2007 |

I have met or spoken with many people looking for technical consultants in my area of expertise. They even have contracts ready and waiting to start: they just can’t find enough consultants to do the job. Apparently there is no shortage of companies willing to offload their tasks to a consultant, and there doesn’t appear to be any shortage of salespeople willing to sell consultant’s time. What troubles me is that many consultant services salespeople underestimate the costs of securing consulting labor to perform the services they sell.Like many things in a capitalist world, the “offer-and-demand” law shows itself here. Many people just fail to understand it well enough. I do not claim to be an expert at understanding it either, but in this article I try to analyze some of its effects.

First of all, in every business you incur in some costs. I will suggest there are four main costs in the consulting services business:

  • Risk Management – Risk of consultants leaving the job and making you find replacement consultants. Risk of underestimating the tasks to be performed. Liability risk. Liability/umbrella insurance.
  • Administration – Legal, accounting, rent, materials.
  • Sales cost – Salespeople salary/commissions, travel and entertainment, cost of doing business. Tools for the salespeople as well as any benefits that they may be entitled to as well as any employment taxes and insurance that should be paid on their behalf.
  • Labor – The actual cost of having people that can do the work. If they are contractors, they may be supplying their own materials (laptops, tools) as well as their own medical insurance and retirement plans. If they are employees, this should include benefits and tools and equipment cost as well. Employment taxes and employment insurance.

What percentage of money goes into each of the previous “buckets” I am not sure. I will, however, suggest that the percentage could be something like: 15/15/20/50%. The numbers may distribute themselves differently and maybe I will be able to find more information online or offline later, but I will start my analysis with these numbers.The first finding I get is that I will need at least 2.5 consultants per salesperson or sales and marketing organization employee. My reason to believe this is that if a consultant earns X amount of money, a professional services salesperson may expect to earn X amount of money also. Since consultants earn 50% of the sale, and salespeople earn 20%, for both to earn X amount of money the salespeople would have to be a 100% responsible for at least 2.5 projects. That is, assuming salespeople are happy enough with earning the same thing as consultants.

The second finding I get is that what percentage of the earnings go into each bucket has a direct impact on the minimum amount of money that the salespeople could charge to their clients for consulting services. I have seen too many salespeople who try to outbid (or underbid) their competitors in order to win the business to later find out that they can’t find consultants willing to work for the amount of money they can pay them. For example, in our 15/15/20/50% example, this means that if you charge $1000/day for a consultant, the most you can pay such person is $500/day. From my previous 100 day/year billable time analysis I can conclude this consultant would earn $50,000/year (before paying all of his/her taxes insurance and administrative costs). Almost no computer worker would be willing to work for that amount. $2,000/day ($1,000/day for the consultant) would be more realistic, matching more closely what big companies charge for their average consultant.

The third finding, which is kind of obvious but intensified with this analysis, is that the more layers you put between the end client and the person doing the work, the less probable you will strike a balance in this equation. I have seen situations where the client hires the big software vendor who hires the system integrator company who hires the worker/consultant: two layers that spend on sales, administration and risk management but don’t add any work: leaving the consultant with well less than 50% of the amount of money allocated for the project.

This analysis could prove useful when pricing projects. It may need more refinement, but I believe the mechanics of it are very applicable to real life projects.


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