James Serra's Blog

One of my pet peeves is seeing a top-notch BI architect/developer working as a salaried/perm employee of a consulting company where they are making a good salary but are being billed out to the client at a rate that is 3-4 times what they are making.  Are they getting taken advantage if their salary is 120k and they are billed to clients at $200/hr (and they are billable 90% of the time and they must travel 50%+)?  Is it better to go 1099/W2 instead (I wrote a bit about this at Salaried employee vs contractor)?

I asked a veteran recruiter who has worked for many placement firms and now runs his own small firm about this.  Specifically, I asked him these questions:

Are you getting taken advantage of if your salary is 110k and you are billed to clients at $150/hr?  Is it better to go 1099/W2 instead?  When you were working as a recruiter for the big consulting companies, did you try to steer consultants to go perm instead of W2 or 1099 because you would make more money off them?  Where consultants laid off if they were on the bench more than a couple of weeks?  Did you place less-qualified people on projects because they were the only one’s available?

We never cared if a person was salaried or a 1099.  I guess a salaried person is more likely to stay with you longer because it is a pain to change benefits (especially if they are really good benefits) when you change jobs, but other than that, the percentage spreadsheets I mentioned before (see Billing rates – other side of the fence, part 2) always spit out a number and it didn’t have a bias towards salaried vs. 1099.

As for the specific question about a salary of $110K on a bill rate of $150/hr, it depends on the benefits (for example, are you taking insurance for a single person, a married couple, or a family?).  Also, what other benefits come with the salary? 401(k) match?  Tuition reimbursement?  Utilization bonus (if you work over a certain number of billable hours in a calendar year, do you get a bonus?).  I’d need a clearer picture of what comes with the $110K salary to know if it is a bad deal for the consultant.  I’d think at a rate of $150/hr the vendor could afford a higher salary, just my gut though until I know more about the vendor benefits.

Also, this type of stuff applies across different industries.  I know a person in a law firm that has an hourly billable rate of $380/hr.  She has a nice salary, but it isn’t anything out of this world.  They scoreboard the entire firm to show how much money you bring in through your billable hours, how much new business you won, etc.  There is a lot hidden behind the curtain in all industries, so it is hard to compare apples to apples on these things sometimes.

As for bench policy, it was always a case by case basis.  Has the person been with the firm for a long time?  Meaning, has the firm made a decent profit on this person over the years.  At the $17B firm where I worked, there was a lady that had been there 30 years.  She was rarely on the bench, but if she ever did need bench time, she had earned it and it was there no matter what.  A general rule of thumb is a week of bench per year of service.  Also, the person’s skill set was a factor – was the person in a marketable space (Java people in some cities are gold, you’d give that person bench no matter what because they’d be out on another assignment for you very soon.  On the contrary, if the person was a mainframer, that work isn’t as hot in most cities after Y2K, so that person probably had a shorter shelf life.  One vendor (a $1B company) was a huge mainframe shop and after Y2K they had a ton of employees that were no longer billable.  They kept them all on the bench and retrained them in Java.  It was a huge investment/loss to the vendor and Wall Street killed them for the move and their stock price sank.  So even when they “did the right thing” and took care of their people, Wall Street slammed them.

To expand on what I talked about in Should a placement firm tell you what they are billing the client?: If you are a consultant working through a placement firm, should the markup percentage (client bill rate divided by consultant rate minus one) be the same no matter what the hourly rate is?

Some placement firms use a fixed hourly rate markup, but many use a markup percentage.  One placement company I am talking with does just that, and they like to have a 68% mark up.  I can never understand why they use a percentage for mark up, especially one that high.  After all, 68% of $50/hr and 68% of $150/hr is a $68/hr difference in margin!

In talking with a recruiter who has been in the industry a while, and is now a recruiter for his one-man shop, here was his response:

My answer is that each deal should be dealt with on a case-by-case basis.  Percentages are dangerous for the reasons you mentioned – and that goes both ways.  The candidate is punished when the rate is high, the vendor is punished when the rate is low.  Having said that, most mid to large vendors (probably those at $50M or more) will have a percentage based formula where they bake their fixed costs into an Excel spreadsheet (insurance, rent, management overhead, vendor mgmt. system fees, etc) and use a percentage system to evaluate a deal.

I’ve worked in a few decent sized companies.  At those firms we used excel spreadsheets pre-populated with the fixed amounts mentioned above (rent doesn’t change often, maybe annually, same goes for overhead, vendor fees, etc).  In my experience, the spreadsheet was probably updated once a year, but the fixed costs are essentially left alone for the most part.  The spreadsheet allowed for two variable data entry points: (1) employee cost and (2) the client bill rate.  Employee cost was basically a candidate’s salary (or hourly rate) and health benefits (how many people are being insured – single, married or family benefits).  The client bill rate is what it is, the rate the end client is paying the vendor.  These two variables were set against the fixed costs mentioned earlier and the end result was a percentage.  There were guidelines as to what percentages were acceptable (if above “X” percent, the sales guy gets a better cut, if below a certain percent, the sales guy wouldn’t make anything on the deal).

Publicly traded companies definitely follow this model because they have to report their quarterly earnings to Wall Street and these firms are typically graded on their margins.  So management will bake in rewards or penalties for the sales/recruiting teams to keep everyone rowing in the same direction.  So when a sales guy says he can’t do a deal, it is probably because the deal is at a certain margin where he’ll get punished with minimal commission.  Some percentage systems involve a sliding scale that accounts for how high/low the bill rate is and higher rate deals would allow for a higher percentage to go to the candidate.  This makes sense for the reasons you mentioned (20% of $50 if far different than %20 of $150 – and things like rent, insurance, vendor fees are all fixed costs, they don’t go up or down based on the amount in the bill rate).  Having said that, some factors (insurance, workers comp, unemployment) do go up with a candidate that has a higher compensation, so those are some things to keep in mind.

All of the above basically applies to bigger and/or publicly traded companies.  It doesn’t apply to the small guy – at least in my mind it doesn’t as we don’t have the overhead, the same pressure from Wall Street or from a parent company – we don’t answer to anyone but ourselves.  For me, my rule of thumb is pretty simple: I have a “walk away” point where I won’t do a deal if it falls below a certain NET hourly amount.  I don’t care about the percentage.  I care more about the bigger picture:

- Who invested the most time in making the deal work?
- Does the vendor have some additional value (for example, are they a preferred vendor?)
- Supply and demand (and market rates) also come in to play (did I find this guy in a day, or did it take me 6 weeks?)
- Did the candidate bring the deal? (and did the vendor do nothing?)
- Dd the client give a low bill rate?  Is there much room to work with?

If I’ve spent a lot of time cultivating a relationship with a client, to the point that when I make a suggestion, my candidate gets to cut to the front of the line and basically gets an interview on my recommendation – now I have value and my margin reflects that.  Additionally, if there turns out to be multiple candidates available for that role, then that also comes in to play.  If I talk to 5 candidates that have the same skill set (and assuming all things are equal) then it comes down to which candidate is cheapest.  My rate will go up and down some to show the end client who is more expensive but generally the lower cost candidate gives a bigger margin.  I guess I work backward and factor in the above points – since running my own firm I have never (and will never) start with a percentage in mind. It is all of the above (and some other things that I’m forgetting) that factor in to what type of a NET margin I’ll accept, then a percentage comes out of it and I look at it more as a reference point, nothing more.

And to put that in perspective, I don’t charge clients $150/hr then pass on $60/hr to my teammate and keep $90/hr for myself.  My teammates make the lion’s share of the bill rate, and my hourly NET is still a nice little number that supports me and my family.  I live by the rule that “pigs get fat, hogs get slaughtered”.  Take what you need to live a nice life, but don’t get greedy because it’ll eventually catch up with you.  I want candidates that have worked with me to feel that they got what the deserved.  It leads to future referrals and repeat business with candidates.  It is a small world, no need to get greedy…

For percentage markups, it seems that a common ground of was 80/20 (in favor of the consultant) was a good deal and 70/30 was more the norm.  In my opinion, the ratio slides from bigger companies needing more (like 60/40 or 65/35) to smaller companies who can tolerate 80/20.  The reason I say this is that I lived it first-hand 19 years ago and am living it again now.  When I stated my own career in 1994, it was for a midsize company (a $400M company that went through an IPO, they are still doing well to this day).  When they were a smaller company (pre-IPO), they signed up a lot of employees for 80/20 deals.  As the company grew, and the company overhead, infrastructure, service offerings, sales/recruiting force, etc. grew, those once “decent” 80/20 deals became the company albatross, putting a serious drain on the overall company margins.  It was my job to meet with the employees and try to re-work those 80/20 contracts.  The message to the employee was “don’t worry about the split anymore, worry about  your Net hourly take home pay”.  If you were making $40/hr on a $50/hr bill rate, don’t focus on maintaining 80% of the new bill rate, instead give me a new hourly number (you are at $40/hr, do you want $45/hr?) and let me worry about the hourly bill rate to support that.  Then I had to go to the client and fight for whatever bill rate increase I could get – and I was challenged to get it away from an 80/20 margin because the company had outgrown that.  So sometimes focusing on the percentage or the split can be the wrong way to look at it.  And for the past four years running my own small firm, I never look at it (other than as a reference point).  As I said above, I have a walk away point based on a NET hourly number that starts my negotiation (or ends the negotiation) and I go from there.  The many different factors (duration, amount of work, supply and demand, amount of money tied up in the deal, risk) all go in to what number I’ll tolerate.  It is a case-by-case situation – at least for the small guy.

To answer about the 68% markup: For a large firm that seems pretty high.  Note that W2 employees have FICA, FUTA, SUTA, Liability and Workers’ Comp which could arguable account for roughly 20% of the margin.  But even after you take off the 20% and get it down to 48%, that is still too high in my opinion.

Here is another response to my blog “Should a placement firm tell you what they are billing the client?” (the first response was Billing rates – other side of the fence).  My purpose of these blogs is to give more understanding as to what determines the margin that a placement firm or consulting company needs to make a profit, the margin being the difference between the clients bill rate and what the consultant/contractor is paid.

Placement companies (staffing firm, recruiting firm, consulting firm…they go by many names) are needed.  I have used them many times to find projects.  They deserve a cut of the margin, as a lot of unseen work goes into them finding that open position at a company and contacting you about it.  It is a question of how much of a margin is fair?  And how much do they really need to “break even”?  I have seen independent recruiters happy with $15/hr margins, and I have seen consultants getting taking advantage of (i.e. making a salary equivalent of $50/hr and the client bill rate is $250/hr and in addition the consultant has to travel 100%).  And I can never understand why some placement companies use a percentage for mark up.  After all, 68% of $50/hr and 68% of $150/hr is a $68/hr difference in margin.  Most of the big placement companies say they need around $40/hr off of W2 rates to break even.  The last placement company I talked to said to break even they need 4% of 1099/C2C and 17% for W2.  I asked a veteran recruiter who has worked for many placement firms and now runs his own small firm about this:

Short answer:
$40/hr seems a little much to “break even” and I’d question it.  Having said that, there is a lot of hidden cost in running a big firm, so that number isn’t a far off as you’d think.  I’ll try to detail it as best I can in the “long answer” below.  On the other end of the spectrum, where the little guy doesn’t have nearly the overhead (personally my overhead cost isn’t in the big guy’s stratosphere) but the little guy has a lot more at risk.  A bad deal (read: bad client) or a series of late payments, etc – those are killers.  If you have a small placement company, you can probably appreciate the pain of paying your teammates on time and a NET 30 day payment stretching out to a NET 90 day payment and beyond.  You become a bank and that isn’t fun.  So the little guy doesn’t need the same mark-up, but there are some variables that impact them differently.

Long answer:
These thoughts are based on 19 years of personal experience in which I’ve worked for a big firm (multi-billion dollar) a few small firms (obviously myself, but I’ve also worked for two other small firms) and the middle guy ($400 million or so).

(1) From my experience with the big/middles guys (from working with (a) ConsultingCompanyA at the time I was there it was a $17 Billion dollar company and from working with (b) ConsultingCompanyB, which went through an IPO and was in the $400 Million space when I was there.  Here are the things that influenced mark-up:

• Office space/physical infrastructure
• Internal office employees (sales, recruiting, managers, regional VPs, payroll, support staff, executives, etc)
• Insurance, payroll tax, FICA, unemployment costs (for W2 people)
• Legal/internal fees for H1-B candidates (visas, filings, support)
• Advertising
• Tools/software
• Cost of being a preferred vendor.  Some large companies actually make you kick-back money, in the range of 3.5%.  Plus, in some industries there are “rate cards” which put max rates on certain skill sets which forces all the vendors to bid against one another and makes the business a commodity play.  It negatively affects the big guy because their max rate is set, they cannot go higher than the maximum rate on the card, and then a candidate can play one firm against the other for the best deal and it becomes a game of chicken between the big firms on who will take the lowest margin

(2) From my experience of working with smaller firms, and from where it really hits home – working for myself – here are the things that influence mark-up:

• Some of the above (insurance and advertising for example)
• Banking/Loans
• Payroll: this is a killer if your clients don’t pay in a timely fashion.  As I mentioned in my “short answer”, you realize that you’re a bank and the “Banking” point above becomes a larger influence.  The current people you have billing fund future people billing.  If that cycle gets disturbed, it is an issue
• Risk: if a client has had delayed payments in the past, I’ll mark up my next deal to them higher to account for that risk
• Skill set: if a skill set takes a long time to staff, that mark-up will be higher
• Rarity of a skill set: in some cities, Java talent is impossible to find.  I’m not going to give that away at a lesser mark-up as an easier skill set to find like a Business Analyst
• Level of skill set: I am working with a client to staff their CIO position.  There are very few people in this talent pool and they are coming from my personal Rolodex – something which I hold near & dear to my heart.  That calls for a much different mark-up (and this segues in to a conversation about perm/direct placement vs. contract vs. contract to hire).  You can see where the subject of “mark-ups” covers a lot of stuff and can get confusing/complicated
• Is your candidate on someone else’s payroll: I have a few partners where I get talent from.  When they take care of the payroll responsibility, some of the points above are eliminated
• The cost of the resource: Does the candidate cost $125/hr?  Is the person a $40/hr resource?  One ties up more payroll, incurs greater risk if the client doesn’t pay on time, etc
• The duration of the opportunity: Is it a 3-month assignment or a 12-month assignment?  The shorter the gig, the higher the mark-up
• Benefits: does the candidate require them?  Is it for one person or a family?

When a consultant brings the solution to the staffing firm, the rules change.  For example, when you already know the end client/hiring manager and they will pick you without an interview and you just need to select a firm on a preferred vendor list, a majority of the stuff on the “big guy” mark-up list drops off.  You didn’t need their offices in other cities to land this position, you didn’t need their recruiting/sales/VPs/etc, you didn’t need their H1-B process, all that cost gets dropped from the equation in my opinion.

If you are that person that the end-client wants to hire and you need to go through a preferred vendor, I’d go to the end-client and ask their purchasing dept who is the smallest of the big guys (or the easiest ones to work with).  Sometimes a boutique firm is on the list, not a high volume churn company.  Some large companies have to have a certain minority spend, so sometimes there is a little guy in the form of a minority vendor.  They’d love to have a deal fall in their lap, it is found money and they’d be very willing to work with you on a lesser mark-up.  If you came to me and said “CompanyA has this position, I know the manager and he already said he’d take me, I just need to find a preferred vendor” – we’d have a very open dialogue where I’d point out my fixed costs (I have a 3.5% rebate I need to account for, I have internal finance people who have to run your paychecks, etc) and we’d weed out all the stuff that doesn’t impact you.

As an independent consultant who has a higher bill rate than average, I would hope it is obvious to clients that the extra money spent would be well worth it.  But that is not always the case, and sometimes who have to help them to understand, like most things in this world, you get what you pay for.  The added value you can get with a higher-priced independent consultant can pay for itself many times over, especially when you are building an end-to-end business intelligence solution.  Here are my reasons why it makes sense to hire the higher-priced independent consultant:

• They bring experience from prior projects on what works and what does not.  So you avoid common mistakes and do things the right way
• The know all the tools to use for shortcuts.  You can spend days or weeks writing your own solution, or you can be made aware of a tool that will do the job quickly and better
• You will receive architecture decisions that are correct, hence saving the large cost of having to “redo” a project because of an inexperienced architect
• They code faster.  I have seen coders who are 2x-4x faster than the average person
• They do not need supervision: They can work on their own and ask few questions, so you are not wasting your time or saying “I would have just done this myself if I knew I would be spending all this time answering questions”
• They can bring in colleagues who are good. Need more resources on a project?  Ask the independent consultant who he has worked with that would be a good fit for the current project.  Would you rather use that person or ask a placement firm to find someone?
• They have excellent people skills, which is the #1 priority for a succesful project
• They are much more efficient with their time.  They have learned over the years to maximize their time and get the most work done in that 8-hour day.  They are the masters of time management
• They work hard.  To feel like they are earning their rate, they put in the extra effort and spend non-billable hours keeping up with technology and learning so they can make sure they are finding the best solutions for their client
• They know colleagues they can reach out to help solve problems or bounce ideas off of.  They have built relationships over the years with other experts, so they can get advise to make sure their client’s project is successful
• The have experience with many tools so know the best one for the job.  The biggest project failures are the ones where the wrong technology or tool was chosen from the start.  Experienced consultants will have been on a project similar to yours and will know which tools made that project successful
• With an independent consultant you get them on the job instead of a large consulting company doing a bait and switch (showing you impressive resumes who will work on your project, but then replacing them with much-less experienced consultants because there are the only ones available)
• They are still a lot less expensive than the big consulting companies.  And chances are the independent consultant will be better than what you will get with a big consulting companies because guess what happens to the top talent at a big consulting company?  They become highly paid independent consultants!
• The end result will be the project is done quicker and with a better solution.  So the extra money spent on a higher-priced consultant will likely result in bigger savings to the company

As BI consultant and longtime colleague of mine Garrett Edmondson pointed out, there are some inherent risks as well. 

It can be very difficult for an organization to determine if the consultant (independent or otherwise) actually has the required skills because in many instances the organization lacks those skills internally.  Otherwise, why would the consultant be needed?

You should own your organizational deficiencies and enlist the help of a very knowledgeable/expensive consultant to help fill either a fulltime or contract position.  A little investment on the front end can yield tremendous results.  Also, the very knowledgeable/expensive consultant can train and mentor a junior BI developer by actually implementing a solution with him. 

Just because someone comes from a large consulting company does not necessarily mean that they have the required skills.  In my experience most large consulting companies actually have very small DW/BI practices, and that void is filled in by smaller consulting companies that specialize in DW/BI.

A few things can be done mitigate the risks:

In my humble opinion, a true data warehouse/ BI expert is worth their weight in gold.  Ask for references and then actually contact them!

Most hardware/software vendors have a list of recommended partners.  They are usually on the recommended list because they have been successful in the past, which might be a good indication of future results. 

While it might have been possible in the past to have one guy know it all when it comes to BI, I don’t think that is still possible.  Do you really think that someone can truly be an expert in all of the following?

• Master Data Management – MDS
• Data Cleansing – DQS
• ETL – SSIS
• Data Warehouse SMP Hardware Architecture (all IO components see: FastTrack)
• - oRAID/LUN/FILEGROUP/DATABASE FILE configuration
• - HBA, Fiber Channel Switch, RAID Controllers, RAID enclosures
• Data Warehouse MPP Architecture – PDW
• Dimensional Modeling
• Data Warehouse Life Cycle
• DW project management
• Unstructured Data – HDFS
• MapReduce – Java
• Unstructured Data Hardware Architecture – Hadoop Cluster
• Data Mining/Machine Learning Algorithms
• CRISP-DM Methodology
• MDX
• SSAS Cubes
• Reporting – SSRS/PowerPivot/PerformancePoint
• Geospatial data
• “Cloud” computing
• In memory/Columnstore technologies….

I could easily double the size of the list.  It simply is not possible to know it all when it comes to BI and finding an organization that truly has expertise in all areas of BI is rare.