24

I am curious as to why a company would rather hire consultants over salaried employees. Aren't consultants more expensive, since there is usually the middleman consultancy firm in between?

And why would you opt to hire someone for just 6 months, and then have an expert(potentially) leave?

I am curious as to the motivations behind hiring consultants. It would seem that the overhead cost for consulting is much more. thanks

So my question is generally - why would you hire consultants if the overhead costs seem so much higher?

5
  • 3
    Related - Difference between contract and full-time?
    – David K
    Jul 30 '15 at 18:16
  • Just curious why you assume all tasks need to be done for the entire life of the company?
    – user8365
    Jul 30 '15 at 19:33
  • In Germany, for example, it may be close to legally impossible to make a salaried employee redundant. That makes it cheaper to pay, say, three years for a very expensive consultant, than 30 for a relatively cheaper employee.
    – Pavel
    Jul 30 '15 at 19:43
  • It is a false assumption that consultants are always more expensive to the company. Overhead for employees includes (US-centric answer) contributions for government required things like workman's comp and unemployment and Social Security and Medicare, cost of benefits, cost of company overhead, etc
    – HLGEM
    Jul 30 '15 at 20:03
  • 3
    I edited this slightly, I think it's a great and answerable question but was picking up downvotes.
    – enderland
    Jul 30 '15 at 21:48
56

Why hire consultants/contractors instead of FTEs?

What are the pro's of hiring consultants, and when do you need one?

Keep in mind that there will be a multitude of employment laws/regulations/etc that vary based on country and region (or even government). These can make hiring an FTE vs consultant a very important decision.

Among other reasons:

  • Sometimes you need someone to get the job done.

  • Sometimes you don't have time for developing a skillset.

  • Sometimes you need to borrow the skillset of the consultant to mentor your FTEs.

  • Sometimes you need someone on a short term basis and don't want to deal with the other overhead with FTE (benefits, development, etc). Releasing a consultant/contractor is far "better" from a PR perspective than laying off or firing a FTE.

  • Sometimes you don't know how long you will have funding (maybe you have extra funding). Or the funding is for a specific calendar/fiscal year.

  • Sometimes you want to call a company and say, "get me an [expert / intermediate / novice] person with skills X, Y, Z" and not spend hours/dollars recruiting/interviewing

  • Sometimes budget categories for FTE vs "contingent/consultant" spending are different, you may have no FTE available but can get a consultant (thanks @LaconicDroid!)

  • Sometimes you want someone to "blame" if things go wrong and it's easier to blame (or pursue legal action against) an external company than an internal FTE (thanks @JoelEtherton)

  • Sometimes a manager just wants to work, and jumping through all the hoops required to get a FTE vs contractor just isn't worth it. If it's easier to hire a consultant, that might be the "preferred" way for a hiring manager (thanks @Air)

  • Sometimes business conditions dictate drastic change and most consultants can be dropped on very short notice without paying any severance or unemployment (thanks @Joe Strazzere)


Cost comparison

This part is not for the faint of heart!

Regarding cost, let's consider hiring a consultant costing your company $100/hr. Somewhat senior, but not super senior. The consultant will be paid to work for 40 hours for 46 weeks of the year (vacation/holidays/sick time totals 6 weeks). The total cost your company will pay for that consultant is $100 * 46 * 40 = $184,000.

For the FTE, how much can we pay before we "run out of money" for that year? Here are some estimated costs and losses for that FTE:

  • 2 week training / year (new hire, lots of misc stuff)
  • 3 weeks vacation / year
  • 2 weeks holiday / year (10 days)
  • 1 week sick (or personal) time / year
  • 2 week of FTE related meetings total (~2 hr/week - 1/1s, team meetings, department meetings, teambuilding, etc)

We will generously say total working hours are 40*42 = 1680 hours.

Here are some guesstimates for additional costs or benefits provided to that person as a FTE that are not present for consultants (or less):

  • $5000 company portion for healthcare
  • $1000 training costs
  • $2000 signing bonus
  • $5000 relocation expenses
  • $15000 cost for interview expenses (total reimbursement, wages for management/HR/recruiting, commission to recruiter, etc - this is probably a very low estimate for any sizable company or recruiter costs)
  • $1000 educational benefit/reimbursement
  • $1000 misc travel

That totals $30k in more fixed expenses associated with hiring an FTE. We also will have a bunch of categories that are more percentage based and not completely fixed, such as:

  • FICA taxes (USA only, 7.65% in 2015)
  • Insurance for life, disability, workers comp (1%)
  • Unemployment (1%)
  • Bonus potential (5%)
  • 401k match (4%)

This is an additional 18.65% in cost per year for an FTE.

Additionally, our FTE and the consultant are working different amounts. Notice from above that our FTE has 42 weeks of direct value add hours per year, compared to 46 for the consultant. We will also assume the new FTE is only 90% as effective as a consultant (which is probably reasonably generous to the FTE on average) which results in only 37.8 weeks of "work value" from the FTE.

Hooookay almost there. So we have:

  • $30k extra expenses
  • Only 82% yearly productivity
  • 19% extra "scaled" costs

If we take that initial $184k, we get:

  • Subtracting fixed costs, $184k - $30k = $155k
  • Subtracting productivity cost, $155k*0.82 = $127k
  • Subtracting extra "scaled" costs, $127k*0.81 = $103k

This means for this example, assuming pretty generous inputs biased towards the FTE, the most you could offer in salary is $103k/year to compete with the $100/hr consultant.

Especially since we haven't "charged" the FTE with anything to account for the FTE hiring process taking longer than a consultant. Or the extra overhead for the entire company for a FTE.

Playing with numbers here gives you a lot of explanation for why "overpaid consultants" are not as overpaid as you might think. Especially depending on how effective of an FTE you can hire, if you have to train in a technology take that 90% effectiveness and drop it significantly.

11
  • 1
    @Adel keep in mind that there will be a multitude of employment laws/regulations/etc that vary based on country and region (or even government). These can make hiring an FTE vs consultant a very important decision.
    – enderland
    Jul 30 '15 at 18:16
  • 3
    As well as all the excellent points above, consultants salaries are typically funded from a different budget. So when FTE salaries aren't available, consultants can be paid from a different pool. Jul 30 '15 at 18:24
  • 1
    And depending on what benefits you offer employees, it may cost more to make someone a permanent employee, there is far more cost to permanent employees than just salary.
    – HLGEM
    Jul 30 '15 at 19:59
  • 1
    As @JoeStrazzere says it can be costly to get rid of employees, and that cost varies greatly with country. Senior employees (the kind you'd hire to do the kind of work a consultant would do) tend to be even more expensive to shed or swap out for different ones. In places where company officials have some personal responsibility for salaries in a receivership this can also be important if money is tight- seemingly paradoxically what looks like paying more is less risk in several ways. Jul 31 '15 at 4:22
  • 3
    Excellent answer as usual enderland. I particularly appreciate seeing you break down the numbers. Obviously it's a rough estimate and will vary a lot by country but it's interesting to see a summary for the US. As a European I'd add that the overhead for an FTE here is probably closer to 100% than 50%.
    – Lilienthal
    Jul 31 '15 at 8:02
8

There are several reasons to hire a consultant.

First, in spite of their "high prices", consultants are almost always cheaper than in-house staff. The cost of an employee to a company is much more than just his or her salary. An employee also has a bonus, has benefits, needs training, uses IT infrastructure, takes up a desk in an office building, builds up a retirement, may have significant costs if laid off (e.g. in Europe), etc. All of these increase an employee's cost, and, in large companies, this is significant. It's not unusual for an employee to cost a project significantly more than $250 / hour when you look at the internal accounting system. The high consultant fee includes all (or nearly all) costs for that consultant.

Second, consultants may have expertise in an area that the company does not want to or cannot economically justify building up. For example, if the company's core business is producing beverages, it may make sense for them to hire consultants to build software systems for them. That is, the beverage company may choose to focus on their core business and choose to hire in experts in areas they don't know much about to help them out. It may be more costly or difficult, for example, for them to find and attract IT-savvy management and technical staff to build the necessary infrastructure, and they may only need the majority of that IT expertise long enough to get the system up and running.

1
  • You forgot a big one -- insurance. Aug 2 '15 at 8:30
3

From the taxes standpoint, hiring consultants is an "expense" that can get written off. However, for employees you actually have to pay taxes for them, not to mention insurance, benefits, etc.

Or in my company's case, it's just hard to hire the right candidate that has the expertise we want. So although we want to hire full time, it's hard to compete with the bigger companies for talent, so we have no choice.

3
  • Is that in the USA mainly, where you can write off taxes ? Jul 30 '15 at 18:29
  • 1
    You claim them as company expenses... which is true, if it's a consultancy. It's in a lot of countries.
    – CleverNode
    Jul 30 '15 at 19:11
  • 1
    @Adel It's the same in the UK. General concept is that you pay tax on Earnings minus Expenses. A consultant will be considered a straightforward expense - the same as the cost of a piece of equipment. Employees have their own set of (complicated) tax rules which very quickly narrows the cost gap
    – Dan
    Jul 30 '15 at 19:33
1

Some of the answers touch on the same points I'm about to make, but I'd argue that companies on the whole hire "consultants" almost entirely to avoid taxes on the one hand, and shirk responsibilities on the other.

Many jurisdictions treat self-employed contractors more generously in terms of taxation, and this encourages firms to reclassify employees as contractors and share the proceeds of the avoided tax between themselves.

The second front is shirked responsibilities (other than taxation, of course). Some of these responsibilities are indisputable, such as the need for an employer to plan their workforce needs and to reproduce over the long-term the capacities and skills they and their sector needs.

Hiring contractors allows the hirer to free-ride on the investments that other companies make into workers in this regard.

Equally the hirer could (and do) do this by poaching workers who are then hired as employees too, but then they would have to pay a premium to dislodge employees from an existing stable employer, to whom a long-serving employee may also feel genuine loyalty and dedication.

The contractor however has already jettisoned the employer which invested in their early professional development, and are already footloose and habitually unattached, and thus hiring them demands no such dislodgement premium. They are the mercenaries of their sector. The risk to the employer of hiring such a contractor who really is a rotter, since that might seem like a real risk of fishing in this pool, is mitigated significantly by their lack of job security.

Then there is the issue of responsibilities like taking care of workers' physical and mental health. When employers wear out employees prematurely through overwork or bad culture, or as workers deteriorate somewhat with age, the employer must typically take responsibility for the costs, or for the adaptations necessary to maintain productivity. Often the state has previously acted to impose this responsibility on employers of employees, in order to encourage responsible behaviour by those employers.

When hiring contractors however, the hirer can immediately shirk such costs as they encounter them, and throw the problem they have created onto the hands of the state (and in turn, onto the contributions which other employers make to general taxation, not just saving the shirker money but ultimately increasing the cost of taxation for the responsible employers who are their competitors).

In my view, these are broadly the true reasons for the widespread existence of a contracting model, the scale of which far exceeds any systemic need for flexibility at the margins, and why some employers (whose management have been able to fathom this model of operating, and are quite unconcerned with the moral questions it raises, or any long-term sustainability concerns) explicitly prefer this model.

A particular proliferation of IT contracting in the 90s and 00s here in the UK, was almost exclusively caused by a shift in judicial ideology which showed an increased willingness to deem a professional worker to be a contractor so long as the employer said they were, and thus unleashed a massive relabelling of IT employees as low-tax contractors.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .