Why hire consultants 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)
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.