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Consulting Jobs Primer
Learn how this business works, and how to best explore the options. If you're being recruited by -- or considering joining -- a consulting company, this is for you.


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Question
This is actually a "composite" question from several readers. Recruiting calls from consulting companies have become  commonplace, and lots of Ask The Headhunter readers are confused about this booming business.

  • If these recruiters aren't headhunters, who are they?
  • What is consulting all about?
  • How does the business work?
  • Why would I want to work for a consulting firm rather than directly for their client?
  • Are the benefits different?
  • How will it affect my career?
  • Is it risky?
  • Will I get rich?
  • How do I jump in?

Insider Advice from
Scott Henty
Territory Manager
Computer Aid, Inc.

Computer Aid is an Information Technology consulting firm, in business since 1981, operating in the forty-eight states with over 1,600 employees and revenues of $95 million. The company specializes in application development, application maintenance and desktop services. Its clients include several major Fortune 500 companies. Scott Henty's office is located in New Hope, PA.

While consulting companies are perhaps most common in the IT industry nowadays, they exist in many industries and fields. Scott's advice is worth considering in any case.

1. What is a consultant?
A consultant is a person who is employed by a consulting firm and who is "farmed out" to another company to do work there. The other company is a client of the consulting firm. Typically, the consultant is assigned to a project that has an end in sight: it might end in six weeks, it might end in four years. The consultant’s employment agreement is with the consulting company, and that’s who pays his or her salary, provides training, benefits and other things that a traditional employer would ordinarily provide. The consultant would tend to report to work every day at the client’s offices.

2. How does the consulting industry work?
Large companies, including the Fortune 500, augment their staffs by anywhere from 10%-50% by outsourcing work to consulting companies or by hiring temporary help. This staffing strategy helps a company manage the cost of its headcount. When you hire employees, you have higher headcount. When you use consultants, you don’t. There are great financial implications here. The finance department in any company prefers to keep "revenue per employee" high when it reports financial performance to the stockholders. By using consultants, or contractors, a company keeps its actual headcount low while still having the number of workers it needs.

For example, the finance people tell the Information Technology department, you may need 100 people, but you get 50 in your budget. This increases revenue per head. When the other 50 are hired as temps or contractors, that isn’t headcount because such staff is "expensed" rather than treated as a long-term cost.

When a client needs workers, we supply them either through our existing staff, or by recruiting and hiring the right people and then assigning them to the client's site. (This is where people being recruited sometimes get confused -- we are not headhunters.) Sometimes its necessary for us to assemble an entire team, and to help design the jobs in cooperation with the client. If training is required, we provide it. Although assignments end, a good consulting company can re-assign a consultant to a new client. It's important to examine a consultaing company's practices on these points -- they're not all alike.

Consulting companies like Computer Aid provide the right staff without causing a company to incur the long-term cost of hiring more employees.

3. Why would a person want to be a consultant to a company, rather than an employee?
People who are good performers and have an interest in having their own business tend to like being consultants. It gives them more professional freedom while helping them avoid the bureaucracy of a company. It also enables them to typically earn more money.

In a traditional large company, there is a lot of paperwork and administrative overhead to most jobs. Your career is determined not just by how good you are at your work, but to a large extent by administrative issues. You get tied down by meetings and other "corportate requirements".

For example, whether they need it or not, employees are required to attend training sessions and workshops. A consultant gets custom training as he needs it, at a level that’s most appropriate to him, not to anyone else. Training also need not occupy his work hours. A lot of his training comes from reading manuals, journals and brochures on his own time. The rest of the time the consultant can focus on his customers and on driving the business. At work, he doesn’t have to do all that other stuff that a large company makes employees do. The consultant’s time is more self-guided, and he is measured mostly on how well he performs his job.

A consultant can also earn more money because companies tend to hire consultants for "hard to fill" jobs that involve the more state-of-the-art skills. Because demand is high, compensation is higher. If you had a traditional job, say in the finance department, and your company needed more web developers, for example, and you were qualified to do web work, you’d probably be out of luck. Even if you have good web skills, you’re not likely to be moved from finance to programming. It would cause political problems. As a consultant, you move based on your skills and your earnings depend on what you can actually do. It’s easy to change jobs, so it’s easy to capitalize on your most valuable skills.

In addition, a good consulting company is more likely than a regular employer to provide you with training outside your normal area of expertise, because then it can bill you at a higher rate.

4. Does that mean a consultant’s career is dependent on the consulting company he works for?
A consultant is more free than a regular employee to circulate within his professional community and to take more jobs in more challenging environments. He can also get more relevant training. There’s no room in the consulting industry for wasting time — training must be good, and it must be for a good reason. The consulting firm a person works for thus has a great impact on his career, based on the quality of assignments it can offer him. By the same token, a good consulting company can offer both short-term assignments and long-term ones. A company like Computer Aid usually puts people on assignment for 2-3 years — sometimes 4 — with the same client. We’re responsible for a certain scope of work, and for improving that piece of work for the client, making it more cost-effective. Otherwise the client won’t use our consultants. We thus have an incentive to provide a good career path for our people.

There are two types of consultants. One is the career-oriented consultant who will work with our company to deliver long-term services, often on a strategic level, to our clients. The other is the consultant who wants to look for the best rate he can get, and who wants to do six months with company A, six with B and six with C. He wants to keep his options open all the time. When we’re recruiting consultants, we often go after seasoned employees of large companies. These kinds of savvy, highly-skilled people usually aren’t interested in quick-turnaround jobs. They’re more interested in a long-term assignment with a good client. Such desirable recruits keep us on our toes -- we have to be good at helping them develop their careers, or they won't work with us.

About 2-3% of our employees are the short-timers. We may use them because we need very specific, new skills, like web development.

5. Some people get recruiting calls all the time from consulting companies. What cautions would you give someone who was considering moving from a traditional job to a consulting job?
Make sure you read your agreement with the company carefully, and make sure everything you agreed to verbally is documented and signed. It doesn’t matter what the consulting company is telling you if the contract says something else. Contracts vary all over the board. Make sure you know what you’re signing up for.

You want to check the company’s references. As a potential employee, it may seem weird to ask a company for references, but today it’s very important, because it’s a job hunter’s market. If I were considering a job with a consulting firm, I’d like to talk to other employees, especially employees who are in a similar role to what I’d have.

6. It’s common to hear stories from first-time consultants who’ve taken jobs with consulting companies, only to find they made a grave mistake. How do you avoid that?
Even the best consultants will encounter problems. A consultant I talked with the other day didn’t get paid for two months by his company. He’s been consulting for 20 years. The firm recently changed management, and lost its ethics. That kind of horror story can happen to the most experienced consultants. That’s why it’s so important to perform your own due diligence before you sign up.

7. Many people eye consulting as a way to earn more money, because they’ve met consultants who seem to be getting rich. Does that really happen?
It does, but usually only for short assignments. Your objective should be to maintain compensation growth for the long term. Some people are able to earn huge amounts of money, but they’re in the minority. Eventually, even if you’ve gotten a very juicy contract, you come back to the norm.

If you’re looking for a high rate consistently over a 2-3 year period, you need hot skills. For example, in the Information Technology industry, SAP would be an example. This means taking a lot of training, which requires a huge investment from the consulting company, and you must sign an agreement that you will stay for probably for two to three years. After that, you can leave with your new skills and your higher value.

You can usually negotiate higher dollars if you’re moving from an employer to a consulting job. But again, I’d encourage the person to look at the long term. Don’t be fooled by the short term rate. Ask yourself, what can this company do for me? If you’re a professional consultant and you know several reputable consulting firms, when you’re two months from the end of an assignment and you get in touch with the managers at those firms and you have the right skills, one of those firms is going to have another job for you. It’s secure as long as you’re performing.

8. What’s the difference between working as a consultant on W-2 vs. 1099?
A W-2 contract is where you’re being paid an hourly wage just for the actual hours you work. While you could work on a 1099 and call yourself an independent contractor, I’d go with a W-2 because the IRS is looking carefully at subcontract situations. The legit subs are fine, but that’s where you usually have the consulting company providing more than one worker. For example, if a firm puts five Lotus Notes workers on a client’s site and one is out sick, the firm replaces him with another. Providing Lotus Notes staff is what the firm does. That’s a legitimate subcontract relationship.

Now, let's say the firm has only one employee (that's what happens when you're an independent one-person contractor, hiring yourself out). If you're putting just one person into one full time position, then your subcontractor status is risky as far as the IRS is concerned, because the IRS regards it as an employee relationship. It’s not worth the hassle for the company or the subcontractor to do that. It’s still done, but it’s not going to last long as a trend.

9. What kinds of benefits should I expect as a consultant?
Don’t expect a lot of benefits for a W-2 contract or a subcontracting job. The hourly employee should expect the company to pay its half of Social Security and unemployment insurance. The better firms will provide some sort of long term disability insurance, life insurance (Computer Aid provides basic life insurance of $10,000) and access to a 401(k) program. Computer Aid can provide medical insurance if the employee works at least 30 hours per week. That level of benefits is considered quite good. The typical situation, however, is probably just going to provide social security and standard withholding.

It costs a consulting firm company about 10-12% of your rate to handle all that. At Computer Aid, due to our size we can leverage the insurance programs we have for salaried employees to help us provide insurance for the hourly staff, too. Not all firms can do that. 401(k) can be a significant benefit for hourly workers; that gives us an edge when we recruit, because not all consulting firms offer it. Good benefits help us encourage a long-term relationship, even with W-2 workers.

10. Is turnover high in the consulting business?
In general, turnover is over 30 or 35% in Information Technology consulting. Among employers it’s about 20%. Our turnover at Computer Aid is about 15-20%. Customers are very comfortable with that and they feel we’re on the right track; we’re positioned right.

11. Once you add the consulting company’s overhead, what does a consultant wind up costing a customer?
A client pays a premium to hire a consultant, and the consulting company takes on the added costs of the employee. We provide services to the client including recruiting, training and certain management functions. From a cost-savings standpoint, when a company hires a consultant there is never a cost of severance when the employee is let go. If the company were to hire its own employee, the additional burden on a $50,000 salary raises the cost to about $80,000 - $90,000. A consulting company’s price for that same employee would probably be a little higher than that.

12. Why would a company hire a consultant for $100,000 rather than an employee for $80,000?
First, there’s the headcount problem, as we’ve already discussed. Second, we provide a lot of added value. For example, we put our new people through 5-10 week training institutes. We teach our consultants a methodolgy that makes them more profitable workers, and we build teams that are very efficient. That pays off for both the worker and the client. We can usually put a team in place with fewer people than the customer could, because we’re focused on that job. Our processes and methodologies more than pay back the client for the added expense of using our people. That’s how any good consulting relationship should operate.

13. How would you advise a consultant who was considering working on his own, as an independent contractor?
Few consultants succeed on their own, mainly because they don’t accurately calculate the cost of running their own business. Make sure you accurately price out the insurance and benefits you used to get from your employer. Then get a good insurance agent. We pay about 20-30% of salary as benefits. You should figure at least that much for yourself. In addition, you have to factor in the time and cost of marketing yourself, and other administrative expenses. Most people who try to go it alone find the marketing to be a real challenge. That’s why they work through consulting firms.

14. Any horror stories you’d care to share with us?
It’s altogether too common for a candidate to be recruited by a consulting company and sent to the end-client before he ever meets the consulting company. This is very poor practice. The candidate arrives at the interview and sees his resume on the employer’s desk and notices it’s on the consulting company’s letterhead. He’s startled because he thinks he’s there for a direct job with the employer. He thought he had been recruited by a headhunter, not a consulting firm. That creates embarrassment and trouble. A consulting company is not a headhunter. A headhunter earns a fee for placing you in a job directly with the employer. Some recruiters at consulting companies aren't very clear about that when they call you -- you have to ask.

Sometimes, a consulting company will send a person’s resume to 30 firms without the candidate’s knowledge. That makes the candidate look bad, because word gets around that the resume is floating.

Our hiring process is very dramatic; it’s more rigorous for salaried than hourly employees. We do two interviews before we’d ever send a candidate to interview with a client: a management interview, and a technical one. We administer tests to assess technical and other skills. This is for the worker’s benefit as well as for the client’s; it helps us assign the candidate to the most profitable job for everyone involved. We prep the candidate for the interview, sometimes for ten minutes, sometimes 30-40 minutes, depending on the situation. But we avoid sending anyone to a "blind interview". We share as much information with the candidate as we can. Of course, there are sometimes surprises, but the goal is to get it right, and to protect all our reputations.

15. How does a person find a good consulting firm?
Ask contractors you know who work in your building, who have been in the consulting world for a while, and find out who are the good consulting firms they’ve worked with over the years. Talk to headhunters. If there are ratings of consulting companies, I haven’t seen them.

When you’re deciding on a firm, try to work with people you know and trust who are reputable, and they can help you through this whole process. If you have to go to someone you don’t know, check their references. And don’t just use references they’ve given you; use your own contacts.


Many thanks to Scott Henty for taking the time to share his insider knowledge and advice. Scott can be reached through The Headhunter; all email will be forwarded to him. Please indicate in your subject heading that your email is for Scott.


NOTE: The advice provided above is an opinion, not a professional service. Ask The Headhunter and the author of the advice are not responsible for its accuracy, use or mis-use.

 

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