Don't Hire Employees: Structuring A Consulting Practice For Growth

Measuring business success by employee count is misleading; hiring often reduces profit margins and adds unnecessary stress. Use associates for flexibility and only hire when absolutely essential.

Hi, I’m Rich. Welcome to my weekly newsletter where I share systems and frameworks for scaling your consulting practice from $0 to $1m+ in revenue.

You can get 1:1 personal coaching or explore my new course: Proposal Mastery: Learn To Write Winning Business Proposals.

Sign up for my upcoming webinar with

SeattleDataGuy

:

Free Webinar: The Brutal Truth About Building a Consulting Business (And Why Most 'Expert' Advice is Complete BS)

---

“How Big Is Your Business?”

When you tell people you run your own business, one of the first questions they ask is:

“How big is it?”

Essentially, how many employees do you have?

It’s a shorthand way of gauging how successful you are. It’s also completely bogus.

In 2019, for example, I had 4299 fewer employees than WeWork….but I was $1.37 billion more profitable.

You can generate seven figures in revenue as a solo consultant. Yet, the person asking the question would be more impressed if you had ten employees (regardless of whether you were profitable or not).

Curiously, no one ever asks whether my practice is profitable, what kind of clients I work with, or if I enjoy running it.

The problem with being asked about the no. of employees is that it fosters the mindset that you must hire employees to succeed.

My Painful (And Less Painful) Experience With Hiring Employees

FeverBee has gone through three iterations of hiring employees.

• Phase One: 2011 to 2013: “Oh, I’m earning enough money to hire employees. I should do it”. [Future Rich - “No, enjoy the profit margin you dummy!”]

• Phase Two: 2014 to 2017: “I’m growing quickly, I should hire employees to build a large consulting practice” [Future Rich - “Are you really sure the market is growing quick enough and big enough for this?”]

• Phase Three: 2021 to Present: “Ok, let’s only hire employees when we ABSOLUTELY need to”

You will notice the long gap between phases two and three. That’s when I downsized the organisation to just me and returned to doing my own thing for a few years.

There were several reasons for this.

1. During phase two, we generated more revenue than before, primarily from two big accounts. We had been a victim of revenue concentration. When the contracts ended in the same month, we went from generating $20k profit per month to losing it overnight.

2. It was stressful. I hadn’t managed employees before. We had a fantastic team at this time, but I had no real ability to manage them in the way they deserved. I wasn’t enjoying the work and was finding the situation stressful.

3. I wanted to get back to doing the work. When I hired staff, I didn't realise that I wouldn’t be doing the work anymore; I’d be managing a team and doing a lot of admin. It wasn’t fun, and I wanted to return to doing the work.

If there is one lesson I would stress to you right now, it’s this;

Don’t hire employees until you absolutely have to!

Hiring Employees Changes Everything

The moment you begin hiring employees, everything changes.

You might think you’ve previously managed staff, so you know what you’re doing. But, hiring employees for your own small business where you’re responsible for everything is very different from managing staff at an existing organisation (with all the processes they have established). It’s also your money that’s on the line.

It’s like teenagers becoming adults. You don’t realise how carefree your world is until you begin hiring employees. You suddenly have to deal with things like:

• Performance plans.

• Payroll.

• Personal issues.

• Employee taxes, pensions, and benefits.

• Providing equipment and security issues.

• Background checks.

• Employee retention and development.

• Resolving disputes.

• Recruitment

• Quality assurance.

• etc….

For example, you can spend days doing criminal background checks and gathering proof of academic achievements from your employees due to requirements in a prospect’s procurement process.

You encounter tricky situations. What happens when an employee (who works remotely) wants to move to a different country? You can either lose the employee or have to deal with the tax affairs of a completely different country now. What happens when they want a pay rise but your revenue has dropped over the previous year?

I’ll break down the key challenges below and how I’ve solved them in recent years.

Challenge 1: Financial Stress

When you hire more staff, your profit margin will decline.

Let’s imagine you’re earning $300k a year with a theoretical 100% profit margin. You hire two new staff members at $75k each to handle growth, and your revenue increases to $500k annually.

Your profit increased by $50k, but your profit margin dropped by 30%. You might not care because profit is up - but this hides a very real problem

When you hire staff, you have a bar to clear each month to be profitable. A lower profit margin makes you highly vulnerable to market conditions. If a pandemic hits or a market contracts, you could lose several clients simultaneously, but you still have to pay staff or let them go.

Consulting work is notoriously feast/famine. When everything is good, you get to reap the profits. But what happens in the months where you’re between clients? In the past, you could work on your marketing or take some time off? Those months now cost you $6k to $13k per employee. Losing $30k per month will cause you a whole world of stress.

The larger a consulting practice becomes, the lower the profit margin.

And once you have more than a handful of employees, you have to start spending more on people and systems to manage those employees. There’s Asana, Breathe, etc.…more employees require more employees. Soon, you must hire project managers and HR to make things work. This again eats into your profit margin.

And the lower your profit margin, the more vulnerable you are to downturns in the market.

Because consultancy work ebbs and flows, there are occasionally times when staff members find themselves between projects. During this time, they typically work on research projects, self-improvement projects, or other tasks that help the business. But that’s still time I’m paying for without any immediate outcome. Trust me, it can feel like you’re paying for someone’s education.

It also dilutes the impact of client wins you might previously have been happy with. I can’t stress enough how different the financial situation is once you hire employees.

I remember feeling good about securing a $30k client project when it was just me. But when I had employees, I realised that the client only kept us going for a month.

Hire Associates vs. Employees

The best model isn’t to hire employees but to build a roster of associates you can work with. Associates are those you bring aboard for specific client projects. You agree to either a fixed fee or hourly rate.

Associates are significantly more expensive in the short term but far more cost-effective in the long term. That’s because their utilisation rates are much closer to 100%. When you don’t have projects, you don’t pay them. You also don’t need to worry about taxes and benefits.

It might sting to pay $80 to $120 per hour for an associate - but it’s a bargain in the long run.

I’d suggest:

1. Creating a survey or application form to become an associate. We did this a couple of years ago and quickly compiled a list of 60+ people with their relevant rates, areas of expertise, and experience.

Anytime we have a project that needs more support, we can bring people from this list in. You can adapt this in any way you like.

2. Provide free training to your associates The origins of this newsletter begin by providing free training to these associates to take on this work. I freely shared our staff training resources on doing the deliverables. Those who completed the training were far more likely to be selected for relevant projects.

3. Interview the prime contenders for associates in advance of a project. Make sure you interview and monitor the best people on this list in advance. You should know if they’ll be good in a client-facing role or not. A key question here is to understand their motivations. The worst scenario is you onboard an associate onto a project and then they get a full-time job with another organisation and leave at short notice (this has happened to me).

4. Cap the hours in the project to keep projects profitable. It’s not uncommon for the number of hours you expect a project to take and the hours an associate might believe it will take to vary considerably. This is why it’s essential to cap the number of hours in the project to ensure there aren’t any ‘sticker shocks’ when the invoice arrives. This guarantees your spending on the associate(s) won’t eat too deeply into the value of the project.

5. Get weekly updates on hours used. I prefer they drop me a weekly line to tell me how many hours they’ve invested into the project. This ensures I know how much capacity we have with each associate remaining in the project. It also helps me to get a sense of how much time it takes an associate to complete an activity.

A notable concern of this approach is you are training your current and future competitors. However, even if you open-sourced your entire methodology, your clients would still choose you. Copying a methodology is easy, but building the brand is hard.

Challenge 2: You Don’t Get To Do The Work You Enjoy

There are many reasons to become a consultant.

Two of the most common is to ‘be your own boss’ and ‘have more freedom’.

However, once you hire employees, you become a manager. You stop doing the work you initially became a consultant to do and instead spend a growing amount of your time managing the work of staff. And if you enjoy that - that’s great. You’re on the right path.

But you might discover you became a consultant to free yourself from bosses and subordinates, only to replace them with clients and employees - whose demands are far higher.

If you don't want to spend 50% or more of your time managing staff, you shouldn’t hire staff.

Managers have a lot more responsibilities. You have to get involved with things like:

• Administration. Managing payroll, taxes, benefits, vacation time, compliance with labour laws, etc.…

• Leadership. Providing direction and feedback, handling interpersonal dynamics delicately.

• Training and development. You need to invest a LOT of time in training staff, providing ongoing development, and ensuring they continue to grow with your support.

All of this consumes vast amounts of your time. Instead of doing the work, you will find yourself giving feedback on the work.

How to solve this challenge

There are only two ways to solve this challenge.

1. Hire someone to manage the team. I tried this for a couple of years. It worked okay, but eventually proved too costly. It also created a distance between myself and the team.

2. Abide by the same rules you set for your staff. Accept that you’re giving up some freedoms. First, you abide by different rules for yourself than those you lay down for your staff. That’s not an unreasonable position - it’s your company. But just be clear and upfront to your team about it.

Most importantly, it would be best to abide by the same rules you set for your staff. For example, I used to think nothing of taking a month off to go scuba diving in Thailand. But I’m not sure I’d want to allow staff to take months off work whenever they want, so doing that now doesn't feel right.

I am also responsible for coaching, supporting, and removing any roadblocks my staff faces. Abandoning them for long periods feels irresponsible.

Challenge 3: Recruiting and Retaining Staff Is Hard

If you start a consulting practice, recruitment and retention will be big problems to solve.

How do you attract talented staff when you can’t match the salaries and benefits package larger firms offer?

How do you keep those staff as your reputation grows? What happens when your staff want to start building their reputation within the industry and begin attracting the attention of larger firms?

Or what happens when clients realise they might be able to hire your employees to do the work for them?

These are all very real challenges to solve.

How To Solve This Challenge

This often forces you into one of three strategies that could be more appealing.

1. The McDonald’s Approach. You get good at hiring and training young people. You train people up quickly, expect two years of work from them, and then expect to lose them.

2. The Right Mindset Approach. You look for people who want flexibility or circumstances larger firms couldn’t accommodate. In the past, I hired people who wanted to work from home and with flexible hours. Since the pandemic, I’ve focused on people who want both this and a relaxed, low-stress work environment.

3. The Rare Gems Approach. You hire people the larger firms wouldn’t want to hire. These are the people whose location, skillset, or qualifications wouldn’t be attractive to firms who can offer more money than you. This isn't easy when you’re a small consulting practice, but there are plenty of rare gems (especially in countries where English isn’t the first language) that make this possible.

Each approach entails its own obvious set of challenges. But you often have to pick a strategy and get really good at it. Think of yourself as running a sports team competing with a team with a far bigger budget.

Challenge 4: Quality Assurance

The other challenge with hiring employees is sustaining high quality—at least your perception of quality. When you delegate any task, there will be a divide (no matter how slight) between how you will do it and how the person you hire will do it.

If you hire people who are not as good as you, clients will be disappointed. But if you hire people better than you, they will want to be paid more than you can afford.

This creates an eternal challenge: You must try to keep your company as close as possible to your vision while avoiding the temptation to micromanage every detail. How you navigate this challenge largely determines the success of your brand.

In my 20s, I shifted drastically from micromanaging to being too hands-off, depending on the staff I had at the time. It’s taken a LOT of work to find the right balance.

How To Solve This Challenge

1. Set and articulate clear principles. Ensure everyone understands who you are, what you do, what you’re for, and what you’re against. The brand guidelines and background should be specific and easy to grasp. It’s often better to set these as 10 to 12 overarching principles.

2. Have lots of examples. People work best with examples. Make sure you have many examples of your past work, what people should and should not do, and plenty of loom videos describing your process at every stage of the journey. Investing the time now will pay off plenty down the road.

3. Commit to training. Any time you hire someone, you must invest a lot of time working with them and coaching them to the desired level. For the first few months, you’re pretty much paying two people to do the same job. You must set aside a lot of time to do the projects together. This won’t be an instant hand-off.

4. Commit to improvement. Like the above, training doesn’t end once someone has grasped the fundamentals. You want to commit to improving them and having them improve themselves until they can do the tasks better than you.

5. Embed your review into the process. These days, we have a system where I initially review the deliverable in its early form to provide feedback and then a final evaluation towards the end. I usually do these reviews via Loom now - I like the ability to record videos with my thoughts and feedback easily. This also makes for good training content later.

A good lesson here is that anytime you request a change or correction in a review, go back to the critical principle you’re basing this on (it should never just be your personal taste) and update it so the issue won’t happen again.

Seriously, Don’t Hire Employees (unless you absolutely need to)

I really can’t stress this enough - if you’re a successful solo consultant; don’t hire employees unless you want everything to change.

Here’s a summary:

1. Measuring a business by employee count is a misleading way to gauge success.

2. Hiring employees typically lowers profit margins and adds a lot of stress.

3. Hiring employees brings complexities like managing payroll, taxes, and personal issues that many business owners aren’t prepared for.

4. Only hire employees when absolutely necessary; using associates offers more flexibility and control over costs.

5. Managing staff shifts your focus from the work you enjoy to administration and leadership, which may be different from why you became a consultant.

6. Recruitment and retention are challenging, especially when competing with larger firms, and maintaining quality when delegating requires constant attention.

7. Clear principles, examples, and continuous training are essential to ensure top-quality client work.

Connect with Rich

• Are you new to the newsletter? Subscribe for free

• Follow me on LinkedIn for more insights

• Learn to write persuasive business proposals with my Proposal Mastery course.

• Get 1 to 1 personal coaching. Get a personal coach to help you grow your consultancy practice. Tackle topics like positioning, client acquisition, delivering exceptional value, industry leaderships, and building the systems to thrive. Hit reply or learn more about my coaching approach.