Have You Failed If You Find Yourself Freelancing?
A vast majority of the people who try to make it as a consultant will eventually wind up as freelancers. Why does this happen? What's the difference? And is it necessarily a bad thing?
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Are you starting a consultancy practice or an agency?
The difference between consulting and contracting (or freelancing) is pretty simple.
If you are helping organisations define their problems and the steps to resolve them, you are a consultant.
If you are providing organisations with the resources to execute these steps, you are a contractor.
For example, FeverBee might help clients build their entire community strategy - including what platforms and techniques to use. But we don’t (usually - more on that later) provide the resources for the client to implement this strategy.
The client will then either do the work themselves (if they have the capacity) or hire an agency to implement the aspects of the strategy they can’t do (i.e. build the website or moderate the community).
In short, a consultant defines the work.
A freelancer does the work.
Both are very important tasks, but the business models are completely different - and each has some rather obvious pros and cons.
It’s important to know the pros and cons when deciding what kind of practice you’re creating. It’s remarkably common for people to set up a consultancy practice and a year later realise they’re running an agency rather than a consultancy.
Why Do Many Consultants Become Freelancers?
Because there’s more demand for freelancers than consultants
There isn’t as much demand for consultants as you might think.
That’s typically because organisations want to figure the next steps out for themselves. After all, why would any organisation hire someone with no experience in their organisation to tell them what to do?
On the surface, that doesn’t make much sense.
You’re far less likely to lose a potential project to a competitor than the organisation simply deciding to do it themselves.
Think about this yourself. How often have you hired someone to tell you what to do vs. someone to do the work you’ve figured out needs to be done?
It’s not even close!
Many of you reading this might never have hired a consultant before (you really should by the way - just to experience the client side).
This means there are often too many people who want to be consultants vs. the number of consultants the market can support. Unless you can rise above the pack, the odds of success in many sectors are slim.
But the odds of building a successful freelancing practice (or agency) are a lot higher.
That’s because the demand for short-term support is a lot higher. Organisations will often require short-term help (or people with specialist skills) to implement part of their plans.
And this is why many would-be consultants eventually wind up freelancing for organisations in their sector. The demand is higher and the work is more plentiful. You can earn a good living with a high level of freedom and flexibility in your life.
Often a consultant simply follows the money and finds themselves doing freelance work.
A consultant might help a client define the problem and the next steps. Then when a client asks if they know anyone who can implement the solution, the consultant sees the dollar signs and says they can do it.
The Pros and Cons of Building A Consultancy Practice vs. An Agency
I’ve seen people launch agencies in my sector and enjoy rapid growth - often building organisations with dozens of staff.
I know a couple of people who have sold their agencies for millions of dollars - even agencies which began long after I launched my consulting practice.
So why doesn’t everyone build an agency rather than consulting?
The table below outlines the differences…
When you are an agency (or freelancer), you typically charge by the hour. The client is paying for your time. A client will compare your hourly rate to others in the industry and decide if you’re worth the money. It’s very tricky to charge beyond $200 per hour. In some industries, the standard is $50 per hour.
Consulting is a different ball game. Your goal is to help clients make decisions which will (often) save or generate millions of dollars. You usually charge a fixed fee which reflects the importance of the decisions you’re helping clients make. You command a premium for acquiring expertise others don’t have.
I’ve never truly tracked the total number of hours invested into a fixed-value project, but I’d suspect the hourly rate would be several multiples of what a freelance implementing the project would earn. And that’s because you’re doing Linchpin work. The value of what you’re doing is so much higher.
There are typically fewer projects out there - but those which are are the kinds of projects which let you bring all of your expertise to bear and create tremendous value for the organisation.
It’s easier to get work as a freelance, but you probably won’t earn as much as a successful freelancer as a successful consultant.
But How Often Do You See A Consultancy Practice Sold?
Now here’s the interesting catch for everyone who’s read the above and has decided to become a consultant.
There’s a short-term vs. long-term pay-off here.
It’s a lot easier to grow and sell an agency than a consulting practice. That’s because agencies have attributes people want to buy:
Higher earnings.
A diverse range of clients (less risk).
A larger number of staff.
Consistent revenue through either frequent client or retained-based contracts (which are a lot more common in agency work than consulting).
More demand for the organisations’ services.
Opportunities to expand into related products and services.
etc….
In an agency, it’s possible to create an asset which can run without you. That’s an asset which you can often sell for anything between 1x to 3x your annual revenue (i.e. if the agency is earning $1m a year EBITDA, you might sell for $1.5m etc…). The higher your earnings the greater the multiple (typically).
The downside is the margins are usually a lot smaller. That’s because you’re not commanding the same premium for your time. The hourly rate has to cover all your overheads. In an agency, an 11% to 20% profit margin is common. Slim profit margins create risks. Losing a major client, an industry downturn, or a sudden systematic shock (like a pandemic) can tip a nice, profitable, business into layoffs and stress.
But if you can endure that risk, it’s possible to grow an agency which becomes an asset you might one day be able to sell and live the good life.
The vast majority of consultants will never have a practice to sell. That’s because they are too integral to the practice. Often the consultancy practice consists of just themselves. Their clients want to hire the individual, not their company. They do all the marketing, promotion, and delivery.
If you want to sell a practice you need to make yourself dispensable to the practice, not indispensable. If your business can’t thrive without you, it’s not worth much.
Worse yet, earnings can fluctuate wildly from one month to the next. 👇
Who wants to buy a practice if you never know what it will earn from one month to the next? Retained-based contracts which buyers adore are less common in consultancy work vs. agency work.
This means you might earn more money in the short term, but you probably won’t have an asset to sell in the long term. You might be acqui-hired, but that’s going back to employment - is that what you want for a 1x to 2x multiple of your annual earnings?
And that’s the trade-off.
Freelancing = Easier to earn a living in the short-term, but lower revenue than consulting. However, there’s a possibility of building an agency in the long term.
Consulting = Harder to earn a living in the short-term, but higher revenue if you cross the dip. However, it’s unlikely you will build an asset others will want to buy.
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A solution that many firms choose to adopt is to have both practices within the same organization, and then differentiate rates and models somehow.
This is tricky to do well, but obviously opens up opportunities for scale that are VERY appealing...