THE REAL COST OF HIRING AN EMPLOYEE VS. A CONSULTANT

HOW MUCH MONEY ARE YOU LEAVING ON THE TABLE? THE NUMBERS DON’T LIE. I’LL EXPLAIN AND YOU DECIDE.

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Recently I read this article from Hyam Singer, VP User Engagement at TOPTAL, that in my opinion “nailed it” on this subject.
Don't Be Fooled: Calculate the Real Cost of Employees and Consultants

​This article is a must read for employers. It outlines and delivers a hands down argument that should not be ignored, especially in today’s economic turmoil. 
I’ve been on both sides of this question, as a former employee, as a company that hired employees and as an independent contractor. Here are my thoughts on this subject, especially as it pertains to senior level marketing positions within our industry.
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First, let’s look at retail today and the looming economic factors companies are staring down today. I recently wrote extensively about this on my blog: http://www.social4retail.com/the-real-retail-economy-is-not-in-good-shape.html
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It all boils down to “revenue vs. costs”; generate more revenue while minimizing costs.

I’ve always tried to post information that will help retailers and brands do more business with less cost to compete more effectively. Lately that has been about using technology as a means to mitigate costs efficiencies, gain more leads, sell more stuff and ultimately … “make more money”.
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​As a marketing guy I’ve been blessed with having the best mentors in the business, as my professional journey took me from the printing/packaging industry, consumer product marketing, agency owner and now industry consultant. 

The problem with the marketing profession today, is that most senior marketers have a job shelf-life of 18-24 months, OUCH. More on this later….

​SO ONWARD WITH THE DISCUSSION.

​​According to the governments Bureau of Labor & Statistics (BLS) the “average” median pay for a senior level marketing person is approximately $124,850/year, or $60.03/Hour. BUT that is only the base cost and does NOT INCLUDE;

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• ​Insurance (medical, dental, life) – Approximately (12%-15% additional)
• 401K/Profit Sharing Contribution – Approximately 2%-3.5% additional (Optional)
• Payroll taxes (company paid portion) – Approximately 7%-9% additional, company paid portion
• Any employee bonuses – Ranging from 3%-7%, depending on overall compensation package

TIME TO RE-DO THE MATH

Base Salary (Based off BLS above) – 
$124,850.00

Plus 12%-15% Insurance/Benefits (AND you know these costs are only going UP) !!!
$14,982.00 - $18,727.50

401K/Profit Sharing Contribution (Optional cost depending on company)
$2,497.00 - $4,369.75

Payroll Taxes – Company paid portion
$8,739.50 - $11,236.50

Yearly Raise/Bonus (Optional)
$3,745.50 - $8,739.50

Your total investment
Base Salary - $124,850.00

Additional expenses (LOW-END figures) – $32,964.00 +26.4% added to base salary

Total $154,814.00 or $75.88/Hour, from $60.03/Hour

Additional expenses (HIGH-END figures) – $43,073.25 +34.5% added to base salary

SO, DO I HAVE YOUR ATTENTION YET? IF NOT, LET’S DIVE DEEPER INTO THIS RABBIT HOLE.

​I didn’t calculate the cost of the i.e. “Learning Curve” time and the resources for this new employee’s acclimation into your culture, business systems and processes.

Think about that for a minute. Other employee’s and time/resources expended in mentoring this new employee plus all those additional direct and indirect costs, explained by the author, amortized into each employee’s “real cost”. Items such as;

• Accounting fees
• Advertising
• Computer hardware
• Computer software licenses
• Conferences and trade shows
• Corporate graphics and web design
• Corporate taxes (property, etc.)
• Dues and subscriptions
• Equipment
• Furniture – (Had to throw this one in there ;-)
• Insurance (liability, workers comp, unemployment insurance, etc.)
• Legal fees
• Meals and entertainment
• Meeting expenses
• Office supplies
• Overhead staff (executive, administrative)
• Printing services
• Recruiting (advertising and fees)
• Travel

HERE’S THE REAL SHOCKER.

According to DCAA Accounting standards ... 
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The real “ALL IN EMPLOYEE COSTS” for this person equates to $248,352.00/year or $119.00/Hour, figuring a base hourly rate of $60.03/hour and adding in all the additional costs outlined above.

I know, the math is getting really obnoxious. But the math is going to get easy, very easy.

If you hire a consultant at $60.03/Hour to do the same job, that’s what you pay, plus any additional “authorized” ancillary or travel expenses.

The amount of infrastructure that a consultant uses is significantly less than that of an employee (not to mention the fact that the consultant doesn’t receive any benefits from the company).

As a result, the actual cost of a consultant is affected by G&A (General & Administrative) costs only; Fringe (i.e., benefits) and Overhead are irrelevant to the cost of a consultant.
And not to mention a couple other considerations.

Check out what the REAL EMPLOYEE COST CALCULATOR and comments below from  HYAM SINGER - VP, USER ENGAGEMENT @ TOPTAL

CLICK THE IMAGE TO ACCESS THE CALCULATOR AND DO YOUR OWN MATH

Hyam also points out;
“Potential financial risks. Companies tend to make hire/fire decisions much more rapidly with consultants than with employees. It is not uncommon for under-performing employees to be kept on the payroll for multiple months, throughout various stages of probation, to minimize the potential for an employee-filed lawsuit. The resulting cost to the company can be quite substantial. In contrast, companies tend to dismiss consultants with minimal if any notice when in any way dissatisfied with their performance”.
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 “Recruiting fees affect the cost of all employees. One obvious savings with consultants is the avoidance of often hefty recruiting fees. What may be less obvious, though, is that each recruiting fee paid drives up the real cost of all employees. Since recruiting costs are including in overhead expenses, every recruiting expense that your company incurs increases your overhead costs, which in turn raises your overhead rate multiplier, which in turns drives up the effective cost of each and every one of your employees”.​

AND THERE IS MORE ...

Liabilities.

​When you hire an individual, such as myself or my company, we take on all the liabilities and usually hold our client “harmless. We carry our own insurance, pay our own taxes, use our own computers, cell phones and more. Sure we bury those costs into our agreements, but they are minimal compared to your infrastructure.

To add to this, figure in the “ROI” of this hire. Remember in the beginning of this article I stated that most marketing people have a “shelf life” of 18-24 months?

Consider this, especially when the marketing paradigm is changing monthly. How much “real profound knowledge” does your current marketing person have? Do they adapt, change and grow with the times, or do they only practice what they knew when you hired them? My bet is that they don’t evolve, that’s why they have a short shelf-life.

​(More articles on this subject below)

SUMMARY
HERE ARE SOME QUICK DISCUSSION POINTS OF USING
​US VS. THEM

​No long term employment commitment. When you hire a consultant make sure the engagement terms are usually very short – 3-6-12 months with 30-day renewal clauses for two reasons;

1. Speaking for myself, this gives me the opportunity to “fire you” should the synergy not work. For me, I will not work with/for someone who doesn’t want to listen and implement needed and/or proven strategies and tactics….and then when they fail to do what we suggest, they want to blame me or my company for not getting the job done or their investment ROI
2. A good consultant/company relationship should thrive based off synergies and exceeding goals without the need of a contract hanging over their heads. For us, we ONLY do short term contracts, usually 3-6 months with automatic 30 day renewals and 60-day “out clauses” for each. Our belief is that we want to addict you to the candy, not the medicine…with tangible results.

Yep, we want you to WANT to keep paying us, so we'll work really hard to do that.

​AND FINALLY, WHAT SHOULD YOU EXPECT TO PAY FOR A SEASONED, SUCCESSFUL CONSULTANT? 

Well, that depends of course on the extent of your needs, the industry, the level of expertise needed and the time estimated to get your results.
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Our services range from $1,500/mth - $15,000/mth. Many of our engagements are in the lower end because what’s mostly needed is to create leads through messaging, creative, PR, go-to-market strategies and tactics, as long as the company has “in-place” the systems and processes to deliver on these promises. If they don’t, then we start there first, for anyone can create a “marketing promise”, but if you can’t deliver on that promise, consumers will abandon you and it will cost you 5X more to get them back.

When the consultant you want to hire has a track record of doing this, over and over in a multitude of positions and industries, it’s probably in their DNA to be successful with a short learning curve. If not, you execute your “out clause” and you will achieve one of two outcomes; Success or disappointment, but either way, you’ve saved a ton of money…and hopefully made even more.

And one additional note, confidentiality and non-compete. All of our agreements protect our clients with a one year, minimum, confidentiality and non-compete clause. These clauses are standard in our industry to protect the integrity of the business relationships so information can “free-flow” for strategic purposes.

Every company and situation is different so there’s no “one size fits all” answer here. But an awareness of the factors and issues discussed in this article will help arm you to make the best financial decision for you and your team.

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