Independent Consulting Guide: Breaking Away
The hardest part about eating sushi for the first time is actually convincing yourself to do it. You know that lots of other people are doing it and find the experience to be tremendously rewarding, but you're afraid that if you try it yourself, you're going to wind up in the bathroom slung over the porcelain throne wondering what the hell you were thinking in the first place. Many developers have the same fears about cutting their corporate ties and becoming an independent contractor.
The second most common question that I get asked about going independent (aside from the obvious “How do you find your clients?”) is “How did you know when it was time to go independent, and how did you make the transition?” That is the topic of this installment of the Going Independent series (see Do You Have What It Takes and Marketing Yourself). If you're confident that you want to make the jump, I'm going to provide you with a strategy for breaking away that worked for me.
First, let's dispel some of your likely concerns. Job security and continuity of income are the two biggest crutches that hold developers back from hanging their own shingle. Those crutches are merely red herrings, though. If the events of the past few years have taught you anything, it should be that there is no such thing as job security. Nobody is indispensable (although I used to be convinced that I was), and most employers just view you as a piece of meat that can be trimmed off at will. Think of it this way. The owner of any company (or its executives) are the last ones who are going to starve if tough times come.
The continuity of income argument doesn't hold any water either, although as an independent consultant you have to learn to adhere to a budget, instead of mindlessly eating at the trough like you're probably used to. To put things into perspective, I could work for three months then sit on my ass for the rest of the year and still make far more money than I could have in an entire year as a salaried employee. However, cash flow management takes on a whole new meaning when you run your own business (especially if you employ others). I'll go into that more in a future installment of the Going Independent series.
A distant third (but often overblown) concern of salaried employees is the whole benefits illusion. My take on benefits is that the last I heard there weren't any benefits that you could get from an employer that you can't get when you employ yourself (unless you have pre-existing medical conditions that preclude you from getting individual health insurance). Yeah, you won't get any “employer contributions”, but you won't mind that at all with your vastly increased income. Also, who wants some dumb 401K limiting your investment options and managing your money for you, anyway? There are much better ways to handle your retirement savings, but I digress. Plus, as an independent consultant, you can take as much vacation time as you want. True, you won't get paid for the time that you're whooping it up at the beach, but that doesn't matter as long as you plan your finances accordingly (there's that nasty budgeting topic again).
One thing that you definitely need to have before you break away is some steady work. Part 2 of the Going Independent series shows you how to take care of that. The key word here is “steady”. A handful of miscellaneous fixed bid work is great for some extra beer money, but it is hardly enough to start your independent lifestyle on. That is, unless you're single with no kids and can spend the next six months eating nothing but ramen noodles if necessary. Most of us don't fall into that category. What you need to find are a few “annuity clients”; Clients with an established budget who come back for more work month after month. Don't act too shocked. Once you get your name out there, annuity clients will no longer be the impossible dream.
Here's a little advice on securing annuity clients. I see so many people handle this task so poorly that it makes me want to gag sometimes. First, don't charge as much as you can. If you have a monster billing rate, but you have the skills to back it up, you'll probably find clients willing to pay it. However, those clients will be highly interested in getting things done (and you out of there) as quickly as possible. It doesn't matter how good you are and how much the client likes you if they flat out can't afford to keep you around long term. To land some early annuity clients (at least two), I suggest using the following formula to establish your billing rate:
[Current Salary] / 2000 * 1.25 = [Billing Rate]
For example, if you currently make $80,000 per year as a salaried employee, your billing rate would be $50 per hour. Now, don't chew my head off just yet. I realize that you're not going to be living “Lifestyles of the Rich and Famous” on that rate. You need to keep your eye on the prize, though. Your goal for now is to build up the base for a stable consulting business. These discount clients will provide steady (albeit modest) income, while providing you with a fallback position if your higher paying clients go away. Once you get the ball rolling, you can step up your rate to the following formula:
[Current Salary] / 2000 * 2 = [Billing Rate]
Anything more and you risk becoming too expensive to your clients. I should note here that my philosophy is to build a consulting business around steady, long term relationships with clients. Some people choose to build their businesses around high-priced, short-term relationships (often with the same clients, just not on a continual basis). There is nothing wrong with that approach, and it can be very lucrative if done properly. However, it saddles you with a constant responsibility to drum up new business, which can get quite stressful. Your income will also tend to ebb and flow more, requiring much more budgetary discipline. An optimistic way of looking at it is that if you double your rate and work half the time, you're still going to break even on income. I'm much more conservative in my approach to consulting, though, and if you're reading this column, you probably are too.
The second bit of advice that I can give you about landing annuity clients is to constantly be looking for ways that your clients can improve their business. That means actually learning about their business. I know more about the medical vertical now than I thought I would ever learn, but awareness of the concepts and lingo of a particular industry can pay you back in spades. Use this knowledge to suggest work to your clients. A little nudge can go a long way. It doesn't hurt to read up on marketing as well. I'm a big marketing buff, so that part of my research was enjoyable to me.
Of course, now you're probably wondering how you are going to be able to work your full time job, while simultaneously building up your annuity client base. There aren't enough hours in the day, right? I tested that theory by pulling three straight months of 80+ hour weeks. After nearly going insane, I came up with a better idea. Hire someone.
Hire someone? At first, it sounded a little bit odd to be bringing in outside help before I had enough work to support even myself full-time, but the reasoning was sound. By hiring a contractor, I could build my business and avoid the risk of a cut-over to full-time independent until the workload was sufficient to support it. Obviously, if you're going to take this approach, you need to broach the topic with your clients. They'll probably fuss a little bit, but that's when you knock about 20% off of the rate you are charging (for the contractor's work only), and tell them about the great credentials that your newly hired contractor has. Yes, you do need to hire somebody good, and it's not going to be cheap. Again, keep your eye on the bigger picture, though. This is only a stepping stone to getting where you want to go.
It's important to note that I said to hire a contractor, not a full-time salaried employee. Contractors are more expensive than full-time employees, but they also come into the arrangement with no preconceived notions of permanency. A contractor is also willing to be paid on an irregular schedule, and to accept some risk. To this day, with any part-time contractors that I engage, I work on an “I get screwed, you get screwed” basis. So far, I have always been paid by my clients, so I have always paid my contractors, but it helps to know (especially when you're starting out) that you won't be left in a hurt locker if one of your clients skips town. Avoid this advice at your own peril.
When you make the cut-over to full-time independent, you can roll your contractor over to a salaried employee, or cut him/her loose. You'll probably have to offer the contractor a higher salary than you would normally offer, but it helps to keep the same person on board to ease client concerns. I have much to tell with regard to hiring employees and expanding your consulting business, but that will have to wait for a future installment in the Going Independent series.
One final piece of advice is to not leave your current employer in a lurch. In the beginning stages of your independent consulting business, you're going to need as many references as you can get your hands on. Even though your current employer is not a “client reference”, your new client leads may agree to consider their testimony on your talents and work ethic. As with any job or client engagement, clean up your mess before moving on. Give at least two weeks notice (longer if you can't finish up by then), and tell your employer that you're not dissatisfied with your job, but you want to try your hand as an entrepreneur. Very few people will find fault in that, so while they will be sorry to see you go, they will most likely wish you the best of luck and help you out if they can. They may even become a client of yours (I've seen it happen).
In the end, no amount of advance preparation will ever make going independent a risk free proposition. At some point, you're just going to have to shut your eyes, hold your breath and jump. As you'll read in upcoming installments of the Going Independent series, the ride ahead is hard work, hectic, enjoyable, exciting, stressful, and lucrative all rolled into one. It's a hell of a ride, and each day brings with it new challenges to embrace and overcome.
Do you want to go independent, but are just too afraid to do it? What other concerns do you have that I did not address here? If you have already gone independent, what strategy did you use to break away? Talk back!