Many consultants are very fortunate in that they are in high demand. Their phone is ringing off the hook and their inbox is full of new inbound consulting opportunities. But there's a problem, and it is a serious problem. You see, the recruiters that are calling you already know you're qualified for the job, but they just want to know the answer to one question - What's your rate?
If you've been in this business for anything more than a day, then you know the dilemma you face. No matter what number you throw out there, it's invariably more than the client has a budget for, at least that is what the recruiter will tell you. However, you aren't really seeing the full story. You see, you're contract is most likely going to be with this recruiter, so it isn't a question of what budget the recruiter's client has; it is a question of what he, the recruiter, is willing to pay you, the consultant. He will be billing his client whatever rate they have agreed upon.
So the real question here is, what margin is the recruiter willing to take? That's one of the reasons you never want to provide an answer to the 'what's your rate' question unless you know all your numbers. You see, there are several villains in this story. The first is, why didn't the end client just contact you directly? What's the value add of the recruiter who is contacting you? Unless he is a SAP Consultant, how is he going to evaluate your skills, as many try to do? Will he even present you to his client? Is he and his company going to have any delivery responsibility? Most likely not, and thus, in addition to trying to get you at the lowest possible rate, he will want you to have a variety of insurance coverages, which are very expensive and getting more so everyday.
So, if for a job that typically pays $150 an hour or even $200, he is saying his client is only willing to pay $60 an hour, what is he really saying? And if he is asking for an 'all in' rate what does it actually mean to you. Do you really know what rate you must make in order to take the job and have it make financial sense. Or will you end up taking a job that, if you do the numbers on it, means you are going to lose money for the first 6 months of a 6 month contract?
You're not alone in struggling to find the number that works here. I've been there as well, in fact, on any given day, I may well receive over a hundred calls and emails with jobs that someone thinks I might be a good fit for. I know, many of you might be saying, well then, you must be lucky, you must be making a fortune. The truth is, I do ok, but there have been many times where I've taken a job, and been beaten down on my rate or in the much more common scenario, a job for which I am a perfect fit has come in, but I have taken a pass on it becasue the offered rate was far below what I am willing to work for. I work in the SAP world, where the demand has been high for many years, but where the story has always been the same, 'our clients have a limited budget, is that the best you can do?' The only question has always boiled down to 'what's your rate' which is code for how low will you go?
But when I started in the SAP world, we flew business class, we earned very, very good rates and customers had to wait on us, because there weren't that many of us. Everyone thought we earned way too much, yet were more than willing to pay $400 an hour or more for someone from one of the Big 4. Most consultants were home on the weekends, if not Thursdays and people understood, you need to maintain your quality of life, just the same as any other employee of a client's company. But then, the on-shoring of off-shore labor began to erode the concept of high-end business consulting. Slowly, but surely, you found yourself flying cattle class. You were staying at the roach motels of the world. You were picking up more and more of the expenses of working on a remote project while doing ever more paperwork just to get reimbursed. Your rate was never based on the value you were delivering to your clients. Clients also began to be more abusive toward everyone on your team.
There was and is a tremendous amount of pressure put on rates by shipping the work off-shore, where the rates were often 10 times less than the on-shore rate. But the skillsets were not and are not the same. The only people to benefit from these rates were the consulting companies. The client didn't really end up paying less and the off-shore consultants certainly didn't earn very much. But the consulting companies did maintain and improve their profit margins - at the consultant's expense.
In a recent Department of Labor report, as reported in the New York Times, it was reported that the lifetime earnings for people who have entered the labor force since about 1967 have actually been steadily declining. This, despite the fact of rising productivity and an ever increasing demand for highly skilled labor - means highly skilled consultants as well as just about every other job category are working at ever lower rates. That's why we began to develop a tool that tells us what rate we must make, which we use to negotiate with. It has been very, very revealing to both us and to certain clients to know that we would lose money on a project, not just on day one, but often times, for up to 8 months! In other words, depending on the rate you agree too, your current location and expense situation and where you will be going to in order to deliver your project, you may well find, that after all is said and done, that you actually lost money on the project, every. single. day.
Oddly enough, the skillsets demanded by the ever increasing complexity of the software have not been reduced. Clients, especially U.S based clients, have become extraordinarily picky about who they will hire, but yet totally and completely focused on paying the least amount of money possible. In addition, almost every company has attempted and keeps pushing to reduce the expenses they will cover for the consultants.
As a senior SAP Project Manager, with a PMP designation and SAP ASAP certification as well as being certified in mutliple SAP modules, I have consistently suffered from not having the resources I needed to do my projects. Through experience, I have seen how the price of consultants is set long before the project SOW (Statement of Work) is signed, with the rates often times pushed down by SAP itself, just to win the software deal. Of course, the rate can't be open, but it has to be high enough to ensure you get the best available resources.
Translation: The rate was set for a resource that neither the consultancy bidding to deliver the project nor the client had a resource for. They, the consultancy, were making a commitment that they could deliver a resource at a price that was totally made up and at best, based on a series of assumptions - that if you play along with, will mean you make less than you must make to take the job, unless you like to lose money!
I've also seen how projects will suddenly appear with dozens or even hundreds of recruiters attempting to fill positions, that were most likely known about months or even years ago. Sometimes, it will be for an emergency backfill, because someone either left the project unexpectedly or more likely, was asked to leave, or fired. Sometimes, this is because the person didn't have the required skillset but more often than not, it was because they found someone even cheaper and they could increase their margins.
With a resource management approach like this, it is no wonder that Gartner is projecting that 100% of the SAP Cloud based implementations will fail. This is not good for customers, but for you, the consultant, it is even worse. Because recruiters, in addition to trying to push your rate to the absolute lowest possible point, will also be wanting a referral from your last project. If that project went South because it was done on a shoestring, with the only focus being on lowest cost versus highest value, then you were not only working for far below what you should've been, you were digging yourself a reputational hole. In our world, our reputation is the only thing we have. Ruin it and ruin your career.
Do you know what your FLC (Fully Loaded Cost Rate) rate is? If you're a consultant and you work for a consultancy, you probably know what your FLC rate is. After all, even when you work as an internal consultant for a company like SAP, you have to bid for projects. The internal hiring manager will ask you what your FLC rate is, because he has to fill the slot with someone who helps him hit his number (meaning he must hit his revenue and margin requirements). But if you work as an independent consultant or even if you are thinking about taking another job as an employee, do you know what your FLC rate is? Do you know how to calculate it? What if I told you there was simple, semi accurate way to quickly determine yours?
Just take your target annual salary and divide it by 1400. This will tell you what your approximate FLC rate is. You can download a copy of a spreadsheet we use to quickly calculate our own here. So if you know your FLC rate, you can also estimate what your daily expenses will be using another rule of thumb ~ 22%. Roughly speaking, you're going to need to spend about 22% of your daily rate on expenses. So lets say you're charging 150 an hour which is roughly equivalent to $210,000 a year, you're going to spend about $308 a day on expenses. In some places, this will be higher, others it will be lower.
But lets say you take a much lower rate, say $750 a day. Your daily expenses won't be covered if you use this rule of thumb! Your airfare won't be lower, your hotel won't be cheaper, your car rental won't be cheaper and your food won't be cheaper. You have to charge for expenses as receipted. That's just to cover the expenses. But if you're truly delivering high value, you need to charge even more for expenses. You should also be aware that for companies such as SAP, they charge a handling fee, sometimes as much as 6% of the expenses, for processing your expenses. You should too. You never know when a major corporation will stiff you, like I have been.
And interesting exercise is to ask yourself, "self, how much do I have to charge to be worth $1,000,000 a year?" Turns out, it is not as much you think, +-$715 an hour. Wow, who makes that kind of money? Lawyers, maybe. But what about you? What sort of revenue would you need to generate to be worth $1,000,000 a year to someone? Well, if your client would be happy to make 35% margin on you, then you would need to bring in about $983 an hour or about $1,350,000 in annual revenue. Now, most of you won't be paid $1,000,000 a year, no matter how much you bring in, but if you know that you will be bringing this much value to the company, perhaps you could make just a bit more. Something to shoot for.
“He who has a thing to sell and goes and whispers in a well, is not so apt to get the dollars as he who climbs a tree and hollers.” —Author Unknown
Now that you know just what's going on when they ask you 'what's your rate' and how much a mistake can cost you, you might want to know what you can do about it.
You can either keep picking up the phone and answering the 'what's your rate' question the way you have always done. You can keep on giving up your margin on your projects, using your hard won skillsets, to a recruiter. Or, you can keep this solution open and running all the time. With it, you can determine not only what your consulting rate must be and:
Our Consulting Rate Calculator is unlike any other online calculator you've ever used. It was developed by us for our own use and to our exact specifications. Then, the MBAs got ahold of it and said, we can do so much more with this. They were right. What we are giving you here allows you to treat each job exactly as it should be - a business proposal. With it, you can get a customized, comprehensive project proposal that tells you:
There is no charge to use this tool and there is no limit to the number of times you can run it. As we provide contractor management services, or what you know as 1099 management services, and we ourselves often work as 1099ers, we want to make sure you are getting value from our relationship, not just from your first interaction with our company, but on an on-going basis.
P.S. Bonus Offer: We also can set you up with an absolutely free Hubspot CRM system, tuned to help you in your job search. We think you will find that by using it, you're probably letting opportunities slip through your fingers. If you're like us, you get inundated with emails and calls, and you know you should be doing a better job of tracking each of these potentially valuable opportunities.
P.P.S Bonus Offer: If you got this far, congratulations. There has been a lot of information presented here. But perhaps you haven't been receiving all the jobs we've been talking about. Or maybe you're not even a SAP Consultant in the first place. That's all right, because our consulting rate calculator works for any job, of any type, in any currency, anywhere in the world. But if you want, you can send us a resume as well. Sometimes, we have openings ourselves or hear of others we can refer you to.