Thursday, January 26, 2012

Contracting Rates Through Agencies

Establishing appropriate consulting rates is always a challenge. As you know I own Brock & Associates, a minor IT consulting firm in Calgary. I've been in the racket since 1991. This is a common issue for new consultants.

As a first time consultant you will likely use agencies as your primary channel for marketing your services. Invariably, the agency will ask you for your expected rate. That is because there are so many factors to determine a "correct" rate. They need to know your preferences to be able to effectively market your services. However, as in any negotiation, the person who puts a price on the table first is in the highest risk position. That is why the recruiter prompts you for your price first. Theoretically then if you are too low they can take more of the pie from the customer or if you're too high they put your resume at the bottom of the pile so they don't waste time on trying to sell you. I said theoretically. In reality if the agency is reputable and experienced they will behave better than that.

You will soon find out if they are not reputable. If so, you won't be using them in the future. If they are that shortsighted they don't stay in business long. That is why most agencies that have been around awhile must be somewhat reputable.

On a tangent thought: All good agencies are actually very well aware of market rates. They must be by necessity. When they submit their allotted maximum of candidates to the client (usually around 3) they are competing with all the other agencies in town. The submitted rate is your rate + their gross margin rate. If the submitted rate for their candidates is too high they will never win any business with the client. If they are too low, all their consultants will be bailing out to other agencies and they wouldn't have any "resources" to sell. It is always important to remember we are simply btheir "inventory" of products to be bought and sold! Imagine they are a shoe store we are just their stock of shoes. If they have no shoes... they have an unprofitable shoe store.

I mentioned the theoretical scenario, but the reality scenario is a bit different. If the rate you initially respond to the recruiter is too low, the recruiter would raise a flag. I say that because the agency margin with the client is determined from the base rate. For example, suppose your "correct" rate band should be about $60-$70/hr. The agency gross margins generally vary from about 12% to 20% of your rate. So 20% of $70 is $14/hr maximum profit to the agency for a perfect fit candidate. So if you quoted a crazy low rate of $40/hr in the first place, their margin would only be $40 * 20% = $8/hr. There is a big difference in their profit on this deal between $14/hr and $8/hr... so it is in the agency's self interest to say... "Oh $40 is too low; I think I can get you $55". They wouldn't necessarily put you all the way up into you "correct" band for two reasons.

i) It gives this agency a bit of a price edge in presenting you to the client. If you are a good resource (meaning comparable in skills & experience to resources submitted by another agency) but you are $5 cheaper, then the client will take you and a deal gets done. So that's good for you.
ii) The are lots of contractors out there that believe they are entitled to a "pay raise" every so often (and I strongly disagree with this practice... I'll explain in some other post). That $5 left on the table allows the agency to give that $5 raise and still be acceptable to the client.

Of course, this all changes once you have some credibility with a particular agency. They can begin to trust you when the following becomes evident:
i) You're reliable, you do good quality and you don't screw the client in any way... Don't forget the agency has to work very hard to have a good collection of customers so they can sell you (and other people) to this client in the future. They want to know you won't screw up that relationship on them.
ii) You aren't a prima donna; always looking for unjustified rate increases. They need to be out knocking on doors to find new clients or helping existing ones. That is the next deal for consultants like me and you. They shouldn't be wasting their time having to deal with a client about some naive twit who thinks he's worth another $10/hr right now. Incidentally, agencies don't mind asking for a justified rate increase now & again. Reasons such as changing market conditions, increased skills, changes in job description are a few examples. Just be reasonable with the agency. Their clients can be idiots about rates too and they have to manage that relationship as well.
iii) when the recessions come and the markets collapse, you will understand that your rate must go down too. It is referred to a rate band for a reason. In recessions you're at the bottom of the band. In a boom, you can be near the top of the band.

So if you ever quote a rate to low in your intial discussions and you are offered a position at that rate, my suggestion is:

1/ Finish the contract, be very happy with the rate you suggested. (at least outwardly)
2/ In the meantime while you're on this first assignment, put some effort in finding out varying rates for different jobs in your field in your market. I know this isn't easy... people don't blab their rate to everyone. You need to be paying attention to any clues that come your way. Be a detective (in an honest fashion with integrity... not a sneak) Just like we expect agencies to know the rates... you should also be aware of your rate band. After all, you are a consulting firm; it just happens to be a very small one!
3/ Presumably your first underpaid asignment will only have a 3 month term. If you think your rate is too far below "correct", you should just go to your agency at about the 2 month mark and ask them to start looking for your next assignment for you. Tell them this: "You always see assignments through to the end, but want to expand your skills & experience at another client" i.e. Use a little advertising with your request... DON'T tell them you're unhappy with the rate because you would be complaining about your own misstep in the first place! It is always good practice to never complain about things... just work to improve them.
4/ In your new search you can then quote a price from your "correct" band.
5/ Alternatively, you can stay at the assignment for a year at a low rate and then approach the agency for a rate increase after a year. This is not my preferred strategy.

As an aside, I still sell myself as Project Manager on occasion. My rate band in Calgary currently is about $90 to $120. I consciously sell myself at the low end. I have been in client sites where some circumstance will happen and the client just machine guns all the contractors at the high end. It is called the "Tall Poppy Syndrome"... all the high ones are cut down to size. Remarkeably, all the consultants with their heads down below the threshold "high rates" are left alone. And if you haven't figured it out yet... your utilization rate is significantly more important than your bill rate. The concept goes by a few other metaphors such as "Slow & steady wins the race" or "a bird in hand is worth two in the bush".

I think that is enough unconventional thinking for this post.