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Comment by tptacek | Hacker News Reader

This is a useful answer and these points are well taken but unless I'm misunderstanding, I object to the underlying logic here. If you work this backwards, starting from "I can get a developer for $100k/yr", your logic re-derives cost-based pricing. And of course, a strong consultancy doesn't price its services based on the cost of its inputs, but on the packaged value it's providing to its clients.

So, for example, if this consultancy found a specialist niche within which it could charge not $165/hr but rather $220/hr, you would not expect to see developer wages increase commensurately.

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I definitely agree with that point; I'm trying to anticipate the question "Why isn't their opening bid $150k given $165/hour?" (Because they'd go out of business.)

Yep, I had the same reaction. :)

I usually don't comment on these threads but felt the need to jump in. While I totally understand and agree that ANY business needs to turn a profit in order to stay in the market. I fundamentally disagree with the distribution of work vs risk in proportion to profit in a traditional consultancy model.

The assumption that seems to be present throughout this thread is that there is an owner/s (not necessarily the same person as the operator) present who needs to take a percentage from the bill rate. This model is inherently extractive and sets up a really bad set of incentives for the people doing the productive work. (productive in this case is actually writing code/solving client problems and maybe not doing the marketing, administrative, or sales work of the business.)

I know someone is going to raise the point that there has to be an owner to put up the capital/bear the initial risk of starting up, which is totally valid! This will always be true I just think that there should be a route/way for the productive worker to work towards a piece of that ownership pie.

Also, the fact that the bill rate vs pay rate is transparent is actually great. I know many staffing firms/employment agencies that keep that information hidden from thier employees. (Full disclosure I am a member-owner at a worker cooperative staffing startup staffing.coop, so I am biased towards employee ownership in general! )

There generally is a way for them to work towards that isn't there? That's what getting made a partner is.

Beyond that, consulting has low startup/asset costs, there isn't much of a barrier to entry. So if a worker at a consultancy doesn't feel like they're getting as much value as they're generating, they can always just start their own. Plenty do.

The way to eventually get towards ownership is through increasing your billings whereby the client is hiring the productive worker, at which point, it's usually when you become a partner of the company (effectively sharing in profits and losses).

The assumption that marketing, administration and sales work of business as non-productive is an arrogant view. While as engineers, we tend to think that doing the actual work counts more than the rest, clients actually value the other stuff and would be willing to pay much more for it as well. You can easily see this with enterprise contracts that value $25k to $1m or more, where they usually have account executives, project managers, training programs, etc. in addition to the product.

I think you misunderstood my intention. I (generally speaking) classify work as either productive or reproductive. In this case the productive work being the engineering and the reproductive being sales, marketing, admin, Etc. Both play very necessary and valid roles within any healthy business. I agree that some engineers have a myopic view of their function/role within an organization. I didn't mean for that comment to be self-aggrandizing at all.

> eventually get towards ownership is through increasing your billings whereby the client is hiring the productive worker, at which point, it's usually when you become a partner of the company (effectively sharing in profits and losses)

I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

Apologies for misunderstanding your intention. Genuinely curious but what's your definition of 'reproductive' work?

> I think that this might not be considering the inherent politics of work and the power dynamics present in every business. To be clear, I don't think the comment is coming from a bad place, I just think that it points to a common fallacy that any sort of "meritocracy" is possible in business as usual. When you have a small group of people holding power there are few incentives for them to share that power. And In my experience it is the person who is able to sell themselves the best that gets the highest reward, not the most productive.

You're absolutely right and I see it with my experience as well. The highest rewards don't usually tend to fall naturally and equally to everyone whom we deem to be the most productive. And while there may be few incentives to share the power in small groups, one would hope that the goodness of an individual's heart would lead them to do so.

If it's true that the "owner" is merely "extracting" value from the "productive" workers, then the productive workers should have no problem setting up shop for themselves. This is a consultancy we're talking about; the way you've framed it, there's no barrier to entry for the exploited consultants to set up competing firms with better terms for developers. In fact, they don't even really have to set up firms. They can just all quit, operate as sole proprietorships, and subcontract back to the owner's firm, who will have no choice but to 1099 them, at floating rates, when all their workers leave.

That this rarely happens in practice should tell you something about where the value in an established consultancy is generated.

As someone who ran a solo consultancy for a few years and probably was not exploiting myself, I think you're undervaluing what an employee W-2 consultant gets from their employer and also what the client gets from what you describe as the non-productive labor of the employer.

When I consulted, delivery was only a portion of the package. Sales work isn't just "Convince the customer to buy the engagement", it often required substantial (and often speculative) work on creating proposals, doing client education ("Why should I even send email anyhow?"), scoping projects, attending conferences, writing publicly (an activity which is both marketing and produced substantial value despite not being directly billable), etc etc. Clients were not strictly buying delivery; delivery came with a bundle of requirements like e.g. having to deliver while being insured. This produces client value, because they sensibly don't want to give a commit bit to someone who could accidentally bring down the business and has no meaningful assets if sued. Warren Buffet will happily take that risk off the client's hands, to their happiness, but he won't do it for free. Clients similarly can't engage consultants without lawyers being involved. Lawyers materially de-risk engagements; de-risking is something both sides very much want; professional labor is not free. Clients benefit from receiving trade credit (the consultancy will advance you $60k of value and you pay them back months later, with no interest charged, minimal underwriting, and functionally no recourse in event of default); trade credit isn't free.

From the perspective of a W-2 consultant, the things you get from the enterprise include having predictable work lined up by people who specialize in getting gigs and scheduling them so that you can focus on delivery. The set of technologists who can deliver is much larger than the set who can both deliver and convince software companies to pay premium rates for their time. (Trivial proof that this is true: look how many delivery-focused technologists say that business owners on HN are blowing smoke about rates clients are happy to pay every time that subject comes up.) The consultancy insulates the consultant from market risk; regardless of whether the consultancy is having a good month or a bad month in pipeline or cashflow management payroll happens on the day everyone expects it to in exactly the amount they expect it to. The consultancy invests in the professional development of their employees and in the specialization of their offering on the marketplace, which specialization increases the market value of their employees while at the consultancy and in the future.

There is a way for delivery-focused employees to get ownership. It is to become a principal consultant. Some firms offer promotion tracks which get one there. The faster option, if a delivery-focused employee thinks that the enterprise is not adding value, is to walk out the door and hang out their shingle. If the delivery-focused employee was right, they immediately have 100% ownership of the enterprise. If they were wrong, oh well, capitalism happens to capitalists.

if this consultancy found a specialist niche within which it could charge not $165/hr but rather $220/hr, you would not expect to see developer wages increase commensurately

It depends on the definition of "commensurately", but assume that only some of their developers are able to fill the new lucrative niche. Would it not be in the company's interest to be willing to give those employees something like a proportional 25% raise? If they don't, isn't it likely that a competitor will eventually poach those select employees, causing the company to lose access to the niche?

Maybe? That's why you want to ask the market about this, not a first-principles analysis on HN.

Speaking from experience and having seen a few of these data points personally (possibly over-indexed on a small amount of data), often this comes down to making a choice of 220 with a 50% utilization vs 165 with 70%. Pretty much the same revenue for the company in the end, but with enough slack to put some extra short term gigs in there. Alternatively, in a situation where the company is confident of higher utilization, getting long term work, locking in a higher rate later, or being able to add extra bodies to the contract this is about $130 at 90% utilization (52 weeks - 4 weeks leave - 2 weeks public holidays). All these are common in .au govt contracts.

The mentioned 80-120 range seems like a feasible answer to this. Push for more (or strong bonuses) if utilization is generally high. Obviously the 140% depends a bunch on location / taxes / cost of doing business etc., find out what these are in your neck of the woods and exploit it to negotiate your salary.

I don't think working back from your bill rate to your W2 FT comp is ever a good idea. You're as likely to under-sell yourself as over-sell. It is not your problem if your employer can't make a unit economics case for your comp; your comp is what the market says it is. Firms can and do keep people on staff that are on paper not worth in billings what they cost to keep around, for all sorts of reasons.

It will likely be cheaper to take the risk and counter-offer for the few employees where this actually happens. This gives them a discounted rate until this moment.

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