Read on to find out about the advantages and disadvantages of both.

Introduction

As many consultancy firms begin as micro businesses, the owner or owners often wear multiple hats and take on a variety of roles. During this early phase it is common for the business to be cash-flow positive but lack in staff to help execute projects. As time goes by, if the consultancy firm is successful in their efforts, they will enter an expansion phase where their reputation and credentials increase. This allows them to attract more clients and the result of such expansion is increased profits, larger client base and becoming a well known name within the industry.

By definition expanding a Professional Services Firm or consultancy comes with scaling the personnel within, so that the growing demand can be matched with a scaled supply.

There are two primary approaches to scaling the human element. Using permanent employees or contractors. A contractor is someone who performs all of part of your responsibilities and is hired on a temporary basis to do this (these are sometimes called subcontractors or associates) These are questions of strategy which need to be asked early, purposefully and often. The choice of which may come down to the following factors:

Cashflow

When considering whether to hire permanent staff or contractors, it is important to consider the impact that this will have on your overall cashflow situation. Permanent staff generally require a salary, which needs to be paid regularly and often in advance of any work being completed. Contractors, however, can be hired for specific tasks or projects and payment may only need to be made upon completion of the task or project. This may help you manage your cash flow more effectively as you are not obligated to make payments until you have received payments

Risk

Depending on how much risk you are willing to take, one may be more suitable than the other. Permanent staff typically require a larger upfront investment and ongoing costs such as benefits and training which still have to be delivered even if there is a downturn in work. Contractors, on the other hand, tend to be less expensive but offer less stability since they work for short-term projects with no guarantee of renewal. Ultimately, it is up to you to decide which type of employee mixture best suits your needs and budget while balancing between risk aversion and cost efficiency.

Skills and Availability

Consultancies can benefit from using both permanent employees and contractors to gain access to a range of specialized skills at the right time. Contractors can provide specialist expertise that might not be available in-house, or fulfil specific short-term project needs without the need for long-term commitments or expensive retraining for existing staff. Permanent employees, on the other hand, offer more stability and familiarity with company processes. They also often require less onboarding than contractors because they are already familiar with organisational culture and workflows.

Employee Management Maturity.

Organisations must have an employee management system in place to ensure that employees receive the best experience possible. This system should be designed to support and promote a positive work environment and should include features such as tracking attendance, scheduling shifts, monitoring performance, providing benefits packages for employees, and implementing career development plans and programs. Developing such systems, require thought and investment and it is a risk to have a permanent employee base without having the infrastructure, support and experience to deliver on the commitment

Scalability.

Using contractors rather than permanent employees can be a great way to scale operations quickly. Contractors are often more available and don’t require the same commitment as hiring full-time staff members. . Additionally, contracts can offer flexibility when it comes to project management, allowing employers to have certain tasks completed within a specific timeframe or budget without having to commit long-term resources. This type of employee mixture could be beneficial for businesses looking to grow their operations quickly and efficiently with minimal financial risk.

Speed to ramp requirements

Using contractors increases the speed at which you are able to increase capacity and get work done. Contractors typically require less onboarding than permanent employees, as they come with a specific skill set that is already in place. This means that more resources can be put into developing other areas of the business rather than training new staff members. Also using contractors allows businesses to tap into a wider range of skills and expertise without having to make any long-term commitments – perfect for those times when additional resource is needed quickly but may not be required permanently.

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Advantages of Permanent Employees

There are clear advantages and disadvantages that need to be managed if you are scaling with the use of permanent employees. The advantages are as follows

Availability

High availability is one of the main advantages of using permanent employees. Permanent staff members by definition have a long-term commitment to an organisation , are therefore available when you need them to be do. This also makes them more likely to be invested in their role and take responsibility for their performance.

Retention of knowledge.

Retaining knowledge is an important factor when considering a mixture of permanent staff and contractors. Permanent employees are more likely to stay with the organization for longer periods, allowing them to build up expertise in their roles over time and share their knowledge with others.

Higher Gross Margin

Although Permanent employees come with fixed costs and the overhead of employee benefits, this is usually offset by a lower overall salary, especially when looked at on a per diem basis. The lower daily internal cost translates into higher gross margins for the business, which can ultimately result in increased profitability and growth opportunities.

Ability to provide a lower rate to a client

The lower daily cost of using a mixture of permanent staff and contractors can be beneficial in many ways. One such way is that it allows organizations to provide a lower rate to their clients, which may make them more attractive for certain projects or jobs. This could be especially useful for companies operating in highly cost sensitive situations, as the lower price point might help them win more work than their competitors.

Organisational Value

Having permanent employees can provide value to the organisation far beyond their immediate tasks. When they are in between assignments, these employees can be used for other internal projects or activities that require specific skillsets such as research and development initiatives. This allows organisations to benefit from having a flexible workforce that is experienced in multiple areas of expertise. Furthermore, this type of employee work helps organisations and employees remain agile and adaptable when changes occur within an industry or sector, enabling them to quickly pivot if needed.

Allows for Career Growth

Having permanent employees allows consultants to have a career path that they can follow and build on, as opposed to a contract-based job where their future opportunities are limited. Permanent staff have the chance to gain experience over time and progress in their role within the company, which can lead to promotions and a higher salary. This feeling of career growth is an important factor in motivating staff and retaining talent within the organisation.

Disadvantages of Permanent Employees

The disadvantages of having permanent employees in your consultant base include the following

lack of cost flexibility 

Using permanent employees often means that businesses will incur fairly fixed costs, such as employee benefits, salaries and other related expenses. This can be a disadvantage if there are times when the business needs to reduce costs quickly in order to stay competitive or meet budgetary goals. Additionally, having a large number of permanent employees also eliminates cost flexibility since it is difficult for businesses to quickly adjust their workforce size and skillset based on changing needs.

Time to recruit

The process of recruiting a permanent employee is typically much longer than that of a contractor. This is due to the fact that employers must put in more effort when searching for permanent employees, as they usually require more experience and qualifications compared to contractors. Additionally, the onboarding process of permanent employees can be extensive and time-consuming, as employers have to ensure all necessary paperwork is completed correctly including background checks and insurance forms. All these steps take time, making it difficult for businesses to quickly fill open positions with full-time staff members.

Longer operating cycle before profitability

When recruiting staff, it is important to consider the longer operating cycle before profitability that comes with hiring employees who may well have been chosen for aptitude and attitude rather than specific skillsets. Employees will require onboarding and often require more training and guidance to help them become successful in their roles. In addition an employee may not come onboard at the precise time a project starts and therefore may remain unbillable for a period. This can lead to a longer period of time before they are able to generate profits for the company as compared to contractors who may start producing immediate returns.

Management overheads

Employing both permanent staff and contractors can create complex financial, legal, and HR overheads for employers to manage. This is due to the need for employers to consider a whole host of activites that they might not otherwise have done. For example taxes, health benefits, workforce and career management, and other factors which vary depending on a person’s employment status. The move to employee is a significant shift and comes with financial and effort overheads

Advantages of using contractors

There are also clear advantages and disadvantages that need to be managed if you are scaling with contractors. The advantages are as follows

Cashflow

Using contractors can help to improve cash flow because they generally require payment upon agreed invoice terms which typically a period of weeks after the completion of the work. rather than the regular ongoing payments for permanent staff. This allows companies to budget more effectively and plan for future expenses without risking a negative effect on their cash flow situation.

Easier cost management

Additionally, using contractors means that businesses do not have to pay for employee benefits or other associated costs such as payroll taxes, insurance or holiday pay. This reduces upfront costs and increases the potential return on investment from each contractor-led project.

A large pool

There is potentially a large pool of skilled professionals to choose from in the market. This means that businesses have access to a wide range of options when it comes to client assignments, allowing them to select the best person for the job while keeping costs down.

Scalability

Using contractors makes it easier to respond quickly to changes in the market by scaling up or down as needed. This flexibility enables businesses to be responsive without having to make a long term commitment that may not be necessary. Contractors can be hired on an as-needed basis, allowing for more control over budgeting and cost management. Additionally, hiring contractors allows companies access to specialized skillsets as needed which would otherwise require significant investment in training permanent staff members.

Less management overhead (though not none)

This is because with contractors, the employer does not need to worry about providing benefits or training as much as they would with full-time employees. Also, since most contracts are project based, employers have more control over when projects start and end so that they can better manage their resources. Ultimately, this means that managers don’t need to spend as much time on administrative tasks associated with employee management.

Disadvantages of using contractors

Continual recruitment

When using contractors, it can be difficult to plan ahead and ensure that there is a ‘bench’ of potential employees who are ready to step in at short notice. With permanent staff, businesses may have the luxury of having extra team members already on hand who are familiar with the company culture and processes. But when relying on contractors for projects or tasks, companies will always need to recruit new workers and negotiate contracts as needed – which can be time consuming and costly.

Cultural fit

When recruiting contractors, it is important to ensure that they fit with the company culture. Without this consideration, there may be a disconnect between permanent staff and contractors which can cause issues down the line. This means taking into account their personality, communication style, and general attitude when hiring a contractor in order to make sure they will be able to work harmoniously alongside permanent staff members.

Independent mindset

Contractors often work with multiple companies and may not be focused on the company’s values or strategy. This can lead to a lack of commitment from contractors, who are more likely to make decisions that benefit themselves rather than the company as a whole. However, if managed correctly, this independent mindset can also be used as an advantage; for example by bringing in alternative viewpoints from outside the organisation that could prove invaluable.

Quality Risk

The downside of using a mixture of permanent staff and contractors is that there may be less control over the quality of work. This is because contractors may not have been exposed to, or be aware of, the consultancy’s quality mechanisms and delivery processes. As they are not permanent employees, it can also be more difficult to keep track of their progress and ensure that deadlines are met consistently. This lack of control means that there is an increased risk when it comes to delivering high-quality results on time.

Less Profit

One of the main drawbacks of contractors is that it can lead to lower margins and overall profitability, due to the fact that contractors tend to be more expensive than permanent employees. This means businesses have less money left over after they pay their contractor’s wages which reduces their profits. Furthermore, with contracts usually being short-term it can increase administrative costs associated with continually bringing in new workers which can further reduce profits.

Difficulty in developing organisational IP and knowledge

Permanent employees bring with them the advantage of allowing organisations to develop an internal knowledge base, as well as to make use of organisational experience. By using only contractors, organisations lack the ability to do this; leading to a loss in potential intellectual property development that could be beneficial for the organisation in the long term. This ultimately leads to reduced profits due to not being able to access this valuable information or resources within its own ranks.

Losing key resources at short notice

Using contractors risks losing key workers at short notice. This is because contractors are not permanent employees and typically come with a short notice period. This could disrupt workflows as staff may not have enough time to train someone else on their specific tasks or pass on any relevant knowledge they have acquired while employed by the organisation.

Having a mix of both permanent employees and contractors

In all likelihood, a consultancy may have elements of both models and whilst there are examples of purely permanent or purely contractor models these are relatively rare. The longer lived the organisation is, the more likely it is to have elements of both. One strategic decision to be made in this case is the appropriate mixture of contractors to permanent staff. This is the contractor mix. Cash flow conditions and investment strategy both have an impact on the overall strategy.

However tactical considerations sometimes take precedence. Sometimes market conditions influence the balance. Firms often increase their proportion of contractors at times of high flex or when the market is perceived to be on a downward or unpredictable trend. In addition, if permanent recruitment is proving difficult firms may be forced to take more contractors than their ideal model. On the other hand, a firm or clear pipeline or sold long term agreements to supply may encourage the firm to reduce contractors and increase permanent headcount.