With dwindling IT budgets, increased outsourcing, and a continuing decline in the job market, many IT managers are thinking of moving into consulting, either in a full-time or part-time role.
"This is a timely and critical issue for IT professionals. With the shift to IT outsourcing, and offshore competition, the face of the IT market is changing for managers and staff. It is requiring [that] all IT professionals look at their jobs as "service providers" whether working within a corporate structure or as a consultant,” explained Phyllis Klees, human capital advisory lead partner at Deloitte & Touche's Technology, Media & Telecommunications Group.
The key to consulting success, whether you jump in with both feet or start with a side job approach, is knowing what to charge before you get that first client or project.
The going rate
According to Joshua Feinberg, cofounder of ComputerConsulting101.com, based in West Palm Beach, FL, consulting newbies often start out by charging lower hourly rates than those with more experience.
“Some new consultants who are charging what I’ll simply call ‘below market’ hourly rates are doing so out of a lack of competitive knowledge or a lack of confidence in their ability to charge more,” said Feinberg. “[But] some…are consciously keeping their rates lower as sort of a grand opening special to rapidly fill up their calendar with 20 to 30 hours (or more) of billable work each week.”
New consultants must take several issues and factors into account when determining their rates, including:
- Figure out the fee structure first: Will you charge by the hour, the half-day, the day, by fixed project fees, or on contingency fees based on the success of your work? Or some combination thereof?
- Consider where you live and your specific skills: Consultants in urban and densely populated suburban areas generally have a higher cost of living, a higher cost of doing business, and a stronger need to pass along this higher overhead in the form of higher hourly billing rates. And specialists can almost always command higher billing rates than generalists.
- Know your competition: Find out what the competing consultants charge for services. The easiest way to do this is to search for competitors’ Web sites and even make some ”potential client” calls to get information.
- Take all financial needs into account: Remember that a standard full-time employee wage package includes benefits, taxes, paid time off, and possibly a bonus. Your rate should encompass all of these things plus a little more to put aside for slow times or unexpected expenses.
Match work with pay rate
In addition to the above issues, any consultant’s rate obviously needs to take into account the type of consulting work he or she plans on doing. “If a consultant is working long-term on the same project like a full-time employee, many of the administrative costs are minimized because he/she has just one client. Smaller projects and larger number of clients requires more administration and overhead,” explained Bill Coleman, senior VP of compensation at Salary.com. He added that the last item noted in the list of issues above—financial needs—requires serious consideration.
“You have to collect enough in consulting fees to pay for your time, benefits, Social Security, retirement, office space and supplies, marketing efforts, administrative time, and sick days, holidays, and vacation days."
While Coleman noted that there is no “one-size-fits-all” answer to setting rates, he did offer a quick rule of thumb new consultants can follow. The first step is to take your total annual compensation (including bonuses and stock options), divide by 2080 (40 hours a week x 52 weeks a year), and multiply that by 150 percent to 250 percent. This figure will give you an hourly rate that will take into account the majority, if not all, of your costs.
The 150 percent (50 percent higher than your current pay) covers a conservative benefits package and perhaps a small amount of the cost of doing business. The 250 percent multiplier will cover you if you have unique skills that are valuable but not likely to be in demand all year round.
Once you set your first rate, make sure you let first-time clients know it’s an introductory rate; that way, if you determine that you’re undercharging, you have room to adjust in the future.