Abandoning the red-light district business model – TOBE

In my previous post Abandoning the red-light district business model – ASIS I explained the current ICT freelance business, and how it is pretty similar to the way business is done in a red-light district.

Now I’m going to explore the possibilities of exiting this business model for a better business model. Better for the freelancer and the paying client, not better for the agencies.

But before we start looking for and alternative, we should first find out why this business model exists. Why is there a party in the transaction that add little or no value, but still walks away with a serious piece of the pie? In other words, are the pimps still in business today?

There are a number of reasons why clients prefer working with agencies to hire freelancers, rather then working with the freelancers directly. If we are to provide an alternative then it should meet each of these requirements.

  • Administration: Working with only a limited number of agencies simplifies administration. If you hire 20 freelancers from 5 different agencies you only receive invoices from those 5 agencies, and not from 20 different one-man companies.
  • Volume Discounts: If a client hires 10 people from the same agency he is in a power position to demand volume discounts. This is not something you can do if working with 10 different companies.
  • Business Continuity: Agencies sell the illusion of business continuity. They claim to be able to replace any resource with a equivalent resource if that would be necessary. While this might hold for the more commodity type of roles such as developers, or network admins, this is definitely an illusion for any type of senior role. You cannot simply replace a senior architect by an equivalent and continue business as usual. First of all because this “equivalent” simply doesn’t exist, there will never be someone out there with the exact same background and experience. And secondly because the new resource will always need a certain time to get to know the new environment and work himself in.
  • Sales: Freelancers in ICT are generally good in what they do, whether it be database administering, architecting or analyzing, that is their trade, and as professionals they master the skills necessary. But sales is a totally different trade, one in general that ICT freelancers do not master. Because of the lack in sales skills clients never even hear from the freelancers directly. In general ICT freelancers are just not able to sell themselves.

If the freelancers ever want to get out of this red-light district business model they will need to join forces. Small one-man companies aren’t even considered by the major clients in the business, but a company that represents a large number of freelancers will.

How should such a joined-forces company look like? Freelancers are all their own business owner, and they surely will not be inclined to join a company as a semi-employee, where they have no control whatsoever on how the company is managed. And they will certainly not be happy with “yet another agency” that creams of the profit for themselves.

So in order to attract freelancers I think this new company should be in the form of a cooperative company, where each freelancer can be a partner and stockholder. Whenever a freelancer works through this company, a part of the margin could be turned into shares. So the more a freelancer works though the company the more shares he gets.

The mission of the company should not be to make profit itself, but to maximize the profit of the freelancers, so margins could be relatively low compared to “regular” agencies. Any profit that would be made can either be invested in things like business development, or it could flow back to the freelancers in the form of a dividend, thus rewarding the freelancers according to their contribution.

Now lets have another look at the clients requirements to see if how such a company could satisfy them.

The Administration and Volume discount requirements both boil down to one point. The company should represent a large enough number of resources. The number of freelancers should reach some kind of critical mass to be allowed to play in the major league.  But how much is large enough… that’s a tough one. I think it’s save to say that 10 is too low, and 100 is sufficient, so I guess the truth is somewhere in the middle.

As for Business continuity, we as freelancers know this is an illusion. I would plead for an honest approach. Just tell the client honestly that we cannot guarantee business continuity for any type of senior freelancer. At the same time I would try to educate the clients and tell them that in fact no agency can guarantee this, despite their promises. If handled well this could even prove to be an advantage for our company as it would be perceived by the clients as being honest; a quality often hard to find in other agencies.

The last issue is Sales. It’s all good and well to have lots of freelancers ready to jump in, but without sales they will just stay there, being ready. So somehow the company should be able to reach out to the CxO’s and convince them to do business with us. On idea is could be to have the freelancers do some sales themselves, but I doubt that would work. I mean, have you ever seen a sales professional? Now compare that with the impression an average ICT freelancer makes….

Right!

No, I’m pretty convinced the company would need to attract real sales professionals to do the sales, after all, we don’t expect sales people to be able to do our job do we? And in the true spirit of the company these sales people should also be allowed to earn their part of the shares and become partners and stockholders.

So to conclude, if we ever want to get rid of the red-light district business model, and we don’t want to be treated like prostitutes, freelancers should join forces in some sort of cooperative company that is big enough to appeal to the major clients on the market.

Abandoning the red-light district business model – ASIS

I’ve been a freelance ICT analyst since 2004, and let me tell you how this typically works when I’m looking for another contract.

First of all I need to let the world know that I’m available. So I strut my stuff and update my CV’s at monster.com, and stepstone.com

The next morning I need to keep my cell phone nearby, as starting at 8:30 in the morning it will start ringing. The next following days I talk to tens of over friendly sales boys or girls, all of them using my first name like they’ve known me for ages, about this great “opportunity” they have at their client in the financial or public sector.

What it boils down to is that there are in general six or seven positions available in total at a given moment, and I get called about each of those three times on average. These positions are generally from the same few players on the market, the large banks and insurance companies, and all kinds of government or semi-government bodies. Apparently, when one of these companies has a need for an external resource, they send out the opening to a number of agencies, who in their turn will often forward that to even more agencies.

If one of those positions appeals to me, and we have an agreement about my daily rate (Why do they always have to ask whether it is negotiable?), I give the sales boy/girl permission to send my CV to the client, but not before I know the name of the client. I don’t want the client to receive 4 copies of my CV, all with a different company header, and a different rate.

If then the client likes my CV,  we make an appointment for an interview. The sales boy/girl will then usually give me some trivial advice such as “don’t wear shorts”, “brush your teeth” or “try to answer all the questions”, and asks me to come 15 minutes early in order to “get to know each other”. Then he/she joins the interview and sits quietly in a chair until it’s finished.

When both me and the client agree to work together the agency sends me a contract to sign, which usually states that they can end the contract at any time, and I don’t, and I’m not allowed to work directly for this client (or one of his clients sometimes) for a period of one year after the contract has finished, stating ridiculous fines of up to €25000 a day would I violate that clause. I usually get the ending clause amended so that I have the same rights to end the contract as they do, before I sign it.

Then the work at the client begins. I go to work everyday earning my paycheck much like any internal employee, and at the beginning of the next month I send my invoice to the agency. They then add 10% to 30% to my invoice total and send that off to the client. So for everyday I work they get something between €70 and €250, for as long as I work at this client, which often is several years. And what to they need to do for this? Well, the occasional phone call: “Hi Geert, how are you doing, everything still OK? Yes? Great, talk to you later!“, and at the end of the contract period make up a new appendix to the contract and get me to sign it. That’s it!

From my first days as a freelancer I noticed the remarkable resemblance between this business model and the red-light district business model. The freelancer is the equivalent of the working girl looking for her next client. And the agencies resemble the pimps. The problem is that all the good windows are owned by the pimps, and there aren’t many clients who are willing to pick you up from the street, and those who will might not be so trustworthy. So the working girl doesn’t have much choice then to work from one of the pimps windows, giving the pimp whatever percentage he asks.

After six years of being a freelance consultant I’m getting seriously fed up with this business model. Most agencies add little or no value, but they are still getting paid very well to sit back and watch the freelancers earn their money.

In my next blog post Abandoning the red-light district business model – TOBE I’m going to share my view on how to actually abandon this business model in favor of new and improved business model that cuts out the pimp-agencies.