I’ve failed to blog this year because I’ve been too busy; at least that’s my excuse and I’m sticking to it! Business is up (about 50% on last year) and it’s been hard to get space to take a breather.

I’d like to be able to claim credit for this upswing (one of my roles is to get new business, after all) but I can’t – it largely happened without my doing. In fact, there seems to be an inverse relationship – the less I try to sell the more work comes in; it won’t be long before someone cottons on to this and I’m put out to pasture.

So what’s behind this? It doesn’t really make sense – the US economy (still by far the largest source of our business) remains moribund, companies continue to cut back and the general push to make savings by outsourcing to low-cost countries remains the orthodoxy.

A couple of reasons are that I think we do a good job (hey, you’d expect me to say that!):

• We have a good team that does quality work. We get to know clients, our churn rates are very low, we have very experienced people etc – these are the minimum requirements in today’s environment and we tick the boxes.

• We’re easy to work with –no minimum commitment, we do a whole range of services so can help out in many ways, we’re very reachable and responsive and while we’re not super cheap, we’re not super expensive either.

But there are three other reasons I think are at play, driving work our way:

• Clients are overworked
• Indian-based vendors are getting more costly and often still miss the quality mark
• Corporations are increasingly turning to contractors and project based work

Clients are overworked

No surprises here. Over the last two years they’ve cut to the bone and people that remain are working harder, longer and need help. Companies don’t have the bandwidth to train lots of people or vendors and are happy to turn to an external vendor they can trust.

Indian vendors are getting less attractive

Let me say upfront that I have nothing about work being conducted in India, in fact I think it’s often a great idea – we have a good number of people there that work for us, and so I know the benefits. But I also see some of the downsides and I think increasingly clients do too. This is what we hear:

• Outsourcing to India is no longer the bargain it once was. The Rupee/Dollar exchange rates continues to pressure Indian providers (their costs are in Rupees but their income is usually in US$). Since Jan 2009, for instance, the dollar rate has fallen from nearly 52 Rupees to about 45 today, a 14% fall, continuing to erode their cost advantage
• Vendor rates have also gone up as companies try to move up the value chain
• Quality remains an issue, especially in areas of writing and services that require cultural insight (marketing, advertising, trend work etc)
• Churn rates are high and clients are fed-up at having to train and retrain.
• Minimum FTE (full-time equivalent) commitments are off-putting

Here’s an anecdotal example of how things have changed. Over the last month we’ve been recruiting to create a team of five writers for some newsletter work we have. We’ve advertised on online job boards, used Elance, Guru, and leveraged our own teleworking database at ClickNwork and reviewed in detail over 200 applicants from a pool of well over a thousand. In previous years I’d have expected Indian freelancers to be amongst the cheapest, but today its people in Pakistan and Africa (I’m sure they’d have been cheaper a few years ago, but they just weren’t as connected then); good Indian freelance writers are today seeking rates comparable to writers in the US, which would have been unheard of just a few years back.

Shift to contract work

Last, companies are getting used to using contractors. This has been going on a while but the recession gave companies a great excuse to cut back, and instead of hiring back, they’re using project-based, contingent labor. A couple of stats:

• An April 2009 report (“The Emerging New Workforce”) by Littler Mendelson, one of the largest employment law firms in the country, predicted that following the end of the recession, “50% of the workforce added in 2010 will be made up of one form or another of contingent workers. As a result, approximately 25% to as high as 35% of the workforce will be made up of temporary workers, contractors, or other project based labor.”

• This isn’t just unskilled labor; it’s increasingly the domain of professional work. This chart, that comes from Staffing Industry Analysts, via Little, makes the point that over time, spending on contingent labor has increasingly been for professional skills (“Commercial” = Office/clerical or industrial)

• Analyst Christopher Dwyer of Aberdeen Group believes such workers already make up 20% of the labor force, a figure that will rise to 25% as early as next year.

Put it all together and you have companies overburdened, looking for different solutions than putting more work over to India and an emerging acceptance of project-based work completed by a growing cadre of temporary professionals.

That’s what I was asked, by email. Someone read my previous entry and wanted more details on how a company could truly realize savings on their research and related knowledge work, without a loss of quality.

Here’s a case study based on some client experiences – brace yourself as it’s rather lengthy; if you still have questions at the end of it, just let me know.

Context: Mid-sized consulting company with a corporate library of eight: two sector specialists, five generalists and one researcher for quick turnaround requests. The company is headquartered in New York with five researchers; two others work from a Chicago office and the fifth in LA.

Until Q1 2008 the team was running at full stretch with a small network of local freelancers helping out as needed (Business360 was part of the network), but since Q2 demand started to soften and there was a sharp drop in Q4. With practice (non-billable) work the team is still busy but billability is down to about 60% and still falling.

The company has an internal charge rate of $120/hour for its research services and tries to operate as a profit center, although the reality is they are happy to cover costs.

We’ve been working with the company to look at how they can save money and still deliver a quality service, and (roughly) this is how the numbers stack up. Note: we exclude data costs here which can be large but don’t really affect resourcing decisions.

First you have basic salary costs:

Then for each employee there are a series of direct oncosts (insurance, pension, training etc):

Add these and you arrive at a grand total for annual direct costs of $725,513.

But salaries and related costs aren’t the only ones, there are also indirect corporate overheads, which in this case we just limit to office rental costs:

Note: we use 60 square feet here which is a little tight – most estimates call for ~125ft but the company runs a hot desking approach and believes this amount is all it needs.

Put it all together and you get total costs for each employee:

These costs go to establishing the research services of the company that are charged out on an hourly basis, some for billable purposes and some for non-billable. I mentioned above that billable work for the client’s research team has been falling and this matters since many research teams aim to cover their costs internally and the only way to do this is through internal billing. Research teams do work besides billable assignments but billable work is usually better measured, the value of the work is clearer and for many teams the percent of time billable is the key metric that is tracked. Accordingly, this analysis focuses on the most cost-effective way a research team can complete its billable work.

The amount of hours an employee can be available for billable work is crimped by vacation, public holidays, sickness and training needs, with the actual number of hours available for billable work is around 1,864:

Of these 1,864 hours the company hopes to get as many billable hours as possible, and the higher the number of billable hours, the lower the average cost.

There are two ways to look at these costs – just direct costs (i.e., those that would stop as soon as the employee was laid off), and those that include indirect costs (office rental costs and other costs that don’t stop as an employee is laid off but which are avoidable in the longer run). This difference is important since if companies really want to save what they can, they need to think about ways to avoid all possible costs, and this means reducing office space.

At high billable levels (90-100%) we find that average costs come down to about $43-48/billed hour on a direct basis (4th column), and $66-73/billed hour on an indirect basis (last column). Depending on the work we do, Business360 charges $15/hour to $250/hour (sorry for the large range, but if we are doing basic and regular data entry, web search etc it is at the low end, while rates for specialized consultants or financial analysts on urgent projects are much higher). Most of our research work is in the range $40-80/hour, so while we are competitive when a research team is at higher billable levels, the case for giving us lots of work is weak, although it is prudent for them to keep a vendor or two on hand to cope with peaks in demand.  (There are two separate points worth mentioning here – Business360 is a variable cost, not a fixed one, which means our costs only apply as we complete work (there is no charge for idle time, vacation, training etc); and second, our network-based business model means we can often access researchers with greater familiarity with certain subject areas, but I’m leaving both these aside for this analysis.)

The table above shows how we can usually help companies save money against fully accounted internal charges. Cost savings opportunities emerge when billability rates fall: below 90% we can save companies a good chunk against their full (with indirect cost) expenses, and below about 80% we even save money against their direct costs.

A logical company’s approach is to reduce its internal team in size so it runs at as close to 100% billability as possible, although given the choppiness of workflow, 90% is a realistic maximum.

So returning to the example, the company can make savings and get all its billable work done through reducing the size of its team by four, layoffs being the unfortunate reality in today’s climate. We assume reductions are made from the larger and more costly New York team. To complete the picture, we assume that Business360 picks up regular assignments that don’t require in-house knowledge (newsletters, clipping services, data capture, some secondary research), which means we can do them cheaper (~$40/hour), as well as a similar amount of some higher value tasks that can be done remotely (competitor analysis, telephone interviews, some analysis) at, say $60/hour, all of which makes for an average rate of $50/hour.

So where does this leave us? The company is still getting all its billable work completed; the in-house team is running at full tilt (and with its own internal charging, making a profit) and Business360 is picking up the difference. Business360′s work is completed mainly by people based in the US working from home, with the possibility of it being done by our teams in lower-cost countries if the need is there to process work overnight or make even greater savings.

In terms of total costs, the company moves from total direct costs of $725,513 to $359,730 (with the level of work associated with 50% billability for the original team of eight) or $732,530 (with the level of work associated with 100% billability for the original team of eight). With indirect costs the total moves from $1,109,513 to $530,397 (at the 50% billability rate) to $903,197 (at the 100% billability rate). Essentially, the company saves money under any reasonable scenario, possibility up to over $500k annually, and at the same time manages to move much of its costs from fixed to variable, not an insignificant achievement in this difficult climate.

Apologies again for the length of this thing, and if you have any questions please do contact me or leave a comment.

It feels like 2001 again, only worse. Clients are very cost conscious and looking to make savings wherever they can. Budgets are being cut and people are being laid off in large numbers. For researchers and analysts that are not absolutely essential to securing revenue, this can be a precarious time, and already we are seeing more applications from people recently retrenched.

But as we see it (and I really don’t wish to sound callous), this is a great time to be in a freelance-based business because we can really help clients solve major problems. Here’s a case in point – in the last few months we’ve been working with a couple of large companies (an advertising conglomerate and a specialized consulting company) to see how we can save them money. They both value research and the work of analysts but times are tough and they need to make savings. What can we do?

Well, we can do two things straight off:

1. We can be there in reserve for them after they have made layoffs, picking up any work their reduced team can’t manage. So if the economy suddenly picks up or they land a large contract, they will still be able to get the research and analysis done. This gives them the confidence to make deep cuts and capture savings as fast as they can.
2. We can help clients move a lot of their costs from fixed to variable (we don’t require clients to pay for FTEs or commit to a minimum level of work, which gives us an advantage over pretty much all other offshore providers). This is a major benefit to clients. It means they don’t have to carry a large research overhead and need only pay for research and analysis work when they actually need it.

Costs per hour for external vendors can look much higher than the average hourly rate of employees, but this is a flawed way to make the comparison. Contractors are only paid for each hour of work they actually do, so a fairer comparison would put employees and contractors on the same measure, like this:

Employee costs Vs. Contractor costs

A dated (2002) National Federation of Independent Business review that looked at marketing specialists (we do a lot of work in marketing too) came to the same result:

The following example compares the actual yearly cost for hiring an in-house marketing specialist, as opposed to outsourcing marketing needs to a freelancer.

Say that the rate for a freelance public relations/ad writer is $75/hr. That hourly rate may seem high when compared with the $20 you might expect to pay for an in-house employee handling PR duties. But if the freelancer were contracted for 10 hours of work per week, over a year the actual cost would be: $75 x 10 hours per week x 50 weeks = $37,500. There are, of course, no benefits or company overhead to consider for a freelancer.

The salary of an in-house PR person at $20 per hour would be $20 x 40 hours per week x 52 weeks (assuming two weeks of paid vacation) = $41,600. Not much different from $37,500 for the freelancer, right? But to calculate the actual cost of the in-house employee, you need at add benefits (which usually total about 30-40% of salary) and in-house overhead (usually about 35-50% of salary). This brings the actual cost of an in-house employee up to $41,600 salary + $12,480 for benefits + $14,560 overhead = $68,640. And that’s on the low side. Benefits and overhead percentages frequently go much higher.

Using these calculations, you’d save more than $30,000 by outsourcing your marketing needs, even at a rate of $75/hr for a skilled freelancer. However, when your company’s need for marketing increases, you may end up using the freelancer for 25 hours or more per week. At this level, it begins to make sense to hire a full-time in-house employee.

A final point worth making is that all these calculations assume using a locally-based contractor, which is costly option. With time and planning we can save clients much more money on their knowledge-based work by building teams of individuals that combine individuals in low-cost countries with some in the client’s home country.

So back to those two companies. It’s early days but things are going ok. One company laid-off 12 researchers the other laid-off three and in both cases we are now doing a lot more ad hoc work for them, but more importantly, we have taken over some ongoing projects -analyzing quarterly earnings and competitor profiles, and writing some newsletters – all of which is saving the companies money but at the same time freeing in-house analysts to focus on higher-value work. This downturn will be grim, by any measure, but it has already started to create opportunities for companies that can help companies save money at the same time as improving their operations, and that has to be a good thing.