The following is a guest post by Tim Morgan from Sullexis in response to a resent blog of mine:

Thanks for letting me reply to your last post, “Should a placement firm tell you what they are billing the client?“.  This question has been around for many years and is understandably emotive – nobody wants to be taken advantage of.  I believe my view, from the other side of the fence, will bring some insight to the value a third-party brings, and put to rest some of the common misconceptions that you stated in your post.

First, I think it is important that I share my background as this will hopefully lend weight to my points.  I’m currently the Managing Director of Sullexis, a Houston based BI consulting firm.  I have been consulting for over 20 years, having started with IBM Global Services as an employee, before going independent and then starting my own professional services firm.  So, I’ve been on both sides of this discussion.

You state in your post that a third-party has no costs – well that’s not accurate.  There are other costs, and these other costs can be significant: financing, legal, insurance, and the risk premium.  Although Sullexis, as a consulting firm, would have a different cost structure to that of a staffing agency there are a number of costs that we share in common – these costs have to be factored into the billing rate.

I think the best way to illustrate some of these costs is with real life scenarios:

#1 Contract Negotiations – recently we signed a master services agreement with a new client.  The initial draft of the contract had some very restrictive covenants related to Limitations of Liability, Warranty Work and Payment Terms.  Negotiating these to a point where Sullexis and its sub-contractors would be agreeable (that’s the independent contractor agreement that independents sign) cost over $5,000 dollars in legal fees – that’s before we’ve started work.

#2 Insurance Requirements – all clients require that a consulting firm have general and professional liability insurance.  The cost of this varies based on the consulting firms annual revenues.  The higher the revenue, the higher the risk, the higher the premium.  Last year we did some work for a major international bank with very specific professional liability requirements which cost an additional $17,000 above our existing coverage – again before we started work.

#3 Financing – our contractors are always paid before the client pays Sullexis.  This financing has a cost, and obviously there is a risk associated with this situation.  Client payment terms vary from 45-60 days but the first invoice can take 90-120 days to be paid – never sure why this is though??  The situation where we have paid a contractor 3 months of services before we get paid is not uncommon.  Even though interests rates are low, borrowing costs are not – if we wanted to factor a given invoice it would cost about 8% per month which I think is a 34% APR.  Then there is the risk associated with not being paid for 90 days – clients can dispute the charges, dispute the work and request a remedy, or in extreme cases not pay.  I know many firms that have not been paid – remember Enron?  There was one instance last year where we had a team of 7 onsite for which we had not been paid for 100 days (which included 3 months of expenses as the engagement was out-of-town) – to bridge that gap I personally had to guarantee the loan.  I potentially could have lost a lot but all of my employees and contractors got paid on time.

#4 – Blended rate – the final example would be where the mark-up varies with the client depending on the nature of the project and the negotiations.  Sometimes on the same project, mark-ups are low (10%) and others are high (50%) but the combined or blended rate means that everyone makes money.

There are many more examples but hopefully this gives you a flavor of some of the other costs that go into the overall billing rate.

So in answer to your question, I’m not sure I’d know how to answer.  In reality we are driven by supply and demand and market forces truly dictate both sides of this equation.  I think the best solution is to work to establish a long-term relationship with a firm that you trust and has your best interests at heart because in the long-term that is how both sides win.

I think in a future post we should consider what makes a good agency and what makes a good contractor?  Because working with the good ones and avoiding the bad ones is valuable to all of us.