Professional Services Contracting

Psychology of the Contracting Professional

People who enter into Professional Services Contracting (PSC) do so for many reasons. The pay is better, the hours can often be controlled, time off is yours to decide whether it is 2 weeks, 2 days, or 6 months, and you do not need to report to anyone. The drawbacks however can be both similar and daunting. There are no benefits or retirement plan, hours are more often dictated by the project, contractors can end up with too much or too little time off, and at the very least you must be accountable to your client.

There is a very definite psychology to the Professional Services Contractor. They enjoy a certain amount of freedom in what they do and the pay is good while it lasts. The Professional Services Contractor must be in a position to weather periods where there may simply be no work. They are accountable to be their own legal, accounting, and HR departments. For every 40 hours of work a contractor does they can typically count on spending at least another 10 doing additional administration, networking, and training per week in order to remain competitive.

Those contractors that understand this can typically make their way fairly well. Those that don’t are usually those that cannot handle either the hours or the risk of going into contracting. Contracting is not for the faint of heart. Similar to investing, it therefore becomes important for the contractor to understand what their level of risk is before entering the field.

There are four key skills then that a Professional Services Contractor must maintain in order to ensure their fitness for potential clients: Fully or nearly fully trained, transferable skill sets, the ability to adapt quickly, and personal responsibility for their training and conduct. A failure in any one of these areas may result in the loss of not just an existing contract but also may impact on the ability of a contractor to obtain future contracts.

The Framework of the Professional Services Firm

Professional Services Firm, whether it is a sole owner / operator or a full-fledged recruitment and outsourcing agency, is based mainly on the flagship model of the firm. Developed jointly by Rugman and D’Cruz (2000) during the 1990’s, the flagship model establishes a five partner model of successful firms including the key suppliers, customers, selected competitors, non-business partners (for example government), and the firm itself (p. 8-11). Each of these are fairly self-explanatory and it is not the purpose of this paper to go into each of these in detail.

Competitive Advantage

To the Professional Services Consultant, their primary competitive advantage is knowledge: knowledge of business systems, knowledge of technology, knowledge of software and software products. Each partner a consultant takes on within the flagship model should be based upon increasing the breadth or depth of knowledge of the contractor. Those that don’t should not be pursued unless they can be tied to some type of a strategic objective independent of the flagship relationships.

The second competitive advantage is the relationship itself. Contract opportunities can come from the strangest of places. The relationship itself then must be protected from being competitively undermined. Porter’s (1980) five forces model of competitive strategy was primarily designed to identify strengths and weaknesses in the sales channel with new or existing customers against a field of competition.

The principles however are equally valid to each of the relationships within the flagship model if we replace the idea of the existing competitors with the existing relationships. Those threats and opportunities then are of new entrants, substitutes, and the bargaining power of the inputs to the relationship and the outputs to the relationship. It then becomes one of the objectives of the PSC Firm to develop entry and exit barriers and strategies to the relationship, not necessarily to the individual firm within those relationships.

Philosophy of Contracting

Clients who hire contractors do so for a number of reasons that include

• Temporary Staff Augmentation
• Development of a new Operational Requirement
• One-Time Project Requirement
• Specialized Need

Temporary staff augmentation is probably the most common reason for contract help. This typically might be something such as replacing a person going on maternity leave or providing support during a peak sales period. The knowledge requirement of a staff augmentation contract is no greater than that required for any other full-time member of the existing staff.

Expansion of an organization’s operational capability sometimes requires expertise that is outside of the normal range of duties supplied by in-house staff. In these cases either a specialist, in the case of a project involving a single functional requirement, or a generalist, in the case of a project involving multiple functional requirements, may be necessary to plan, organize, develop, and/or implement the enhanced operations. The primary objective for a contractor in these circumstances is to provide assistance as per their function, and explicit knowledge transference so as ensure the success of the project once it has been transitioned into ongoing operations.

One-time projects are those projects that will not transition into ongoing operations. They have a specific life span and once that life is over the project is completed. Moving office locations, the planning of a specific event (weddings), or the installation of a PBX. The primary objective for a contractor here is not so much to transfer knowledge but rather to have expertise beyond what is found in the organization to plan, organize, develop, and/or implement the project.

Special needs are a unique classification of consulting work in that the requirement is to provide a mentoring role for an organization independent of a specific project. Members of a Board of Directors represent a special needs consultant. Senior business development consultants who are used specifically to train, coach, and mentor junior level business development managers would be another example. The primary objective for the contractor then is the tacit transference of knowledge. Those items that cannot be readily quantified but yet are at the core of an organization’s competitiveness and effectiveness.

Approaches to Personal Services Contracting

The approach consultants take to a given assignment then must change depending on the nature and type of function the consultant is being asked to perform. Many consultants however lead from a specific formula of which there are two extremes.

• Knowledge Transfer as a competitive advantage
• Practical Application as a competitive advantage

Each has its own strengths and weaknesses.

Knowledge Transfer

Knowledge Transfer in Personal Consulting Services provide for greater value add to an organization when the organization’s objectives are systematic or operationally based. The requirements on the consultant are to give as much or more than they receive in terms of knowledge. They should always conclude a contract such that the organization is capable of carrying on, in the contractor’s absence, without undue disruption to the normal flow of daily activity.

Knowledge transfer projects however have two primary weaknesses that an organization must be aware of in hiring a contractor for these purposes. The first is that the contractor loses some of their competitive advantage in the process of fulfilling the contract. Contractors that do their job well are no longer required and quite likely will not need to be asked back. The organization must realize this and be aware that they will get exactly what they pay for. If an organization goes for the lowest bid they may find themselves only getting partially what they are hoping to achieve no matter how well defined the specifications are.

The second is that inefficiently run projects, or projects that are ill defined, may incur significantly increased costs due to long retention periods of contract staff. A project where the full time staff have not fully bought into the project or where there is ambiguity between what the project verses operational components are can create a situation where the company relies on a contractor as a vital component of their operational capability.

Further, getting a contractor to switch to full-time employee may not be a simple as offering them a position if the organization decides that in light of the benefits, the position is one worth keeping long term. A contractor that is worth the money they are being paid will not easily be convinced to switch to full-time employment when their gross pay is 1/3rd higher than the full-time staff and their tax burden is 1/2 to 2/3rd lower.

Neither is the allure of a benefits package necessarily going to sway someone that is in the prime of their physical health for whom health, life, and dental benefits are not a key concern. Independent health and dental benefits can be obtained at extremely reasonable rates for those contractors that want them. In many cases such benefits can be obtained at a cheaper rate than that being offered to large corporations.

Unless the contractor has an internal motivator to switch (such as a new family or recent mortgage), a company may be getting a Trogon Horse. The best way to alleviate this situation is to provide firm commitments to financial packages and career objectives prior to attempting to convert someone and ask for firm guarantees on a minimum length of stay on which such commitments will be contingent.

Practical Application

Practical Application in Personal Consulting Services provides for greater value add to an organization when the organization’s objectives are project based and not necessarily related to an ongoing operational function. The requirements on the consultant are simply to provide their expertise where knowledge gain by the organization is acquired through other means than through the contractor. The contractor should always conclude these contracts such that the stated goals and objectives are fulfilled to the satisfaction of the organization. A contractor is free to walk away once those terms have been met and signed-off.

The benefits for the organization are that it reduces the organization’s overall cost of service (or production) by not having to maintain a specific skill set on salary 100% of the time. By using targeted and specialist resources, the slight increase in cost to a one-time project is more than offset by the reduction in carrying expenses by having a skill set sit ‘on the bench’. In addition, companies that cannot keep people with specialized skill set challenged (and by challenged I do not mean overworked which is a common misperception of the term) will find that what investment they do make in these people quickly goes out the door once an appropriate opportunity comes along.

Practical Application projects have two primary weaknesses that an organization must be aware of in hiring a contractor for these purposes. The first is that the contractor in these situations typically takes more from the organization in terms of knowledge transfer than what they provide in return. Many times a company will hire a consultant with almost all the right skills however is missing one or two skills that are either transferable from the organization or must be provided to the contractor in terms of additional training. This is not necessarily a bad thing – many times the qualification a company needs from a contractor are those experiences they bring from other organizations, not necessarily their own. However, in doing so the organization must be aware that those knowledge assets will walk out the door at the termination of the agreement.

The second weakness is that a practical application consultant may end up inadvertently placing a company in a bind. This normally results when a consultant is brought in to do one job and their “other duties as required” start to take them into areas of operational responsibility. Although morally and ethically the consultant should transfer these skills to full-time staff, if the terms of the contract were to produce a single a widget, there is no requirement for the contractor to tell the organization how they did it. In fact some contractors feel morally obligated not to provide knowledge transfer in these circumstances in that it reduces the ongoing pool of future work opportunities for themselves and other contractors. While this would obviously not be the position of the organization doing the hiring, the argument does have some legitimacy and an organization should be aware that if they change the working conditions without changing the contract, they might be faced with situations whereby the only one capable of managing an operational process is the contractor.

Kevin Feenan
Managing Director
Knomaze Corporation

References

Porter, M.E. (1980). Competitive Strategy: Techniques for Analyzing Industries and Competitors. New York: Free Press

Rugman, A.M. & D’Cruz, J.R. (2000). Multinationals as Flagship Firms – Regional Business Networks. Oxford: Oxford University Press.