Bill Rate: The Biggest Scam in the Software Industry
Bill rates are a bizarre anomaly in our industry. In one example, I can sum up why: I have five people that are not capable for the job, but I can hire all of them because they are less than $100/hour; but I cannot hire one guy who is capable of completing the entire job in the same time because his rate is $101/hour and our company has a policy that prohibits hiring any one person for more than $100/hour. If you do the math here, you are already scratching your head. Before we begin, I have to say that my company offers both recruiting and consulting services, so this post is not intended to put any particular service down, it’s only meant to bring light to this interesting occurrence in our industry. Okay, now let’s dive in deeper and analyze this with a more detailed example.
Let’s say there’s a project to build an enterprise scale website. Imagine it facilitates an already successful business that does $4 billion of transactions through an existing website, which is legacy and it’s time to rewrite it. The CIO will now ask the CFO what the budget is for the project. The CFO says the company can allocate $10 million. At this point, we already should be asking, is this amount of money really needed for this project? What is the real basis for this number?
Continuing along with our example, the CIO says, “Okay, I have $10 million for the website, can we get it done? The CTO will say yes, of course, because he’s not ever going to say no to his CIO, right? (As a side note, it’s important to remember that executives think of budgets as power. So, if you have a $2 million budget v. a $20 million budget, people will look at you much differently. No exec wants to leave his budget unused, otherwise next year he probably won’t get as big of a budget). Now, the CTO goes to his VPs of development, recruitment, and IT. The VP of development says he will need half a million in fee to put towards his contacts at the recruiting firms to get it done; the VP of recruiting says he will need four developers to complete the project for a total of $2.5 million; the VP of infrastructure says he will need a server, licenses, CDN, and other related hardware and this will total $1 million. The remaining budget is $6 million and now the team goes to the consulting company and says, “Okay, make it work with less than $6 million.”
The consulting company is now thinking, “Hmm, how much can we do this project for?” The consulting company is not looking for the less expensive alternative to complete this project; it will look at what is the maximum amount that it can bill. The consulting company will never want to do a project for $4 million when it could instead do it for $6 million. The consulting company will pitch a $6 million/year contract and a follow up support contract as well. If you are keeping up with the math, we are already over budget.
In contrast to the above example, a company like ours comes in to bid for the same project and says, “We don’t need a full-time designer on this project. Maybe we only need one for a couple of weeks while we mock up the project with one of our architects. Once the architect has fleshed out the architecture, we will provide the UX, and set out the plan with the designer. Following this, the designer is only needed part-time.” Now, we already know what we are trying to build, what we need in UI, what we need in servers and maybe a database isn’t needed at all. Maybe all that is needed is a NoSQL database or maybe just a cloud database. After a few weeks of planning, the big picture is done and we know how long the project is really going to take.
Here is where the recruiting company is going to look at how much can be billed and for how many hours. The company might have some kind of rate cap it wants and will look at the hourly rate and assume there are 2,000 billable hours in a year. So, if one person is going to cost $200k/year, it can provide 30 people for the year (this number could be divided and consultants allocated at different quantities and rates to achieve the same total, but you get the idea).
Whereas, our company looks at the requirements, the layout is already done, we know what to code and what not to code, and we can actually complete the whole project in $500,000 or maybe even $100,000. Whatever the number, we will provide a fixed bid and get it done and maybe it can be done in less than a year, maybe just a couple of months.
Following completion of the project, we may also help you recruit your developer team if you don’t have one; and if you already have a team, then we will come and train your team. Now, once our consultants move out, the company is completely capable of handling this website and maybe after we sign a support contract to help for another one year. This way if the client has questions, it is only paying for help for five hours/week and getting help for all its needs. With this approach, it doesn’t matter what our hourly rate was because the company was going to spend $6 million of its original $10 million budget, but now has the project completed for only half a million. And just like that, we’ve shown that the hourly rate is a scam!
By now, you may be wondering how we are able to successfully complete the same project at a fraction of the cost. We have many factors that differentiate us from our competitors. We work with a lot of the developers who are the creators of a particular technology or framework that the clients want to use. If you are able to work directly with the creator of the technology, you can reduce the time to complete a project since you are going straight to the source. We also bring people who understand how to do the entire project. We don’t use project managers because our team is so good at managing their own output.
The big difference we make is that we will give you the right person for the right job. We are not like the billion-dollar consulting corporations that will want to bring in all their developers full- time because they have a bench of 100 developers (what they like to call “bench strength”). We have so many projects going on at one time, we don’t have a big bench. We want to keep our team busy on different projects because
- that’s what they like and
- this enables us to keep our bill rates lower than our competitors.
Our success also lies in the fact that we remain technologically advanced and we show real value despite our small size. Our edge is that our team knows what is really needed and can better advise the client decision makers what the budget should actually be to not only complete the project, but successfully complete the project. It’s an unsaid rule that most of the work, no matter where you go, is done by contractors of consulting companies. The full-time resources are knowledgeable on the domain, the business, and the legacy systems, which are all very important. But a full-time resource is unlikely to be abreast of all technology advancements and to have had the experience working on it whereas the consultant has been working with multiple companies and knows exactly what works, what fails, and is more capable of making the tough technological decisions.
Another differentiating factor is that we don’t have monthly quotas that we are working towards. Salespeople at other consulting companies are looking at numbers and if they are unable to place, let’s say, five consultants that quarter, they know they will either lose their job or take a smaller paycheck home. The client may not need five consultants, but the salesperson is going to convince them that it does. The salesperson’s motivation is very different from ours because we are looking to keep a relationship with the client so that when the client has needs six months or even years down the line, it calls us back. We are not there to sell people; we are there to sell results.
When the market becomes good, there are a lot of recruiting companies that pop up. When recession comes in, it’s better for companies like mine because the clients begin paying attention to the actual cost and the hourly bill rates. This is the time when 80% of our competitors shut down or move on because they can’t hang in this type of market. Our edge is that we have low overhead. I once met a consulting exec that was paying $36,000/month for an office in downtown Austin for only one client. Unsurprisingly, when he lost this client, he had to shut down this office. Indirectly, the client was paying for that office in the bill rates. We don’t have that problem. We can always work at lower bill rates because we keep our overhead low.
To wrap up, let’s discuss what needs to change in the industry:
- The mentality that a certain amount of bodies are needed to make a project successful.
Once a team grows big, it can no longer work optimally. With a large team, it becomes harder to communicate the overall vision and it becomes even harder to keep the team motivated. Other issues can come up that can delay the project because the team is not as agile as you think it would be.
Here’s the other scam: only 1% developers really know what they are doing. If you are looking at this number, you could be racking up a lot of technical debt because you may have to redo the entire site/app if not done correctly.
And what if this website is to be the primary website of your business? We know that the competitive advantage is 250 milliseconds, so if the company was able to get this project done with lower bill rates, but now has a slower website than its competition, that multi-billion company could start losing sales. The loss of those sales is going to be way bigger than what it tried to save on the development fees.
- The lack of executive accountability.
What about the execs? What if the project fails at the end of three years and that exec has already moved onto another job? He trusted the people below him and the people below him trusted him, these people trusted their partners (i.e. recruiting companies) and at the end, no one ends up taking responsibility for the failure. In tech, the failure rate is higher than the success rate on software projects. This failure rate also includes projects that are successfully completed, but are completed over-time and over-budget.
We could, in the right set of circumstances, offer a fixed bid for a project. A fixed bid guarantees the deliverable for a certain price. This is in a way taking the ownership away from the client and putting it on us.
- The corporate rate cap.
This mentality kills innovation and future growth. Some Start-ups and mid-size corporations have done a good job of understanding this because they have opted not to hire people full time on projects and have instead done a hybrid model. It works for them. Some of the bigger corporations that have tried to use a rate cap have actually gone away from innovation and are instead only focusing on reducing cost. Has that worked in the long run? No, it has been followed by trying to use more full-time resources and running into recruiting issues, then eventually lower sales and bigger layoffs.