Contract vs. Permanent – Profit Discussion
Hello everyone,
My colleague and I are in a heated debate and could use some insights.
Here’s the scenario: we have a consultant billing £400k annually on a freelance basis compared to another consultant earning £200k as a permanent employee.
Which consultant is generating more profit for the business?
Historically, our company set incentive targets at ‘x’ for freelancers and 50% of ‘x’ for permanent staff. However, the policy has recently changed to align the targets, leading to permanent consultants competing against freelancers who have less experience.
For context, freelancers and permanent staff operate under different management structures in each region.
Business leaders, we would love to hear your thoughts on this!
RCadmin
This is an interesting debate, and it really boils down to a few key factors when comparing the profitability of a freelance consultant billing £400k a year versus a permanent consultant on a salary of £200k a year.
Cost Structure: Freelance consultants generally come with higher billing rates, but they may also incur fewer overhead costs (e.g., benefits, taxes, office space) for the company. However, businesses might have to pay higher fees or commissions for freelancers, which could chip into the overall profit. On the other hand, permanent employees usually contribute to fixed costs, including salary, benefits, taxes, and potential training and development expenses.
Direct Profit Contribution: If we only focus on the direct revenue generated versus the cost incurred, the freelancer at £400k is generating a higher income for the business when measured purely by billing. In contrast, the permanent employee generates £200k, but there will be a steady salary cost.
Incentives and Targets: It’s interesting that the company has moved to equalize the incentives. This can create frustration among permanent employees who may feel they are competing against freelancers with potentially more experience or connections. Permanent staff typically have a more stable, predictable cost structure compared to freelancers.
Overall Impact on the Business: There are more intangible factors to consider, such as the value of having a stable workforce, existing relationships built by permanent employees, and long-term knowledge retention. If the permanent consultant contributes significantly to relationships or strategic initiatives, their true value might go beyond direct billing.
In short, if we’re strictly looking at billing, the freelancer is likely considered more profitable in the short-term perspective. However, for sustained growth, employee retention, and institutional knowledge, permanent employees can provide value that’s harder to quantify. It would be beneficial for your business to weigh both perspectives carefully before making any decisions regarding targets and incentives.