Contract vs Permanent – Who Brings More Profit?
Hello everyone,
My colleague and I have been having a spirited discussion, and we can’t quite agree on the answer.
Here’s the scenario: a consultant earning £400k a year as a freelancer versus one earning £200k a year as a permanent employee.
Which one is contributing more profit to the business?
Historically, our company has set targets for incentives where freelancers receive a target of ‘x’, while permanent consultants earn 50% of that. However, the new policy has leveled the playing field, making targets equal for both groups, which means permanent consultants are now competing against freelancers who are often less experienced.
For context, freelancers and permanent employees operate independently, each under their own line managers in different regions.
Business owners, we’d love to hear your thoughts on this!
RCadmin
This is an interesting debate and touches on a few key considerations regarding profitability in a consulting business, especially when comparing freelance and permanent consultants.
Billing Rate vs. Salary: On the surface, a consultant billed at £400k per year (freelance) is generating more revenue than a permanent consultant billing at £200k. However, the profit for the business doesn’t just come down to gross revenue.
Cost Structure: Freelance consultants typically have higher costs associated with their status, such as taxes, insurance, and potentially other operational expenses. However, businesses generally incur costs for permanent employees, such as salaries, benefits, and overhead. It’s essential to evaluate the net profit contribution of each role after considering these costs.
Incentive Structures: Your company’s incentive structure initially favored freelancers, perhaps reflecting the belief that they generate higher revenue for the business. If the incentives are now equal, it may demotivate permanent consultants and lead to imbalances in performance. The disparity in base pay and potential reward structure could impact overall morale and productivity within the teams.
Workload and Deliverables: Depending on the work nature, freelancers may have more flexible hours or project-based scopes that yield different profit potentials. Permanent employees might focus on ongoing client relationships and retention, which can also drive long-term profitability but may not show immediate revenue in comparison to a high-billing freelance project.
Market Value: The market conditions and demand for freelancers versus permanent staff can shift profitability margins. Understanding market trends can help shape incentive programs that truly reflect contributions.
In conclusion, while the freelance consultant is generating more revenue on paper, the actual profit contribution to the business will depend on a mixture of costs, their roles in generating long-term value, and the structure of incentives within your organization. It may be worth analyzing detailed financials to determine profitability per role more accurately.