Fewer of us than ever before have permanent jobs, and fewer of us want them. According to Intuit, a cloud accounting firm, freelancers will comprise a whopping 40% of the American workforce by 2020.
Most agencies and consultancies are living in denial about this. They act as though it’s still a buyer’s market. Where freelance work is concerned, their general approach is: barter a freelancer down to the minimum day rate, charge the highest fee possible to the client, hide the reality from everyone, and seek maximum profit. Hide and seek is an old game – and even children tire of it quickly.
As a way of working, it is murky, open to abuse, and unsustainable.
Buyers might have got away with a lack of transparency when the workforce was largely permanent, but it isn’t a recipe for success in a world full of freelancers. For one thing, price bartering creates zero incentive for the freelancer to do career-best work. Product quality drives differentiation; when freelancers represent an increasing proportion of your product, their work counts. What’s more, great freelancers will always choose to go where the most rewarding relationships are, in all senses of that phrase. A lack of transparency undermines trust in relationships, which in turn impacts loyalty and advocacy.
Ultimately, if you treat people like fools, you end up working with fools. It’s not good for business.
Like every other professional services firm, Corporate Punk needs to collaborate with freelancers and other partners to prosper. But, unlike every other professional services firm, we’ve decided to be 100% open with our freelancers (although we call them ‘collaborators’, as logic suggests that the word ‘freelancer’ is disempowering). For all the reasons above, openness feels right. When something is the right thing to do, the only risk is not doing it.
So we’re turning the traditional approach to setting freelancer compensation on its head, using a simple and transparent model. It was designed in partnership with the brilliant Chartered Accountants at Redfin, who will be helping us to develop it beyond its current alpha state over the coming months. We’ll also be making it available for free to agencies, consultancies and our recruitment partners, along with an open invitation to help us refine the approach as it develops.
The model has a name: Lucid. At a basic level, it enables our collaborators to see exactly how their fees are calculated, and allows us to adjust said fees in line with business performance.
But just achieving transparency isn’t enough. Lucid also helps us to embrace two radical principles:
- The more hours we sell, the more (not less) that our collaborators earn
- The more money that we realise from each hour sold, the more that our collaborators earn.
The key business decision that helps us achieve these outcomes is that Corporate Punk’s profit from collaboration should remain fixed and transparent. Regardless of how many hours we sell, and the value that we realise from them, our margin will always stay the same. Every pound we earn over and above our margin and the overhead we need to recover belongs to the collaborator. Our hope is that the significant investment we’ve made (and will continue to make) in this model will motivate loyalty, better work, and business growth. Importantly, it also feels like an enlightened, 21st century way to work.
For anyone who might be interested, there’s a bit more information below on how Lucid was put together. Everyone else, feel free to stop reading now. Just know that we’re doing this, and committed to helping the rest of the market wake up. It’s about time.
(Incidentally, what all this means for our client relationships will be the subject of a future post.)
With thanks to Sarah Cowell-Thomas, Julian Davies, Toby Ingram, Magnus Macintyre, Deri Llewellyn-Davies, and all the collaborators whose brilliant work inspired us to question what’s fair.
Lucid: our thinking
The economics of most professional services firms are pretty simple. They sell capacity, so calculate their charges on a time and materials basis. On top of people-related costs, they need to recover their expenditure on office space, marketing, recruitment, finance, legal services and so on. Crucially, much of this expenditure is often fixed, and any variables can be forecast well in advance. Similarly, the cost of acquiring new business can be modelled relatively easily with the right data. Finally, good pipeline management means that it is possible to forecast income with a high degree of accuracy.
So it stands to reason that the more hours a professional services firm sells, the smaller the proportion of costs that each of these hours needs to ‘absorb’ in order for the business to create profit. Similarly, the higher the hourly rate, the more profitable that those hours will become.
We thought: if we know what’s coming in and going out, and we also fix our profit margins, surely that means the more successful we become, the more that everyone can benefit?
And then we built Lucid.
- Our Accountants calculated our forecast overheads and new business costs for the next 12 months, and made both the figures and the assumptions fully transparent within the model
- As part of this, we also made a decision to be transparent about our people costs (which means that, yes, our collaborators can see the salaries of our full-time staff)
- We then created a calculator that allows us to apportion all costs equally against the number of forecast hours sold
- We established a fixed, per-hour profit margin
- The model then allows us to flex collaborator day-rates in accordance with how many hours we sell, and how much money we sell them for.
Here’s how part of the model looks, using a set of dummy figures:
Now, the accountants in our midst will have spotted some potential flaws in this model, and they’d be right. There are two big questions. One, risk management: what if we sell fewer than the forecast hours, or incur unforeseen costs? And two, what about different types of projects, which have different types of resource allocated to them, and cost differing amounts to sell and service?
Our current answer to both of these questions is to reconcile our activities quarterly and adjust collaborator compensation based on actuals, meaning that in effect our collaborators get a pay rise (or cut) based on the previous quarter’s performance. (We will never undercut day rates below a generous minimum allowance agreed with each collaborator.)
But this is far from perfect. Over the next 12 months we are developing financial insights and accounting practices that will allow us to get greater clarity on what the right cost allocation by project type is – and model risk accurately within our forecasts. We will then be able to adjust collaborator rates on each project in real-time, and in the process move away from quarterly reconciliations.
If you’d like to a copy of the alpha model, drop us a line at firstname.lastname@example.org and we’ll happily share it. We’ll also be publishing a link to the beta on this blog in a few months, when we’ve finished building the model.