Advice on some cost-cutting options I'm considering

[SomewhatNovice]

Hello all,

I run a small design firm (just me technically, though I have a small number of local contractors I work very closely with), and I'm paying way too much for design and development. I have a few options I'm thinking of to reduce costs, and I wanted to get your opinions. I wrote up the whole situation on the blog that I keep (here's the post (http://somewhatnovice.com/resources/cutting-costs-with-my-design-contractor/)), but here's the summary:

I'm currently paying on a per-project basis, and here are the changes I'm thinking about making:

Option 1: Put the designer on a retainer in exchange for a reduced hourly rate. Downside: I have to manage hours.
Option 2: Paying on a per-page layout basis. $X for homepage, $Y for interior page, etc. This would allow for more accurate scoping, not necessarily a reduced rate.
Option 3: A combination of 1 and 2 where I put the designer on retainer and hold the designer to X hours for homepage and Y hours for interior page, etc. Still have to manage hours, but it's more accurate scoping plus a reduced rate.
Option 4: Some sort of closer partnership with this particular designer, who I do all my work with currently. He's a freelance who's been doing his own stuff for 3 years, not sure how receptive he'd be.

Any advice or considerations?

[MyITGuy]

Any advice or considerations?

Hire someone?

In your post you talk about paying a retainer of $2500/mo for a set number of hours which you state is certainly doable, then you would pay extra ($35-$45/hour) for any work going over the hours that are outside of the retainer.

To me, that sounds like you can bring someone on in a part-time capacity who has the flexibility to work overtime or move to full time if needed.

[Harold Mansfield]

Option 4: Some sort of closer partnership with this particular designer, who I do all my work with currently. He's a freelance who's been doing his own stuff for 3 years, not sure how receptive he'd be.


This is how I do it. Additionally it's also how people use me.
Partnerships with other small businesses and freelancers are the most cost effective way to offer more services, without the expense of having full time employees on stand by.

It's not necessarily easy to find people that you can depend on, but if you deal with people who take their business seriously, have dedicated business hours, and know how to keep a deadline, you should be able to grow a decent stable of dependable sub contractors to call on when needed.

The upside is that you don't have the expense of paying them when there is no work that you need them for. Also, you each keep your own business identity, and cleints, but can still market together.

For me it's been a win-win.

[Freelancier]

How much are you marking up their work? Where exactly are you "paying way too much"? Is it a margin issue, that you're underestimating their work in a fixed bid but they are billing you hourly... or what? I don't think we have the full picture yet. This could be an issue you're not even considering yet.

[SomewhatNovice]

In your post you talk about paying a retainer of $2500/mo for a set number of hours which you state is certainly doable, then you would pay extra ($35-$45/hour) for any work going over the hours that are outside of the retainer.

To me, that sounds like you can bring someone on in a part-time capacity who has the flexibility to work overtime or move to full time if needed.

You're right that I could hire someone at least part-time for that amount, but there are few things stopping me:
1. Employee complications/costs: I'd have to pay an employment tax on top of the salary, and I'd be liable for unemployment, workers comp, etc. if anything happened.
2. While I could hire someone for that rate, I'm not sure what quality of designer I could get.
3. It's a huge time investment to find someone worth hiring, and a lengthy process, and I need to cut costs more quickly.
4. I'm not confident enough in my sales yet. Ending or reducing a retainer is easier than letting someone go or reducing their pay.



This is how I do it. Additionally it's also how people use me.
Partnerships with other small businesses and freelancers are the most cost effective way to offer more services, without the expense of having full time employees on stand by.

It's not necessarily easy to find people that you can depend on, but if you deal with people who take their business seriously, have dedicated business hours, and know how to keep a deadline, you should be able to grow a decent stable of dependable sub contractors to call on when needed.

The upside is that you don't have the expense of paying them when there is no work that you need them for. Also, you each keep your own business identity, and cleints, but can still market together.

I'm curious, how exactly are your partnerships set up? If you're just paid on a per project basis, do you reduce your rate for companies that contract to you? Do you have any exclusivity agreements? I guess what I'm asking is, how are you partnerships different than typical contracting arrangements?


How much are you marking up their work? Where exactly are you "paying way too much"? Is it a margin issue, that you're underestimating their work in a fixed bid but they are billing you hourly... or what? I don't think we have the full picture yet. This could be an issue you're not even considering yet.

Good question - I'm doing fixed bids, and I give more detailed numbers on my blog post, but it's enough here to say that I'm spending about 40-50% of the cost of project on design+dev. This is far higher than standard for the industry, and I know that part of the reason is that I'm putting out higher quality design than what I'm charging for, but even so I am paying too much. I'd like to get down to 30% in the short term and see how that goes.

[Freelancier]

Good question - I'm doing fixed bids, and I give more detailed numbers on my blog post, but it's enough here to say that I'm spending about 40-50% of the cost of project on design+dev. This is far higher than standard for the industry, and I know that part of the reason is that I'm putting out higher quality design than what I'm charging for, but even so I am paying too much. I'd like to get down to 30% in the short term and see how that goes.

Ok, now I understand the crux of the problem: you're likely comparing apples to oranges. Let me explain: the reason that it's "industry standard" to spend about 30% on your labor is because it's also likely (in that situation) that you have a sales and admin staff, and they'll also cost about 30%, leaving about 40% for profit in an average year.

When I subcontract someone, I mark their work up anywhere from 30-50%. When someone wants to subcontract me, I give them a 10 - 30% discount, depending on how many hours they are willing to commit to. So if you're not doing any work on a project except for the sales end and getting a 40-50% margin, that's actually exceptional. If you have to do management that you're not recouping, then you need to increase your fees to incorporate that extra work.

So the problem may not be your costs, but your revenue. You may not be bidding enough. Or you could just be using subcontractors who are over-priced. It's hard to know which answer is correct for your situation without doing a deep-dive on your specifics, which you should do before you take any action. We have designers we pay $50/hour who do awesome work and we mark them up to $70 (that's a 40% markup or a nearly 30% profit, depending on how you want to look at it), and we bill some management time on top of that at a different rate. We make enough, they make enough, the client gets great work and keeps increasing the amount they want to use us, so everyone is happy.

Food for thought.

[Harold Mansfield]

I'm curious, how exactly are your partnerships set up?
It's pretty simple. More or less like a Contractor/Sub Contractor relationship. Or a "White Label" service, if you will. There are a couple of businesses that use me as their WordPress/Web Person. When I am working on their projects it's as a member of their team. My payment comes from them. Even though the job is for someone else, they ( the business or agency) is the client.

On the flip side, if I need to hire someone who has an expertise that I don't to work on aspects of a project, they work as a member of my team and I pay them.

My main partnership is with a business out of Boston that provides website services. I'm the website guy. She brings them in and does the branding, copy writing, Social Media stuff and acts as the project manager, and I do the web work. Full rate.



If you're just paid on a per project basis, do you reduce your rate for companies that contract to you? Do you have any exclusivity agreements?
No. I'm flexible when I need to be, but I don't normally reduce my rates. I've worked with, and have been approached by people that wanted to set up an arrangement where I work for them for less, in exchange for them using me exclusively. I've found that those arrangements aren't worth it and don't do that anymore. Usually those are people that bring nothing to the job and are just marking up your work as a middleman..and I always end up spending far more time per project than normal. People seem to use time more efficiently ( and respect yours) when they are paying more for it.


I don't have any exclusivity contracts. So far I've managed to keep my relationships by giving good service and doing good work. In the past I've lost 1 or 2 that say they found someone cheaper. 1 came back and the other is out of business.


I would be open to a retainer type situation where I'm guaranteed a monthly in exchange for a reduced hourly and priority, but so far that seems to work out better for my individual clients, than it does for the agencies. Mainly because I give everyone priority and keep my word on deadlines. So in essence, I probably shoot myself in the foot on the retainer set up.



I guess what I'm asking is, how are you partnerships different than typical contracting arrangements?

They are a little less formal. For me it works well if you partner with complimentary businesses, not people who do the same kind of work. Or as in some of my cases, work with people who need an occasional person, but not anyone full time. For instance, I work with a Marketing company whose core services isn't Websitesm or WordPress. So when they have a client that needs that or Facebook work, they call me.

It's a win-win for me because I keep my identity, benefit from thier marketing, and don't have to go through the time consuming process of the back and forth with the website client, and just do the technical work, and yet still get paid the same amount for the job. I also get the follow up work, and continuous maintenance on the jobs.


I also feel the need to point out that I normally don't work on a running clock unless it is specifically hourly, as we go, work. If I understand the parameters of a project, I give a flat rate and get it done on time. Everyone understands that significant changes will add to the cost. It makes it easier for eveyone involved to budget both cost and time.

[jim.sklansky]

Your Option 2 is more lucrative among 4s. Next, i have a proposal for you, you can go with freelancer with lower cost and best quality. Here only one disadvantage could be "time". But if you do monitor the project properly then it is possible to manage.

[phanio]

Great advice here - partner with other local businesses to keep your cost down and that it might be your prices that are the issue and not your costs. You might also look into battering your services for the services of others.
Lastly, why not just shop around - shop around the world - for cheaper contractors? Cutting costs just to cut costs is not good. You should think about what you want in the long-run and work it backwards to see what you have to do today. Maybe you need to pay a premium for the talent you get as that is what your customers want or can you bring down the level of quality and still satisfy your customers.