What is the optimal balance between permanent and contractor staff in a professional services business?

Staff balance contractors permanent - people cropped

A significant challenge for any management team of a professional services firm is pursuing the most efficient way to grow the business. A company will look to expand by growing current clients and securing new business, but new business projects need balancing against available resources. Having a large percentage of consultants sitting on the ‘bench’ is a drain on overheads and impacts profitability. Thus the question is raised: What is the optimal balance between permanent and contractor staff to help drive growth for a professional services firm?

Certainly, there is a definite trend in the use of more contractors in the industry. This follows the increasing number of consultants who are operating as freelancers, taking more responsibility for their own careers. This trend has had a noticeable knock on effect within the buyer community where there is now less emphasis on the need for permanent staff.

In the past our valuation models would have assessed a firm operating with a larger number of contractors negatively, impacting on the value of a firm. However as industry sentiment has changed, our valuation model has evolved to reflect a more positive view of contractors. In recent times we’ve witnessed firms made up of 75 per cent of contractors realize full value when sold and whilst some buyers are still very negative, the scales are tipping in favour of a balanced employment model.

Of course this still doesn’t help us as we ask what the appropriate split is between permanent and contractor staff. In reality there is no right or wrong answer to this, it is a subjective decision belonging to those in charge, but there are definitely certain roles which should be held by permanent staff if value is to be optimized.

A professional services firm absolutely must own its business development, client relationship management, intellectual property development and practice management. If all of these are firmly held within permanent roles in the organisation then remaining work can be delegated either to contractors or other permanent staff. In the case of contractors, a firm – and clients – can benefit from access to a broader range of skills and the cost flexibility they offer.

Naturally, it’s still important to bring in the right kind of contractor and that’s not just to do with the skill set. Making sure that a contractor is not only skilled enough but also a good cultural fit for the organisation is of paramount importance.

As far as the industry is concerned we’re moving away from the notion of just two camps of permanent or contractor. Now we see organizations categorize operations in a wide array depending on how consultant compensation is structured, something which we believe is healthy for the future of professional services firms.

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