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From the author of Financial Transparency

Financial Transparency

No firm that respects its consultants expects them to accept, as a matter of faith, that the company is solvent, especially in bad times. Good consultants understand this principle: Either I know how well the company is doing and therefore how secure my job is, or I assume that the moment I hit the bench, my job is probably at risk. Because they want to retain good consultants, good consulting firms practice these behaviors:

  • Communicate the financial status of the firm, keeping people apprised and in touch with reality.
  • Give consultants a stake in improving the firm's financial position—that is, incentives beyond mere job security (something that good consultants can easily find elsewhere in the market).

Good consulting firms are clear on everything from profitability to the balance sheet to the sales pipeline. Having this information allows a consultant to make an informed decision about whether to stay or go after a given assignment is over.

Bench Policy Transparency

Of course, no consultant should expect to be able to sit on the bench for an extended period of time and not add value. On the other hand, if the firm is going to fire you the moment you hit the bench, you've been conned out of risk premium. Put it this way: To accept an hourly position of a fixed contract length, you would demand an amount of money that allowed you to even out the periods when you wouldn't be working. Most independent consultants who are not affiliated with a firm set their rates according to this plan. When a firm says "no bench" after someone accepts a salary, what's really happening is that terms are being changed, usually unilaterally, taking away the risk premium.

Consultopia doesn't engage in the practice of uninformed risk transfer to its consultants. At Consultopia, the risks are made clear. The bench policy (how long and under what circumstances layoffs will occur, and so on) is made clear so that consultants can evaluate, in the sunshine of reality, the value of their employment relationship.

Bill Rate Transparency

At Consultopia, consultants are aware of the billing rates at which their work is charged, just as they know most of the rest of the financial details of the organization. The usual reason that a company keeps this information secret is fear that if a consultant sees how much money he or she is generating, the consultant may ask for more money. This is an understandable fear, to some degree. One of the reasons I wrote The Nomadic Developer: Surviving and Thriving in the World of Technology Consulting was to help consultants understand the economics of their position. When consultants learn that their bill rate, multiplied by their billable hours in a year, is a lot more than their salary, they must understand why that difference exists. It's incumbent on company management to help consultants understand this practice, because there are indeed good reasons justifying it—taxes, training money, and overhead that have to exist to run a firm.

Of course, some firms charge a hefty premium but fail to deliver on the benefits that the premium should bring to the consultant, such as some level of bench, better quality work, training, equipment, and so forth. Although it's understandable why they would want to keep the information secret, doing so is a good indicator of a firm with something to hide, which means that you should be very wary.

Salary Transparency

This next issue is much more controversial. In fact, it scares many human resources people, who suddenly worry what might happen in a world that's transparent about how much money people make. Whenever this topic is brought up, worries abound: lawsuits, privacy concerns, and all sorts of other issues related to doing something this different from normal practice.

People come up with all sorts of reasons not to publish such details, but there are serious benefits to salary transparency:

  • Without mystery or secrecy, a lot of controversy could be handled up front. Any decision to pay one person very much more than anyone else would have to be strongly justified, because there would be no refuge for hiding the decision.
  • In essence, the market would come much closer to clearing; that is, the price for an individual's "unit of labor" is much more likely to be correct when it's made in broad consideration of other marketplace information.

Obscuring salary information preserves a couple of things: a little privacy, and the ability of management to make decisions that, when shown in the sunshine, might not be justified by logic and reason. Usually, there are reasons for keeping private the salaries of people hired some years ago when the market was low, while paying newer people more money as the market improves. But given the fact that the information tends to get out anyway, such tactics rarely work.

Why Transparency Is a Win-Win Deal

Financial transparency is a win-win deal for consultant and company. You get to know your clearing price, which gives you a piece of the picture in understanding your market value. The consulting firm benefits to the degree that after the information is public, it's a lot easier to explain any salary differentials that come up (people who bill higher rates probably justify higher salaries). Although such transparency doesn't guarantee conflict avoidance (because there will always be some people who are unhappy with where they are), the important part is that it brings such problems out into the open, versus keeping them in the background, where they simmer. Efficient markets assume that both sides can do reasonable price discovery; limiting price discovery causes market distortion, which is really the source of most issues related to dissatisfaction with pay and benefits.

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