In the book ‘The brand you 50′ by Tom Peters, one could be forgiven to conclude that freelancing is the way to go. High payment and a dynamic working environment provide a continuous stream of interesting possibilities. Every couple of months you switch employers or, if you have multiple assignments at once, you have the luxury of a new working environment every couple of days.
And Tom Peters really puts it in fabulous writing as well. If you live for these sorts of projects and you thoroughly enjoy it, by all means do not give it up. But if you are like me and you are wondering whether this will make you rich, the answer is no. Simply having a high paying position isn’t going to get you rich. You will need a better business model.
The limiting factor
Quite simply put, it is you. The freelancing businessmodel is based upon a couple of assumptions. The first is that your pay will be higher than an employee’s pay, since you take the risk that your ‘employer’ will ‘fire’ you. Normal employees don’t have this risk, but they litterally pay the price for this reduced risk (although as we’ve seen from the crisis; this is hardly any security at all, with masses of people losing their jobs due to the current recession). This risk that you take can be managed effectively by having a good network of potential and current project sponsors. When managed well (provided you do an excellent job), this will translate into job security basically.
The second, and bigger problem, is that you are paid by the hour. While this sounds great, because your hourly pay is quite high, this is actually an enormously limiting factor. Even if you make $500,- an hour, this means that you can at most earn 8 * $500,- = $4.000,- per day. Okay, you can squeeze some more hours out, so let’s say 10 * $500,- = $5.000,- a day. With an average of about 200 working days per year, this will be 1.000.000 per year! This sounds great!
But it is also the absolute maximum that you can earn in a year. And you need the exuberant price of $500,- per hour (which in the current market, is not very likely and I doubt that anyone reading this is actually making this rate). And you need to work an average of 10 billable hours each day, for 200 days a year. This is all very unlikely. But if you’re an optimist freelancer, take these numbers, multiply by your hourly price and you have a good idea of what you will make utmost in a year.
To be quite frank; earning even $1.000.000,- a year is not going to make you rich. I hope that you can see my point of view that with $1.000.000 ,- a year, for 40 years you will make at most $40.000.000,- total. Of course we are not taking into account inflation etc, but even if the number is higher over the course of several years, we will link it to the same feeling of riches as we do $40.000.000,- now. And I understand that this is a lot of money, but again, this is the absolute maximum!
Getting scalable
So the main problem that freelancers will have to overcome is … well, themselves. As long as you are the sole force behind your business model, it isn’t going to land you more money unless you work more. This is thus a scalability problem. You cannot scale yourself to do 10 times as much work.
So in order to overcome the problem, we need to find a method that scales well. And the only way to do so is work with other people. Don’t worry, you don’t have to hire people and become an employer. There are different models to work with. The one that I prefer is to outsource the work and manage the outsourcers. Basically you become a project sponsor for other freelancers or companies!
Outsourcing
The outsourcing model means that you will have to build up a network of freelancers or companies who can do the work, at a fair price. If you handle this well, you can get the work done at a lower price than your own rate was, which effectively means you will make a little money from the price difference. Outsourcing to lower-wage countries can be a big help here.
But that is only part of the potential profits. The other part is that you will be able to handle larger projects, which means that the profits are bigger in general. And if you manage the project, you can sometimes charge higher hourly rates to your customers than you were used to.
Outsourcing is very powerful in this way for freelancers. As a freelancer you have the knowledge to communicate with both the customer and the team you manage in clear terms. This is what makes this business model possible and indeed very profitable for most freelancers. It is also a low-risk model, as long as you manage the risk of your teams not delivering well.
I have been able to do huge projects this way, which made our company about EUR 500.000,- in less than a year, by working about 2 to 3 days a week on a project on average. Much more than I would have been able to had I just freelanced for those companies.
Thu, Sep 17, 2009
Entrepreneurship