He might seem like he’s burning 1 consultant hour vs. 2 employee hours, but that’s only part of the truth… Photo by Karsten Winegeart on Unsplash
Freelancers are too expensive!
I hear this one quite frequently. Actually, most freelancers probably do.
Properly unpacking this entire statement might as well end up in an academic thesis, but since we’re all busy, I’ll focus on one key aspect of its meaning:
“I’d rather hire an employee because it’s cheaper and provides more long-term value.”
To be fully fair — this might be a valid request in some cases. It’s just that it’s less valid more often than people might think (or desire) it to be.
Really in a hurry? Here’s the TL;DR rundown:
- Cost per hour is only part of the truth: you need to factor in fringe benefits (e.g. health care, paid time off), overhead (e.g. office rent, computer equipment) and G&A (general & administrative; e.g. adminstrative personnel, accounting fees) costs.
- Also factor in the “cost of commitment”: employment & labor laws might make “hiring & firing” of employees strenuous and costly — and don’t kid yourself, most of your employees are going to leave again within 5 years.
- Ultimately, your decision should factor in budget as well as project type and available talent. If you always go for the cheapest solution, you’ll be getting what you give!
Want more details — alright, moving on:
The Real Cost of Business
A couple of years ago, Hyam Singer put together a comprehensive piece for Toptal on factoring real costs of hiring freelancers vs. employees; if you’re into the full range of details, check it here:
https://www.toptal.com/freelance/don-t-be-fooled-the-real-cost-of-employees-and-consultants
While I highly recommend the exhaustive 17 minute read, I’ve decided to boil the essence down to what applies to product managers.
Wait — what?!
Hyam starts out with a pretty standard case — the choice of:
- Hiring a freelance consultant at $70/hr, or
- Hiring an employee at $95,000 p.a., translating into $46/hr.
So the employee only costs a bit more than half? No-brainer, right? Except — after factoring in costs for fringe benefits(e.g. health care, paid time off etc.), overhead (e.g. office rent, computer equipment, hosting services etc.) and G&A(general & administrative; e.g. adminstrative personnel, legal fees, accounting fees etc.), Hyam ends up at a real hourly cost of
- $84/hr for the freelance consultant, and
- $92/hr for the employee.
How the Tables Have Turned
To be honest, I was surprised myself, so I double-checked the math.
It’s correct in itself; however, it’s based on a somewhat specific case (hiring a developer at a large firm), so it rather provides a loose blueprint for what costs to factor in that a universally applicable calculation.
Obviously, it highly depends on your company’s size, its location (and local labor legislation) and the position you’re hiring for.
So — let’s see how Hyam got from $95,000 to $189,050 for that employee:
Fringe Benefits
This portion concerns all benefits offered to employees and paid for by the employer. Common examples include:
- Social Security/Payroll Taxes
- Health Insurance (medical, dental, life)
- Retirement Contributions (e.g. 401K and other retirement fund matching)
All of the above would apply in usual scenarios of hiring a product manager.
In Hyam’s example, a common cost multiplier for fringe benefits is 35%.
Overhead
Overhead collects all costs related to having your employees getting work done — i.e. office space, technology infrastructure, devices, other equipment, travel expenses etc. — and attributes them to single positions — which can be a department, or a headcount.
In the example, the multiplier for overhead is another 25%.
G&A
General & administrative costs are those associated with running your business as a whole. This usually encompasses salaries for administrative & management staff, as well as legal & accounting fees.
This adds another multiplier of 18%. However, these costs are also incurred when working with freelancers, so it is also applied to the cost of hiring freelancers.
Real Costs
The final tally for this calculation (using 2,080 annual working hours), applying the multipliers cumulatively, is:
- Freelancer Costs: $70 x 1.18 = $84/hr ($174,720 p.a.)
- Employee Costs: $46 x 1.35 x 1.25 x 1.18 = $92/hr ($189,050 p.a.)
So — what now?
As you can tell, this result hinges on a lot of different figures. So depending on how those are being shifted around — amount of working hours, benefits, administrative costs in your locale — this might tip the scales a different way.
More importantly, this analysis highlights the costs that freelancers have to factor into their pricing because clients don’t need to pay them.
As a freelancer, I pay my own accountant, my own health insurance, my own retirement benefits —I even bring my own laptop, and I don’t need a seat at the office.
For employees, you are legally required to provide (and pay for) all of these things, and more. Just because those costs become obfuscated in the “overhead pool” doesn’t mean they aren’t incurred!
What’s More: The Cost of Commitment
Now, let’s look at this a different way — it has been raised that the referenced article doesn’t weigh in the benefits (and drawbacks) of having employees on board.
Truthfully, this escapes the pure cost-driven analysis. We’ve covered this from a different angle in our article How Freelance Product Managers Help You Scale Your Product Organization, but as a rule of thumb, let’s say that if you are absolutely sure that you’ll need someone to work on the same thing for more than 12 months, it makes financial sense to prefer hiring an employee.
But here’s the caveat —
How often does this occur nowadays, especially in product management?
What product will consistently require similar work over a year-by-year time frame? Sure, there (still) are a considerable amount of those — but in today’s fast-paced world of technology, with an ever-increasing pace of change and innovation, the likelihood of your products changing face over the course of a year is only growing.
And what do you do if your talent can’t (or won’t) support that change?
If it’s a consultant, you just close the contract, and find a different one. If you took our recommendations from Need a Product Management Freelancer? Here’s how to find the best! to heart, this should be easy for you!
If it’s an employee, you might need to move that employee to a different product or department.
You might not be lucky enough to have another compelling project to offer that employee, so they might want to leave.
That’s when it gets tricky — termination can legally be a mine field depending on your locale, and you might have to pay them severance, or worse — deal with a wrongful termination lawsuit, which can get really expensive.
Example: A Product Manager in Germany
Alright, let’s adapt this to a case close to home for us: getting a product manager (mid-to senior level) in Germany, freelance vs. employed:
- Consultant: average hourly rate for a freelance product manager in Germany is €90 (according to freelancermap.com — slightly corrected by the platform’s margin).
- Employee: average yearly salary for a product manager in Germany is €70,000 (according to gehalt.de)
Base Hourly Rate
In Germany, there are approximately 250 business days (after weekends and public holidays). Deducting required paid time off (30 days/yr) and an average yearly 10 sick days, this leaves 210 working days, or 1680 working hours per year.
- Consultant: €90 x 1680: €151,200
- Employee: €70,000 / 1680: €41/hr
So — obviously looks much cheaper to have an employee at first glance. But — we know better by now, so let’s proceed:
Benefits
In Germany, social security costs are quite substantial, and the employer-side portion of that can easily add €10,000 on its own. Including retirement, healthcare and other benefits, the 35% factor seems accurate.
Overhead
Employees in Germany also enjoy a high amount of legal backing when it comes to tools being provided. As a product manager, this would usually encompass an office (with meeting rooms, whiteboards etc.), a state of the art laptop and workstation, subscriptions to JIRA, Miro and similar SaaS products. In total, a 25% markup seems almost a bit tight.
G&A
Unless you’re a startup, the 18% markup for administrative costs definitely is consumed in Germany. One thing that was also missed in the Toptal article but is especially pertinent to hiring new product managers in Germany is the cost of hiring, which is estimated to be another 21% markup to the annual salary.
Final Tally: 12 months
So, let’s crunch the numbers:
- Consultant: €90 x 1.18 = €106/hr (€178,080 p.a.)
- Employee: €41 x 1.35 x 1.25 x 1.18 x 1.21 = €99/hr (€166,320 p.a.)
That big gap just got real tight, didn’t it?
Now, as I said — if you’ll need that person for more than a full-time year, it might very well be advantageous to have them be employed.
But — let’s look at a different scenario:
You’ve got a project that will be consistent for 6 months.
What happens after that — not sure.
So — you can either get a freelancer, or hire a permanent employee, and see what happens (no product manager will agree to a 6 month limited employment contract, trust me.).
If you get a freelancer — you’d usually do a 4 days per week deal, assuming 2 weeks off in the meantime, so 24 x 32 = 768 hours, so €81,408. That’s your bottom line.
If you hire an employee (assuming that the person is available on time for the project start), that would amount to half the annual days (840 hours) at €99/hr, so €83,160 total cost incurred.
But wait — there’s more!
Now — ideally, your project’s done on time, and the team needs to be dispersed.
With a freelancer, the contract ends — you shake hands on a project well done, and go about your separate ways.
With an employee, however — legally, you need to find something else for them to do now.
If you can re-assign them to a different project and they opt into that, great.
But if you can’t — or they don’t want to, this might result in a termination for operational reasons (betriebsbedingte Kündigung in German).
This usually requires you to pay severance, which for product managers usually is 3 months’ pay, so you’ll need to add a quarter of annual hours (420 hours) with benefits and G&A (no overhead or hiring costs), so 420 x (41 x 1.35 x 1.18) = another 27,432€ on top of the €83,160.
Plus — looking beyond the numbers, you now have a (rightfully) disgruntled to-be-former employee that feels having been led on and probably has negative things to say about your organization, as well as irritated team members and HR managers that feel like they wasted a lot of time hiring and training that person.
Our Recommendation: Do the Math — Properly
Instead of just looking at the bottom line, accept it:
Good talent is expensive.
No matter whether they’re freelancers or employees.
Look at the long-term costs.
Are you looking to establish a person with a root function within your team, or do you “need a job done”?
Are you willing to enter into an intimate relationship that comes with ample commitment from both sides, and will invariably require you to own up to your part? Or would you rather benefit from a flexible business arrangement?
And — the most fundamental question of all:
Is that choice actually yours to make?
More often than not, companies believe it’s their choice to make. But talented and loyal employees aren’t just expensive, they’re rare.
And before you start counting your consultant hours, you should look at the cost of inertia while a project is on hold for being short staffed— some projects get worse by every idle minute, and that’s just lost value (since it’s 2021, I’m thinking of all the pharma companies that missed the mark on moving their COVID vaccine R&D along…).
Rather keep your 👀 on the 🏆 — assess what you really need, and try to leverage a sourcing mix of on-staff and freelance talent!
So, how about it?
Did you expect those cost figures? Do you think they’re accurate? Did you ever do the math yourself? We’d love to hear from you, please leave us a comment below!👇
Interested in more stories around freelancing in Product Management? We publish regularly to our Freelance Product Manager publication & would appreciate a follow! 👆
And as always,
Thanks so much for reading!
We acknowledge that with the 10 minutes, you could’ve literally done anything else, and we’re very honored that you decided to dedicate them to our piece! ❤️
This post was originally published on freelanceproductmanager.com.
Quick Note: This post originally didn’t include an explicit note of the cumulative nature of multipliers as specified in the original article, suggesting a possible mathematical error; this has now been added.