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Subcontracting Too Many Times

February 22, 2011

In the past, I’ve written about subcontracting both here in the blog and also articles for the “Out on a LIMS®” newsletter (http://www.geometrick.com/newsltr_signup.htm). I’d suggested where subcontracting can work for your project and mentioned when it doesn’t work as well.

As it happens, I’m just finishing reading a book about the last US (and world) financial crisis called “All the Devils are Here: The Hidden History of the Financial Crisis” by Bethany McLean and Joe Nocera. Some of the problems with the financial package products that were put together that so badly failed are basically like a subcontracting situation taken too far. Thus, I thought it worth using as a comparison.

The Similarities
Basically, whenever you remove the person lending money from the person borrowing it, you’re breaking down the urgency of and ability to make sure the borrower is a qualified. The other issue is that, as you take something like a home loan, something that might appear to be a transaction between just the borrower and the lender but you start reselling it and adding many layers of buyers and sellers to it, it involves more and more people that must make money off of it.

First of all, when you go look for resources for your project, you are making some effort to find qualified people and you know what you’re willing to accept on your project, to some extent. If you do not have this ability, of course, you probably will want to find someone who will do that for you and when they do not have the resources to provide, themselves, they will need to subcontract the resources for you. After all, if you don’t know where to find people, this is reasonable that you would have someone else do it for you. The problem comes when the subcontract gets subcontracted and possibly even multiple times. At that point, it merely becomes about finding a warm body to fill the spot.

Also, just like a security that has many levels of people involved in bundling and reselling the bundles, where each layer of people must make money, such is also the case with the subcontracted (i.e., rebundled) work to be done – every level must make their money. If this means the final resource is billed at a high rate but is paid at a lower rate, that high rate which should get a high-level resource is more likely to bring your project someone junior. The more levels of groups involved (i.e., the more levels of subcontract), the wider the gap between what the customer is paying and what the final consultant is offered. It can end up being quite a lot of money. Thus, the customer who is paying the high amount is sometimes entirely dissatisfied with the resource’s work, not realizing the resource is actually working to the level they’re being paid at. As with the financial failure, where so many people tried to make money off some of these financial products, it didn’t work out, to say it mildly. And that is just as it doesn’t work out when you buy resource time that has been through too many hands.

Comments From First Quarter
As a small business, I have a choice of working directly with end customers or with trying to find a larger services group that can use my services. Think of my company as a tiny banks with a small amount of loans, just to go back to the financial example. After all, one would think a buyer is a buyer (whether for securities or for consulting time). Well, that’s the theory. BUT that’s not quite true. For example, I’ve had a number of calls just in the past month, asking if I could provide resources to larger consulting services groups to fulfill their projects. Unfortunately, as soon as they tell me what the customer is looking for, the rigid outline they present to me is usually not something I’m interested in providing. I sometimes ask where the customer’s flexibility is at so that I can determine whether there are areas we could discuss further, but the services group cannot tell me this. Now, that is truly reasonable – no-one can speak for the customer but the customer. Thus, the reasonable thing to do is to ASK the customer. However, most services groups are expected to find people without bothering the customer too much and/or just hesitate to do this because it takes too much of their time. The other problem, of course, is that the rate that the customer thought was comparable to the industry’s rates to get a senior person are no longer at that level by the time I get that phone call from the latest subcontractor level.

This means that we find ourselves at an impasse fairly early in most of these conversations. Thus, if some of you wonder why you see people around who are saying they are looking for projects yet your services vendor is coming back telling you they can’t find anyone, what they mean is that they can’t find anyone based on the requisition you gave them. Depending how badly you want to fill your spots, you do have some choices. For one, you could go look for yourself because if you find someone that has the right skills and can negotiate with them on the terms, you might be able to get them onto your project. But if you could have done this, yourself, you probably would have. After all, if you knew you could call me and get my services instead of having them do it, you probably would have done it, already. So, what you can do with your services vendor is try to be clear about where you have flexibility and to also try to be available to them. Make it clear that you won’t be upset if they call you to discuss flexibility for various resources and, not only that, that you expect it from them. Also, if you have a “no subcontracting” clause in your contract with them, make sure you enforce it.

Gloria Metrick                     
GeoMetrick Enterprises
http://www.GeoMetrick.com/

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3 Comments leave one →
  1. Brian Meadows permalink
    February 23, 2011 4:24 pm

    You omit the other common reason for the final customer going via large groups, Gloria – the perception that, if you screw up, it’s not worth suing an individual contractor while it would likely be worth suing a large services group, and I know from experience that this can cause major problems.

    I had the lab manager at one VERY big company (when I was still in England) agree a job of work with me then told me that I’d have to work through an agency because she wasn’t allowed to employ an individual contractor directly. I told her that would probably add 40% to the rates we’d just talked about with no added benefit to the company, she said that would be fine.

    So I went and talked to an agency that had seemed reasonable to me in the past, told them who to contact and mention my name. They came back to me and said that the project, which the lab manager told me had been classified as “essential”, wasn’t going ahead. Personally, I think the greedy b******s undercut me for the work. I never managed to speak to the lab manager again, but as I landed another job about two weeks later, I maybe didn’t try too hard.

  2. February 23, 2011 4:39 pm

    Brian, you bring up a good point. To that, I’d like to point-out that, while we often think of suing the company that does the damage, it seems likely that compensation for damage probably ends up going to the insurance company, instead, depending on what the damage is. Not only that, but insurance is available here in the US to all sizes of companies, even mine (and available in some other countries, too, but each country will be different). As a couple of examples, many customers require consulting companies to carry GL (General Liability — example would be if someone spills coffee on your employee) and E&O (Errors & Omissions — example would be if someone programs the system wrong and it causes batches of material to be mis-manufactured). Hopefully, customers will begin to realize that insurance is not limited in its availability only to the largest companies who, actually, don’t always necessarily carry all of these insurances, either.

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