Thursday, December 12, 2013

Build Your Capabilities with Independent Affiliates

I once worked for a firm that had a nationally-recognized risk assessment practice. They owed much of their reputation to a group of college professors who worked with them on a part-time contract basis. Same for a mined land reclamation consulting firm that became one of my first clients. They partnered with a few professors whose reclamation research was known around the world.

Another firm I worked with picked up a former Exxon project manager who had directed multimillion-dollar oil shale development projects in western Colorado. When the oil shale boom went bust, he wanted to stay in the area and supplemented his part-time work with us as a substitute high school teacher. Given his credentials, high billing rate, and reasonable cost, he made more money for us per hour than any of our 500+ employees.

These are just a few of the many examples I could share from my experience working with what I call "independent affiliates." The proper legal term is independent contractor, but I use affiliate to designate a special class of independent contractor who has notable expertise, is well connected, and can help you expand your business. This person essentially serves the role of a strategic hire without all the risk. In return, you offer the independent affiliate the reputation and resources of your firm, another source of revenue, and the freedom to continue to pursue other business opportunities as well.

This type of win-win partnership is a no-brainer strategy that I've recommended to most of my clients, yet very few of them have followed my advice. I've heard various reasons for this: They can't find the right people for their needs. They have concerns about the associated liability or legal issues. They prefer making a strategic hire versus counting on someone outside the organization. In most cases, I suspect they simply haven't given enough attention to exploring the possibilities.

Independent affiliates have not only proved valuable in the past, but they appear to be part of a growing workforce trend. The latest Workforce Trends Study by the staffing firm Yoh found that 75% of employers surveyed anticipate increased dependency on the "non-employee workforce"—defined as consultants, independent contractors, and temporary employees. Independent contractors now comprise about 23% of the U.S. workforce. This trend has long been forecast (e.g., the popular 2002 book Free Agent Nation), but has no doubt been accelerated by the Great Recession.

So the demand across multiple industries seems to be increasing, but what about supply? The data I've found seems contradictory. One article says that the number of self-employed "has skyrocketed;" another says the number of self-employed Americans is at an all-time low. One study found that 40% of workers classified themselves as "free agents" in 2012, compared to only 26% in 2008 (I'm not sure how that relates to the 23% figure above). My own experience suggests that the weak economy has pushed many professionals into the ranks of free agent, even if they've not yet established a formal business entity.

In any case, I remain convinced that looking to partner with independent affiliates makes good business sense if you can find the right candidates (which means looking for them!). Here are a few ways that independent affiliates might help you grow your business:

Move into new markets. With some markets still struggling to recover, many A/E firms have given renewed emphasis to moving into new ones. That can be difficult to impossible without adding new capabilities, so in the planning meetings I've facilitated there's frequently discussion about making a strategic hire or acquisition. These are certainly viable strategies, but they're costly and risky. About 70% of acquisitions fail to produce anticipated results. And I would guess that a substantial number of A/E firm strategic hires prove disappointing.

One civil engineering firm took a different tact. Wanting to break into the industrial market, they partnered with a sole proprietor engineering consultant with a wealth of industrial experience and contacts. The consultant benefited because he lacked the resources to pursue the larger industrial contracts that he enjoyed. Eventually the firm was adding junior staff to meet the growing needs of their new industrial clients.

Expand your geographic reach. Our firm had a strong environmental management systems New Haven, Connecticut. I was having little success selling those services in the Rocky Mountain region. So I contracted with a solo consultant I'd met in Denver to support our firm as an independent affiliate. We began opening doors with existing and new clients, largely using our firm's resume but with his local expertise. While he managed the work in our region, much of it was performed back east.

There was admittedly a good deal of time spent selling the partnership before it yielded any new work. That's to be expected any time you're entering new markets or service areas. But one significant advantage of this arrangement versus a strategic hire (which we had considered) was that the upfront investment of our affiliate's time didn't cost us anything. Individual agreements may differ on this, but most of the independent affiliates I've worked with count business development time as the normal cost of doing business.

Strengthen your capabilities. Interested in pursuing a big contract opportunity but realize that your firm's resume is weak in one key area? Most firms in this situation subcontract another firm to shore up that shortcoming. But an independent affiliate has some advantages, if you don't need to extra manpower another firm would provide. You may earn a higher fee from the affiliate's work. Coordination can be easier since you're dealing with an individual. It may be easier to portray the affiliate as an extension of your project team (although you want to be upfront with the client about the nature of your relationship).

Expand your staffing capacity. One of the greatest challenges of running an A/E firm is matching your staffing to an ever-changing work load. Assembling a cadre of independent affiliates can provide some extra capacity for those temporary surges in workload where staffing up isn't warranted. Of course, affiliates are usually more senior personnel who may be too expensive to perform the bulk of typical project tasks. But I've seen firms have success with this approach in addressing the variations in their work load.

Outsource some strategic overhead functions. Some firms may find it advantageous to outsource some aspects of overhead functions like accounting, HR, IT, and marketing to save costs. But there can be some strategic merits as well. Many HR directors, for example, are too busy with routine day-to-day tasks to focus on critical long-range goals such as recruiting strategy, new hire orientation, performance appraisal, and professional development. An independent affiliate with expertise in these areas may enable you to accomplish much more than would be possible otherwise.

I have served in this kind of role on several occasions. For example, I was hired as business development director on a part-time contract basis for two years with one engineering firm. We were able to restore growth and profitability after years of underperformance. One of the advantages I brought was the inherent credibility that often comes with hiring an outside expert. I was able to push needed changes in their BD practices that they had failed to accomplish on their own. I've had similar experiences with other firms: Overhauling project delivery and quality assurance practices, installing a behavior-based safety process, leading implementation of other strategic initiatives.

Despite the benefits of using independent affiliates, let me warn you to be familiar with the rules associated with hiring them. The IRS is currently cracking down on companies that misclassify workers who function as employees but are designated independent contractors. This may scare some firms away from considering this option. But the free agent nation isn't going away. Many successful firms will learn how to leverage the advantages of using these individuals to rejuvenate and build their businesses.

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