Headspace Design

To Firm or Not to Firm? How to Choose Between Going Solo or Going Big

Posted On July 25th, 2008 Author Kyle Racki  Filed Under Headspace News, Business   4

A post I wrote has been accepted to Freelance Switch.

The article has been copied down below (but you should still check out the site!):

Before going out on their own, many freelancers struggle with the idea of how to position themselves in their market of expertise. Considering many freelancers have at one time worked in an agency setting, it’s tempting to have the agency mind-set when crafting your promotional materials.

For example, the decision of whether to use ‘I’ or ‘We’ can dramatically affect the way you’re perceived by prospective clients; “We can deliver excellent results” sounds much larger than “I can deliver excellent results”. The big question, then, is this: do you want to be an agency or a freelancer?

The truth is, most big agencies started as one or two people. For those who knew they didn’t want their business to stay small, they had to position themselves as something greater than what they were, and grow slowly over time. Therefore, any freelancer starting out has to consider the question of whether he/she wants to stay a freelancer, or grow into a firm. There are definite pros and cons to either approach. Here are just 5 factors to consider:

1. Overhead
2. Competition
3. Client caliber
4. Hourly rate
5. Busyness

Freelance

1. Little overhead. When you work from home, as most freelancers do, you have little to pay for, other than the cost of keeping a roof over your head, food in the fridge and the internet connection plugged in. Most of the money you make can go directly into your pocket, whether that be a savings account, investments, or a new Apple cinema display. The lower your overhead, the higher your profit margins.

2. Competitors are colleagues. Competition is fierce in any business, and the same goes with freelance design/programming/writing. That being said; many of our freelance competitors tend to be colleagues or even friends. People we can have a beer while sharing client horror stories. Sure, we may lose projects to them on occasion, but for the most part, there’s enough work to go around, and clients make their hiring decisions based on our portfolio, price, experience and professionalism—and nothing else.

3. Worth less in the client’s eyes. While reputable freelancers can certainly gather big client work, many large companies tend to favor established firms for their $50K projects. It can be hard to convince a prospective client that you can do the same quality of work as a 10 person company with a downtown office, a team of designers and coders, and an attractive front-desk person who offers to hang up the clients’ jacket and make them a cup of coffee. Meanwhile, the lowly freelancer is sitting with the prospect in a Starbucks. The truth is, many prospects worry a one-man band is unreliable since, as they often put it, we could ‘get hit by a bus tomorrow.’

4. Lower rate = no outsource potential. Let’s face it, freelancers generally can’t command the high rates that even small agencies do. Clients know we don’t have to pay employee salaries, or keep the phone system running, so the same caliber of work will often get sold at half the rate that the big boys charge. Because of this, freelancers generally can’t afford to outsource their work and turn a profit. As a result, they can only bill for the hours that they are physically able to work. This may mean they have to turn down work on occasion.

5. Octopus syndrome. Freelancers tend to suffer from this. They are required to be all things to all people; designer, writer, programmer, copywriter, strategist, accountant, cold-caller, dog walker, networking-event shmoozer—the list goes on. As previously stated, freelancers usually can’t afford to outsource their responsibilities, which means they have less time to be working on the stuff that actually pays the bills.

Firm/agency

1. Major overhead. Office rent, furniture, computer hardware and software (times the number of employees), file servers, phone systems, not to mention salaries—firms and agencies have overhead to spare. It’s usually the ol’ bricks and mortar that destroys the cool little design firm that used to churn-out award winning work… before they went under.

2. Competitors: they’re out to get you. Unlike freelancers, competing agencies are usually not the best of friends. Because of the aforementioned overhead problem, every agency needs all the work they can get. That means they’re usually savagely competing with other firms on proposals, and often bad-talking their competitors when they can. That can be a little unnerving when your monthly break-even rate is 50K.

3. More credible to large clients. One of the benefits of being considered an agency is that big clients with big projects have no problem handing you big wads of cash. You’ve got an office and a fancy phone system, so the client has less concern about liability. In this case, perception is everything.

4. Higher rates mean outsourcing potential. Because agency rates tend to be in the triple-digit-per-hour range, you as a business owner can leverage the talents of other people, whether that be salaried employees or contracted freelancers. This means you can take on more projects, and, if well managed, can turn a good profit.

Think about this in simple terms; imagine you could take on 10 projects a month, at $10,000 per project, each one requiring 50 hours of development time. You have 10 good contractors to outsource to who charge $50/hour, one contractor on each project. If you paid each contractor $2,500 for a job, and took the time to manage each client and each contractor, directing the quality of the work and the expectations of the client—you’ve just made $75,000 that month, you’ve got 10 happy clients, and 10 happy contractors who can be used in future projects. This is something you would have never been able to achieve as a solo freelancer.

5. More time to focus. In theory, if you have a team of either employees or freelancers at your disposal, you should have more time to do what you do best. If you find you’re better at developing business than designing, then you can hire a great designer and have fun watching her work some magic while you profit off of it. If you love being creative, but have trouble managing the business end (paying bills, invoicing, networking etc.), then you can hire someone else to fill that role. That means you’re spending your time doing what you love and what you’re good at, and avoiding the octopus syndrome freelancers often contend with.

Do what feels right

So what do you choose? There is no right or wrong answer because it all depends on what you value most. If you’re positioning yourself as a business, you can hope for more money in the long term, but more initial stress and start-up risks to go with it, and greater complexity overall.

Freelancing tends to offer a simpler way of life: working on what you want, when you want, but it may not bring the prestige of working on million dollar projects for international brands, or making the top CEO list in the local business mag.

Every company starts as one or two people, but it is your positioning that will dictate your growth potential. If you’re content to stay as an independent freelancer without any ball-and-chain overhead, then position yourself honestly as such.

Do you have any other factors that can help you decide whether or not to grow your freelance business bigger?