Yesterday I got a mail from one of my clients that started with:
“The telecom sector is a dynamic industry, which requires us to constantly focus on costs. We have therefor introduced 3 measures to help us manage costs.”
And it continues to require me to agree to a 5% reduction in my hourly rate. If I don’t agree I might lose my contract.
Oh.. and they need an answer today.
Now here is why I will not negotiate about cost. There is nothing to negotiate about.
Cost is only half of our transaction. I do work for you that is valuable to you and you give me money, which is valuable to me. Now the trick is to get more value out of my work then you pay me. It is called running a business.
So if you are unhappy with my benefit/cost ratio I would love to (re)negotiate. But only if we negotiate the whole thing.
That leaves open the option of figuring out how I deliver even more value to your business for the same pay.
Sending out a mail to a bunch of your subcontractors asking them to agree to a cost reduction is not only silly, but it also shows you have no clue how to run a business.
Should you not care about cost at all? Of course you should keep an eye on your costs. And you should strive to root out all cases where you do not get more value out of a transaction, but costs should always come second to creating value.
Which is why a focus on only costs is a sure sign of a company in serious decline. With no way to grow revenue, cutting costs seems the only way to improve profits. But if you focus just on cost, you might not see the impact it has on your revenue.
Here is a quick tip to all companies looking to cut costs.
- Sell all your assets
- Cancel all contracts with your suppliers
- Fire all your staff
- Optionally: Tell your customers you won’t be around for long
Voila, no more costs.
Update:
tferris posted a slightly inflammatory comment on Hackernews, which also has a good point buried deep within.
Getting tired of simple-minded self-help advice in blog form. And this bitter post even doesn’t give you any advice.
When doing business you will face negotiation tactics every single day (like the OP described in his post). If you are long enough in business you know how to handle to this and how to counter attackâwithout having to write a whiny blog post. And if you are a talented developer you have enough options anyway.
I was certainly not trying to be whiny. This is just business after all. I was just trying to point out how a single minded focus on costs without relation to benefits helps neither the company or you as a contractor. But just to be clear, my advice is to open up the conversation from just costs to a negotiation which includes other things, including the benefits.
Hi Erwin,
Nice writeup! I got a similar ‘offer’ once: the HR department wanted to lower costs by 10%, and offered the same deal. I’m quite flexible, so I proposed to work 10% less, which would lower cost also by 10%. For reasons still unknown to me, they declined my offer almost quicker than I did theirs
Geeh. That’s weird?
You were just trying to be very helpful
Bravo! Very well said.
Thanks A. Non. It seems like it has struck a cord with a lot more people. We really need more people to make a stance for common sense in our companies.
You are way too bold ! Common sense ?? In our companies, what for ?
Joke aside, I thank you for this short but really powerfull post.
The trouble is, unless you have difficult to replace skills, there will always be someone else willing to take the 5% cut. If the client is in the stronger position they will get their 5%, otherwise they won’t. Often, they are “trying it on”. One thing is certain if you agree to a 5% cut then there will be another fee reduction request, and then another …
@Ed — maybe. But while they find that magical other person, the work is not getting done. If the work getting done is not important, then maybe *no one* should be paid to do the non-essential work.
and you’ll find, in the end, that it isn’t the amount of work getting done, but how much it costs. This is predicted strongly by the “everybody must take a 5% cut” form letter, rather than a “we want to talk to you about your rates with respect to the value we perceive from your services” letter.
Once you’re views as an FTE, all decisions will be based on average cost per FTE, and if the specific cost for your FTE is low, then yo just make all the high cost FTEs fit into the budget better.
I would have replied with: “The consulting industry is a dynamic industry in which requires me to constantly focus on revenues. I would therefore like you to agree to a 10% increase in my hourly rate. If you can’t send me an agreement within 24 hours, I may have to terminate our contract.”
Actually, this is exactly what I do
. I give them usually couple of hours to let it be (with no explicit warning or deadline) and after that start re-negotiating upwards.
I’m about to be laid off this week. Because of ‘cost reduction’ and they won’t see any deals coming in in the next 6 months to cover my salary. But I haven’t even put half my value into this company in the last 6 months because of first cleaning ‘technical debt’ (I’m a programmer). So yes, people steering only on costs without leaving room for creating more value won’t have a business for long. They get blind and are afraid to uncover their eyes.
That sucks Ashwin. Hope you can find a better suited employer with a focus on both costs and value.
Costs are easier to see. Value is *very* difficult to calculate.
In the end, it’s all just lazy accounting…
I’m confused. What you define as their cost is your rate. Your rate depends on much more than just the value. It depends on your market, on industry, depends on the country you work and the current situation. In Switzerland for example you get paid more than in any other country, for the exact same value. In other words, the cost, your rate, is defined by industry and market factors, It is not defined only by value. If all the potential customers are put in financial trouble, they will indeed have to cut their costs, so you will either have to cut your rate or they will find someone else. When all your market does the same, what will you do?
Your post would be just fine in an ideal (for you) market.
Spiros,
Of course those are good points. Rate vary greatly between geographic locations. But doing contract work is only one way to make money. For now I divide my time between contracting and 2 other small businesses on the side. At this price point it is worth it for me to combine the 3. If tomorrow the entire tech industry would cut rates by 20% I would shift my time spend on my other businesses accordingly and try to capture my own value instead of going through a 3rd party.
Nice article, not to hyjack the thread but this same logic applies to businesses who try and hire IT people. They want the moon in terms of being a Network admin, Windows admin, Linux admin, Backup admin. DBA admin, plus all the other applications that need to be supported and everything else that plugs into the wall. all for a princely sum of 85k. Some people will work for even less to get the job. The above skillset is easily well over 250k a year. Do you think any company will pay that? Not in hells chance.
I doubt that “tferris” is *The* tferris*
1. The “real” Tim Ferriss’s name ends with 2 s’s not one, i.e. it’s Tim FeriSS not FeriS
2. tferris has submitted links for node.js, mongoDB, and other highly technical topics. I doubt Tim FeriSS is into such technical topics (over topics one outsourcing, lifehacking, dieting, etc).
3. tferris’s hackernews comments make him appear as a pompous dick. Again, I doubt the “real” Tim would be highly critical without being constructive, first.
Amen.
Thanks to you and Andy I can sleep better
I had not noticed the missing ‘s’. Although point 3 is why I doubted it was him straight away.
I initially thought the same about “tferris”, but checked and found that *the* Tim Ferriss spells it with a double S, so find I it unlikely that it’s him.
The cost is determined by the market, supply and demand. However, from a sales perspective–price is rarely the attribute that makes the sale–people aren’t buying the price, there is some other reason. Also, it’s not a liquid market. Software developers aren’t like Legos, not easily interchangeable. Switching out a developer or losing a developer is very costly. And the “supply” is replete with incompetence. On top of that, for whatever reason, women hate writing software and nobody seems to know why–even though they are just as capable of facing the cold countenance of an unforgiving, unfeeling calculating machine for hours and hours. Even for men, it’s not glamorous work and most people find it extremely boring and frustrating–sitting, staring at a screen, very few people have the focus, interest and physical stamina to do it. Add to that the politics of language choice and coding style and the rapid pace of technological advancement and the limitless and never-ending acronyms, frameworks, libraries, IDEs, GUIs, operating systems, configurations and tantalizing buzzwords. The moat is deep and wide and full of sharks, piranha and entanglements. So halfway-decent developers are worth more than they realize.
Do not apologize about the comment on HNews. The post was absolutely not winy and it did in fact include advice. Your advice to the worker was that you should not allow your compensation to be reduced unilaterally when a ‘cost cutting’ sweep is underway. If you are a valuable asset then demand that to get paid. And the advice to a manager: cutting compensation will not certainly increase your return on investment (labor). Think of the Smelly Fish Shop analogy by Seth Godin: http://sethgodin.typepad.com/seths_blog/2009/07/death-spiral.html. You don’t shrink your way to greatness.
Thanks for the kind words. And for reminding me about the Seth Godin post. A classic
I guess I’ve been fortunate, I’ve never been in a situation like that.
But I can’t help but think that this “altering of the deal” has a rather Darth Vader tone to it. It seems that trying to change the deal after the deal has been struck will only erode trust in the company that you’re trying to work for.
I don’t see this post as whining.
I see this all the time in the IT industry. They try to reduce IT budgets, but the don’t remember IT actually reduces costs and make money, contrary to HR which is always trying to push salaries down, but without looking to lower production that leads to poor performance and so the company make less money. Kinda like a snow ball effect.
Google, Microsoft, Facebook, Apple, are always trying to giving more money and benefits to their people, because they make the company and they bring a lot of money to it. If they lose the persons and have to get a new one, they will lose months and months until they have the same performance of the person who left. Not to mention since they got the best, it’s very hard to find a replacement.
So if I were to give an advice, I would say hire the best and keep them. They will bring a lot of money to you and add a lot to your company. And, like Jobs used to say, good developers are worth like 25 times an average one. And you won’t have to pay 25 times more.
Great post, and don’t worry about the haters. If you are saying something with conviction, someone won’t like it.
Purchasing departments serve a valuable purpose, but all too often, their incentives are at cross-purposes with the businesses they are supposed to support. They often focus on cost to the exclusion (and reduction) of value. And anyone who wants to renegotiate like that just because they have leverage cannot be trusted.
Of course, some of this comes down to what you sell and what the customer is buying. If your proposals says “I’ll have someone sit in a chair and write some code for 40hrs/week at $X/hr” you are stating that you consider yourself a commodity. Your proposal should crisply define the benefits of your work, so the customer is thinking about value, not cost (and you have a natural way to respond to cost questions, as you discussed).
Couldn’t agree more
Blind requests for % cost cuts are ae sign of credit risk.
Effective immediately all contracts must be prepaid.