Contractor vs. Employee

When trying to determine whether or not you should hire somebody, I want you to consider a couple of things. I like to do what I call a staffing ROI, or a staffing return on investment of that individual employee. So you want to hire that employee. And you say this employee cost me this much. But how much revenue can that employee actually create? If they can create more revenue than they cost, then it may be a worthwhile hire. And I will say that not on every employee can you do this. But on a lot of employees, you can. So let’s say for an example that you have a consulting business. And you want to bring on a new consultant.

So their salary is $100,000. The other thing I want you to consider is, what’s their utilisation rate? Utilisation rate is how much can you actually bill them for? What is, how much can I bill them out at? And that Utilisation rate in this particular service business is 80%. So when they’re fully ramped, they’ll be at 80%. So I know from that calculation then their bill rate, if I calculate their bill rate, that I can bill them at about $200,000 a year. But they only cost me $100,000 a year. So I’m in pretty good shape there. In that case, I would hire that staff member. I would bring that person on.