How to transition from freelancer to agency using the incremental time leveraging method

Being a freelance developer has a number of great benefits over employment. However as many of us who have been freelancers for a long time can attest too, there are also some significant downsides. Freelancing can actually feel like a trap. Just like employment, it can feel as if you’re not going anywhere. Year after year, selling your time, never really able to advance forward to making profits from a margin but instead always having your income tied to your own labor. Freelancing in this sense is like a stepping stone from employment to business ownership. Technically yes it’s a business, you can say you’re self-employed. You can even grant yourself the title of CEO if you like, but that will make people look at you a little funny if you have a staff count of zero or one.

Making the jump from freelancing to agency ownership can seem daunting. And that’s often because it is a big leap if you approach it all at once. That’s why I recommend using an incremental approach where the goal is to make that shift slowly over time. In other words keep working directly as a freelancer, but begin to hire contractors to help you on a limited basis. Don’t rush out and try to replace every hour you currently work. That’s because if you do, you could run into a number of pitfalls that will leave you right back at square one, including:

  1. If you rush hiring you’ll get the wrong people. Unfortunately in the dev industry, and quite likely in most industries, there are contractors who will fail to deliver or rack up a large bill that will leave you in a very bad position.
  2. Work quality may suffer even if you do hire qualified people, they might not be able to deliver what your clients expect right away. Again rushing causes this, because if you do the process slower you’ll be able to keep a hands-on approach with existing projects and clients.
  3. You might not be able to keep up on the sales or client management side of things. When you replace freelancer income which has a gross margin of 100% (you keep every penny earned by your own work) with leveraged income where you might expect to pay between 40-70% of the revenue out to your contractors, you will need anywhere from 200% to 400% more sales in order to maintain the same net profits.

What is time leveraging?

Time leveraging is a topic that somebody running a larger business already might never even have to consider. It refers to you as the business owner replacing yourself as a worker. It comes from the idea that in a business that you own you wear various hats. If you’re alone then you might be the bookkeeper, the janitor and the CEO. As a freelancer, typically your main role is that of service provider, directly delivering the work that your clients need. As a freelance programmer for many years I was directly writing all of the code for my client projects. But in order to grow a business that I can eventually sell, and in order to generate profits beyond the limits of freelancer earnings, I must find a way to leverage my time. That means I’m still involved in the business, but I’m removing myself from directly generating the revenue. We do this of course by replacing ourselves, hiring either contractors or employees. For most freelancers looking to make such a transition, contractors will be the more likely choice.

How to measure time leverage

Time leverage calculations should be made on the gross revenue of the company. Like with most fiscal analysis we want to look at the same metrics in a variety of ways. We want to project the number (predict the results), we want to track the number based on actual results, and we want to set objectives around this figure as well. If we have too many moving targets it’s hard to accurately measure without some equally complex formula. So my advice is “fix your profit goals” and then track the percentage of that profit that is derived from time leveraged work. The way I started this process was I took my average weekly profits which were at the time $2,100 USD a week and made that a “fixed profit goal”. In other words I didn’t aim to increase it, I also didn’t want to allow it to decrease during this process. Now of course in practice your profits may vary and if they increase, that’s great. Which they did for me because what happened is in the early stages when I brought on contractors I still kept doing a similar number of billable hours plus I had the gross profit margin from the contractors on top. So my actually profits went from $2,100 up to $2,500 and sometimes $3,000 per week. Nonetheless when I calculate my time leverage and compare it to the goal, I based that on the original fixed $2,100 figure.

Example scenarios and calculations below:

You’re fixed profit goal is $1,000 per week. You hire a subcontractor at $30/hour. You bill out their time at $50 per hour. The new subcontractor does 10 billable hours in a week, earning your agency $500 in revenue with a gross margin of $200. You then divide your fixed profit target ($1,000) by your gross margin on subcontractors ($200). The result is 20%. Another way to say this is you earned 20% of your gross margins from time leveraged work. For those that like formulas it looks like this:

TIME_LEVERAGED_MARGIN = FIXED_PROFIT_GOAL / SUBCONTRACTOR_GROSS_MARGIN

Here is a more compact example from a recent week in my business:

$700 derived from subcontractor margins with a goal of $2,100. The result here is 33%.

How fast is fast enough?

Like any business growth goal you have to decide what you’re comfortable with aiming for. This approach is really about being “reasonably patient” as opposed to trying to make a massive leap all at once. But on the other hand, moving too slowly might lead to a lack of momentum. I divided the overall objective of going from 0% leverage to 75% leverage into 5% chunks per week. I’d say that the realization that these small steps (chunks, bites… use whatever small division of things you like!) were relatively easy to manage is what helped me get through something where I’d been blocked before many times. You see the balancing act you need to do here is bringing in a higher volume of sales than usual plus at the same time also recruiting, training and managing new team members. Done too rapidly this feels massively overwhelming especially if you’re not great at these skillsets. And let’s face it, unless you’ve studied HR and recruiting, you’re probably a little bit lost about what matters in that process or what is most effective. Same can go for ramping up sales or using a marketing budget to increase sales volume. These are things that require you to grow as a business manager which means you need time to study and practice those skills. You also need time to create your own processes that fit your business, and developer the habits of doing those processes every week.

By aiming for a marginal increase in time leverage and thinking of it as climbing steps, you’ll find yourself at some point looking back and going wow this is working. Unless you find yourself crumpled at the bottom of the steps. Let’s face it, that’s a possibility. If you are trying to make this shift and then suddenly you lose the sales volume, it might not make financial sense or even be possible to continue the hiring side. And if you hire people and they show up or they don’t deliver work you can feel proud of shipping to your clients, you might have to eat the losses and jump in to do the work yourself. These are not fun experiences to have, and can be very frustrating. That’s partly because these are things beyond on your control. As much as you can initiate sales activities and do recruiting processes, whether other people buy from you or work with you is their choice. You can only structure your business and carry it out in a way that appeals to people. On the sales side that means having a consistent focus on delivering value. On the recruiting side that means thinking about how you can make winning a contract with your company the kind of thing that makes your subcontractors excited about their own businesses.

Whether you choose 5% steps per week, or you go with something like 10% per month also depends on the starting point. I started at 0% so every $100 earned via subcontracting was nearly 5%. After 6-weeks I had beaten the target every week. Sometimes it was close, like around week 4 I needed to hire another developer otherwise the next week we would miss it. That’s what I like about having a clear objective, but also having that objective be small enough and simple enough to solve. Hiring 1 contractor for only 10-hour the next week seems achievable. It just meant going through the process of posting a job, interviewing candidates, making a selection and getting them started. I used to dread that process because the failure rates I experienced before were over 90%. Imagine doing that process in earnest, really hoping it would work, and having it fail 6 or 7 times in a row! I used to think to myself, am I the last qualified programmer on the planet? Which is a crazy thing to think because you know every second person on the planet is a developer! So why can’t anybody show up for me and write reasonably good code?? Now in reality I had to change how I did recruiting and how much I was willing to pay. Once I got that formula right the success rate improved. But it was also the system of incremental time leveraging that made the difference. I was no longer trying to make sudden leaps. I wasn’t hiring at 20-hours a week (which for complex technical projects involves a lot of management).

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