How to Go Freelance

41tQiXO81hLSince I posted Why I Freelance a few months ago, people have been asking me for advice on how to get started.  So, this week I fulfill a promise to share some pointers.

There are probably books on this, and they’re probably better organized, but here is my experience.  We start with the easy stuff:

  • Form a legal entity. I have tried various forms over the years, including a Latin American SA.  What I recommend for you is an LLC.  This leaves you free to elect C- or S-Corp tax status later – and you don’t need a lawyer.  You can form an LLC online for a few hundred dollars.
  • Draft a consulting services agreement. For this, you will need a good lawyer.  It is always better if you can send a prospective client your standard contract.  This frames the negotiation in terms favorable to you.  Pay special attention to the non-compete terms.
  • Find a good accountant. If you are good at tax prep, and using a “disregarded entity,” you may be able to do the firm’s returns on your own.  Otherwise, seek professional help. Pro tip: pay Uncle Sam quarterly to avoid a surprise at tax time.  Canadian pro tip: keep your HST receipts in a separate account.
  • Choose a tax status. The last time I was incorporated in the U.S., I used an S-Corp.  This is a hassle because you have to deal with payroll tax.  It was handy for me because I was able to have my wife on the payroll.  The Canadian version of this is called “income splitting.”
  • Set up a web site. No, don’t look at mine.  It’s overdue for an update, and this here blog is my main presence online.  Depending on how you plan to market yourself (see Networking Tips for Consultants) you will spend more or less money on the web site – and you may have to learn about SEO.
  • Open new bank accounts, and obtain a corporate credit card. Using the corporate card is an easy way to keep your business expenses separate, and it’s a source of working capital.  When I started at GMAC, it was months before I got paid, and I had accrued thousands of dollars in expenses.
  • Learn how to use QuickBooks. As you can tell by now, keeping the books is a big part of running your own business.  You will need to keep track of your accounts, and payroll, and 1099s, and present your clients with professional-looking (and accurate) invoices.
  • Obtain health insurance. I can’t help you here.  I haven’t lived in the U.S. since Obamacare took effect.  I understand it’s expensive.  At present, I have an international Blue Cross policy.  Depending on your tax status, this is deductible on either your business or your personal return.
  • Plan your budget. Figure out how much income you need to pay the bills, and then figure out how you can earn that much – after taxes – assuming you are on the beach for three months of the year.  That’s a sardonic Big Six expression, “on the beach.”  It does not mean happy hour in Playa Bonita.
  • Identify your prospective clients, as specifically as possible, and where they’re located. Unless you have a versatile skill set and live in a high-demand area – developing software in Seattle, for instance – you will be on the road.  I could write a whole ‘nother article about living on the road.

I presented the easy stuff in a short list that you can print out and check off.  Now, the hard question is, why should somebody buy what you’re selling – and for how much?

As of this writing, I know that I can rent a good software developer for about a hundred dollars an hour, and down to $65 for newbies.  The rental agency may keep up to 25% of that, which is not the scam it sounds like once you consider they have to do all the stuff on that list – plus find the gigs.

If you can possibly manage it, work under contract for whatever agency serves your trade – they’re ubiquitous – and learn everything you can about how they do business.  Learn how they handle sales, contracts, billing, payroll, benefits, beach time, and something called “realization.”

Your situation will depend on how old you are, and where you are in life.  The best way to start is with a firm, while you’re young, and before you have kids.  Consulting can be demanding.  If you have a family, I recommend keeping your day job, and then picking it up after the kids are grown.  I know a bunch of successful “mature” consultants.

I was fortunate to start in a Big Six firm (there are four now) that taught me how to manage clients, how to sell an engagement, and how to write a statement of work.  I had classroom training, role playing, one-on-one instruction, and a whole lot of hard knocks.  That early experience was priceless – and I can’t distill it into a blog post, sorry.

The good news is that I was a lousy staff consultant.  All of this stuff is trainable.  I hope these few pointers from me will help you to make the transition.  On the other hand, if you’re having second thoughts – that’s valuable too.  It’s not for everybody.

New Consolidation Stats from NADA

I chose consolidation for the first of my megatrends series, because it’s the least controversial.  Everyone seems to know it’s happening, and the records and rankings in Automotive News are dominated by big groups.

Ten years down the road, we don’t want to be the 13-point dealership group feeling that pain from the larger groups the way the smaller ones are now

This year, for the first time, NADA Data takes a look at consolidation.  Probably the best single number to look at is the ratio of rooftops to dealers, which represents the average number of stores in a dealer group.  This has grown from 1.8 to 2.2 over the last nine years – not exactly a revolution.  I was a little surprised to see such small numbers, but this is an artifact of how NADA presents the data.

NADA, logically enough, presents the number of dealers owning a group of a given size.  I would have preferred to see the number of stores, not owners, in each category.  This is a better reflection of the market coverage.  To show the distinction, I plotted the total count of both rooftops and owners.  You can see that, while the number of rooftops is recovering since 2010, the number of dealers is not.

Next, I recast the data in terms of rooftops.  The number of rooftops belonging to groups of ten or more has almost doubled over the period, from 12.2% to 21.3%.

Below, I have plotted the number of rooftops in three tiers, by size of the dealer group to which they belong.  The 2 to 10 tier has been remarkably stable, numbering roughly 8,200.  The single points have been in steady decline, losing 2,500 over the period.

Dealers know that single points are vulnerable to market shocks and competitive pressure, if for no other reason than being tied to a single make.  On present trends, we can expect them to vanish entirely within ten or fifteen years.

Optimal IQ for Managers is 120

It has now been proved that you can indeed be too smart for your own good, at least in a business context.  New research shows that the optimal IQ for managers is roughly 120.  This theory is based on dividing the bell curve into three regions:

Let’s say that your IQ falls at the point marked above, which happens to be the optimum.  The colored bands show the size of three groups:

  • To the right (blue) are people who are smarter than you. They may like you, but they will not look to you for any difficult decision.
  • To the left (yellow) are people somewhat less smart, within 16 points. They respect your intelligence and look up to you as a leader.
  • To the far left (grey) are people who do not understand you at all. They think you are arrogant and condescending.

The theory is that the optimal IQ for leadership falls at the point where the size of the middle group, minus the size of the smarter group, is greatest.  A little calculus finds this optimum at 1.2 SD, or roughly 120 on the standard IQ scale.  Other theories have generally assumed a continuously positive effect of increasing IQ, but with diminishing returns.

Researchers plotted intelligence scores versus perceived leadership attributes, for a large sample of middle managers at seven multinational companies.  All attributes, like the one shown below, had a maximum value around 30 on the Wonderlic scale, or 120 IQ points.

I have long suspected that medium-bright students, who must struggle to make good grades, end up more successful than the super smart ones who breeze through school.  Throw in some military experience, and you’ve got the perfect employee.

Of course, this is in a corporate context.  It assumes you are working with a reasonably large group of people having normative IQ distribution.  There have been no studies yet on scientists, engineers, or professionals in private practice.

So, if you are languishing in your company’s IT department, maybe you are just too smart to be a manager.  I’ll see you at the Star Trek convention.

Cox Automotive Double Play

It is time to break out your game board once again and play “link the subsidiaries.”  I heard this one recently from a Cox person at a conference.  I don’t know if they have it in production yet, but it sure sounds good.

If you authorize vAuto to source new inventory as it sees fit, then it can connect to Manheim and automatically place the orders.  As soon as the gavel goes down, Dealer.com can pick up images and data from Manheim and immediately begin merchandising the vehicle.  Cox also owns the logistics company that hauls the vehicle, so they can report when it will arrive on the lot.

So, you could conceivably have a customer walk in to buy a vehicle that is arriving today, with the entire sourcing cycle untouched by human hands.  In fact, this sounds a little like what I described in Cox Automotive Home Game.  No mention (yet) of the COXML message format.

Update:  Details here from Mark O’Neil.  The chain goes: vAuto, Stockwave, Manheim, NextGear, and then Dealer.com.

The Voice of Experience

This is a funny little story with a serious message.  I improvised this coffee timer, pictured below, for the break room here at Safe-Guard.  On days when I arrive before Yarileen and make coffee, she can see that it’s from this morning, and not left over from the night before.

There is general agreement that “whoever made that thing is a genius.”  Well, actually I picked up the idea from another client some years ago.  This reinforces what I wrote in Why I Freelance.  If you keep moving, and keep your eyes open, you can’t help but pick things up.  I may not be the smartest knife in the shed, but I have been consulting a long time.  Más sabe el diablo por viejo que por diablo.

Dealer Megatrends Part 3 – Process Change

In my previous Megatrends article, I wrote about how advancing technology is changing the role of F&I.  This week, we examine some new business practices.  You already know what I mean.  We’re going to talk about:

  • Hybrid Sales Process
  • No Haggle Pricing
  • Salaried Employees
  • Flat Reserve

High line manufacturers have tried to promote “one face to the customer,” since I was at BMW in the twentieth century.  Lexus Plus is the latest iteration.  Tellingly, BMW called it Retail 2000.  I fondly remember hearing a radio spot for “the last BMW dealer” in San Francisco, because we had styled all the others as retailers.  “If you want to pay retail, go to a retailer,” the ad went, “to get a deal, you need a dealer.”

So, it goes in cycles.  Lexus, or Scion, or AutoNation, will roll out a new process only to be outmaneuvered by the wily dealers.  Then they retrench and, five years later, someone else tries the new process.  They could literally be passing around the same procedure manual.  Look at me.  I have been advocating price transparency since Zag.

One Sonic-One Experience offers no-haggle pricing with one sales rep using an iPad who takes the customer through the entire vehicle sales process, including financing and the F&I product presentation.

A good example of the new process is Jim Deluca’s exposition of the Sonic One Experience.  In their EchoPark process, Sonic also eliminates dealer reserve.  The fight over flats and caps lasted from roughly 2012 to 2014.  See here, and NADA’s endorsement of caps here.  Next, Sonic will leverage their heavy investment in training to roll all of this into an online process called Digital One-Stop.

I suspect that Sonic would soon like to fire all their trained F&I professionals in their self-interest of saving a buck.

Forum comments reveal that old-school practitioners dislike the new process.  It’s funny to hear an F&I manager accuse a dealer of shameless self-interest, but there it is.  On the other side, Sonic’s Jeff Dyke reports good results from hiring people with no prior automotive experience.  Meanwhile, at rival consolidator AutoNation, 70% of the sales staff opted to go on salary.

Well-known F&I trainer Tony Dupaquier is here, advocating the hybrid process at First Texas Honda, and here is Findlay Group’s Las Vegas Subaru.  Savvy dealers everywhere are experimenting with at least two or three of the four new practices (online selling and iPads come up a lot, too).

Smart people have told me that the hybrid process will never produce four-digit PVRs, but many dealers – and certainly the consolidators – reckon that’s a price worth paying for a streamlined process, reduced turnover, and improved customer satisfaction.

Why I Freelance

Recently, Linked-In reminded me that I have been an independent consultant for fifteen years.  Thanks to all who called and wrote with congratulations.  In fact, I have been either consulting, at a startup (or consulting for a startup) since business school.

I used “freelance” in the title because this word is in need of some rehabilitation.  There was a bitter post on Linked-In about how “freelance photographer” means “unemployed guy with a camera.”  I get that all the time.  I spoke with a recruiter recently who was startled to learn this is really what I do, and not just a placeholder on my resume.

According to McKinsey, there are 49 million of us “free agents,” equal in number to those who do it out of necessity.

I started consulting for a Big Six firm, back when there were six, and I noticed that our projects were always a big deal for the client staff.  They felt lucky to be on the client’s once-in-a-lifetime project.  We consultants, meanwhile, were continuously assigned to the good projects, client after client.  It becomes addictive.

If I were recruiting here, I would recount some groovy projects and then pitch the glamour and excitement – but I have a much more practical argument.  When you work for a long time at one company, you accrue specific knowledge about its organization, procedures, and history.  If you ever leave that company, the value of this knowledge falls to zero.

I was engaged by GMAC just before the crash.  Suddenly, my entire department was shuttered – desks empty, lights out.  It was a disaster for the faithful, lifetime employees.  Some were out of work for a year.  The consultants, however, rapidly found new jobs.

Job security no longer exists, and the good wages, generous benefits and secure retirement that used to be guaranteed with full-time employment are in decline or have disappeared.

It is a little scary not knowing where I’ll be working next year.  I won’t deny that.  My point about GMAC is that the people who thought they had job security were mistaken – and they were the ones most at risk.

Tom Peters writes that job security does not come from allegiance to your company.  It comes from having skills and accomplishments, plus a network of people who know about your skills and accomplishments.  This is where the exciting projects come in.  When I call around looking for work, I want people to recognize me as “the guy who created Provider Exchange Network,” or something like that.

Changing jobs enhances your value by exposing you to new people, technology, and business models.  This has certainly been true for me.  F&I is a small community, but it includes dealer groups, software companies, and finance sources.  This is great because it allows me to move around without violating any non-competes.

This article in Harvard Business Review echoes Peters’ observation about job security.  The author is a B-school prof, who writes that the gig economy is the future.  Focus on finding work, she says, not a job. I am lucky that this attitude (and related skills) were drilled into me at Coopers.   In case you’re inspired to quit your day job, I’ll follow up with a “how to” article.