When creative freelancers start to become successful they often decide to hire help. But the significant step cost in hiring that first employee—can be a step right off a cliff.
Growing from a freelancing practice into a small creative firm is a hard transition to make. Especially, as discussed last time, if you have ambitions to continue doing creative work yourself. The step of hiring your first few employees carries a huge financial burden, that is often unrecognized—until it’s too late.
Every time you hire an employee, in addition to their compensation, there are costs associated with integrating them into their new job. They have to learn about all your clients, about your workflows, and adapt to your expectations for them in this new role. These are all soft overhead costs that are not typically factored into a budget. Any new employee therefore will not start their job at maximum capacity. It could take a month or more before they are able to be as productive as you need them to be. On top of this, your own productivity will take a hit, since you’ll need to provide them with orientation, direction, and review their work.
These kinds of overhead costs are known as step costs. Scaling up any business involves these kinds of costs. But here’s the thing. The relative proportion of these costs, to your overall capacity to bear them, is highest earliest on. Let’s estimate these costs to see how the impact of your earliest hires are the most costly. Let’s say that you have been able to hit that 60% utilization target I’ve mentioned before—that of all the time you spend in your business, you’re able to bill out 60%. When you hire someone to fill another production role, their utilization can be as high as 80%-90%. But your own utilization will go down, since you now have to spend time managing this employee, and ensuring that you have enough work for the both of you. So your average overall utilization is still going to reflect that 60% target. But early on, this new employee will not be able to be 80% productive, additionally, your management overhead will spike in those first few weeks. And so your overall utilization will drop from 60% to perhaps as low as 40%, until you both settle into your new roles.
But that’s not the only impact of steps costs. If one of the reasons you decided to hire help in the first place was due to having more work than you could handle, how much more was it? Maybe you were working at 150% capacity, which would be extremely hard to maintain. But while 150% is way too much work for one, it’s not really enough for two. And so neither of you will be fully resourced, even after the initial onboarding season.
These gaps—gaps in utilization during the onboarding process, and gaps in opportunity to keep two people fully utilized, are significant step costs to face. When you go from one person to two, the relative proportion of these steps is much greater than it is for a firm that has, say ten employees to go to eleven. And so step costs have the highest impact earliest on. And when you’re just starting out, those early days are the ones when you’re least experienced as a manager, and probably less astute about financial planning, and so you won’t likely be prepared to manage the high impact of step costs.
This is why so many creative service firms go out of business. Leaping over this gap requires careful planning, with plenty of savings. And if in those early days, the feast season starts to wane, that first step could be your last.
That’s why it’s so important that you have a solid marketing plan in place, and that you keep it up during the strenuous early days of growing into a firm. If you wait until the feast season ends to start thinking about your marketing you’ll be way behind the curve. And so we’ll be returning to this important topic of marketing next week.
Until then: don’t let the business of creativity overwhelm your creative business.