Since I became an independent SAP consultant in 2008, I’ve encountered many times what’s become known as a “middle man.”
Independent consultants provide services to companies for a limited duration because they only need you there for a short to medium length of time. So, why would a company look for a third-party middle man to intermediate contracts with these independent consultants? This post aims to clarify.
Consulting companies are not middle men. Consulting companies or consulting teams sell software and implement projects. They bid on a customer’s request for quote and are responsible for delivering it. Consulting companies hire independent consultants as needed. The good ones build their team to fit the project needs, whether hiring employees or independent contractors.
Consulting companies may hire a middle man if they are large enough. I’ve seen this happen out of desperation, i.e. after they are unable to find independent consultants on their own with the specific skillset they need. In these cases, they open a request to any middle man able to find the right fit. This is typically an exception; consulting companies usually hire the independent consultants directly and bring us in as part of the team, making no distinction of remuneration method.
What is a Middle Man?
The middle man I am referring to develops relationships with companies looking for specialized talent and then finds such people on LinkedIn (or other platforms) when that need arises. They then bill the customer for the independent consultant’s time and expenses and pay the independent consultant a portion of that. Their cut can be anywhere from 10% to 100%. If you’re acting as a middle man, you would typically talk to customers twice: once when you join the project and later when you leave. Any other call you might get from them would be for you to help them find more resources. Any call you make to them is to follow up on invoices that haven’t been paid yet.
The middle man relationship with a client usually happens first. The fact that the relationship is in place and the client needs human resources is a motivating factor to start such a business. Sometimes independent consultants develop this relationship during their tenure with the client. They see the opportunity to bring in other resources, and with that start their practice. It is like the headhunting business but instead of only charging a fee at the time of hire, they will accrue additional fees for the duration of the assignment.
For example, if a customer pays the middle man $200/hr for the work performed by an independent consultant, and the independent consultant’s fee is $150/hr, the middle man nets $50/hr during the course of the project and, over a 40-hour work week, will make $2,000. It is not uncommon for middle men to place five or even ten consultants per client—and have multiple clients. A mid-tier middle man can bring in $2,000,000.00 per year or more. It is a great business if you get a chance to be part of it.
The relationships middle men develop over time become very valuable, in particular to foreign consulting companies that want to grow their business domestically. Because of this, a middle man with multiple clients is likely to receive offers of acquisition by such consulting companies.
A common way to develop relationships is to do good networking with people during your time at university and/or MBA. Often, many of the people you meet in these courses will become executives of large corporations and would give you the opportunity based on the friendship. That can yield you millions of dollars in a few short years.
When to Avoid Working with Middle Men
Just like nepotism, there can also be corruption and you need to watch out for it. For example, the middle man may offer a cut to an executive, program/project manager, and/or any other company resource involved in the decision making.
It is important for you to be aware that this takes place to know what to expect. For instance, there is no point reporting resource issues to a project manager that is being paid by the middle man. They do not want to hear it and will not take action. If you report human resource issues and see no action, this may be a sign of corruption. If you can confirm this really is the case, I recommend leaving the project at your earliest convenience. It will likely run into problems. This is because the middle man is likely to place subpar resources in the project and charge a high price for them. With a lot of bad resources, you will either have to stretch yourself thin to save the day every day or let yourself be part of a failed endeavor and deal with the damage that will do to your resume and career.
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Why Do Middle Men Exist in the First Place?
Now if you, like me, find yourself in the role of independent consultant you are likely, at some point, to experience feelings that a middle man is costing you a lot and offering very little in return. It is easy to give in to thinking their fee is legitimately yours and it is being taken from you in an unfair manner. What you need to know, however, is why they exist and what is their true importance.
From a client standpoint, why would they rather pay $200 to the middle man than pay $150 to an independent contractor? If you ask around you will hear several explanations. The most common are:
- The client’s accounts payable would be overwhelmed by the influx of invoices from all consultants. The middle man consolidates them all and it is therefore easier on the finance department.
- The middle man guarantees the quality of resources brought into the project.
- The HR department would be overwhelmed if they had to hire all the independent consultants directly.
- The client does not know how to select good resources due to their lack of expertise on the tools being implemented.
- The client needs someone to manage the consultants in case they are underperforming.
This rationale is legitimate, but none of it seems to really justify the expense incurred by bringing in the middle man.
There is only one reason I can think of that justify companies having to hire a middle man, and it is directly related to the a lawsuit that settled in the year 2000. In short, temporary workers had been working directly for a large software company for several years (and in some cases, decades) and sued the company for benefits, including stock options, vacation, health insurance, etc. The case stated that although a temp worker, they were doing the same type of work, and should be owed all the benefits a regular employee normally gets. The software company had to pay tens of millions of dollars to the temp workers.
So from this point forward, legal departments of many companies no longer see a difference between temp workers, contractors, part-time, and technology-independent consultants. To provide a layer of insulation from further litigation, they turned to middle men, who would assume the risk of the kinds of lawsuit settled earlier. Paying an additional fee to the middle man would be an acceptable sunk cost to ensure lawsuits wouldn’t touch the business.
Companies cannot neglect the importance of technology in their business; it’s important to keep up with competitors or risk becoming acquired by them. Implementing and enhancing technology-based solutions require utilizing the talents of specialized people for a limited period of time. Candidates for these types of positions are only qualified for this type of engagement if they move from company to company and acquire the skills/experience they need. This is a different type of company-people relationship and is not the gig economy, not temp work, and not part-time resourcing. This is independent consulting. And middle men help bring together consultants and businesses in a timely manner.