Making Staff Augmentation Work

More and more creative firms are getting nudged into "staff augmentation" for their clients, and a dozen of my clients have embraced it--all of those are making buckets of money. Way more than what they were making in their traditional work-for-hire contractual relationships.

Even if you aren't interested, it will be useful to understand it, and to have a policy formulated so that you don't hem and haw when it comes up.

Definitions & Distinctions

First some definitions, since there is a little overlap between several concepts and I see people getting these terms mixed up. I’ll explain how I use the terms:

• Staff augmentation refers to your employee(s) working for the client. More specifically, these two things are true. First, they are working at the client’s direction. In the past, this may have been even on-site, but where they are working “at the client’s direction” is immaterial. Second, they are on your payroll (or on the payroll of a sub-brand under your umbrella).
• Nearshoring refers to the practice of hiring (typically) multiple people from another firm in a nearby locale to work under your direction. Picture a 40-person firm in Austin who needs developers with fluency in a particular application environment. They work with a firm in Colombia or Argentina or Mexico or Chile. This "augmented" development team is bought as a group and reserved for you. Essentially you are leasing these employees. They are English speaking and are usually within 1-3 time zones away.
• An affiliate firm takes nearshoring further in that you set up operations in one of those same nearby countries. This won't work long-term, by the way, unless you have an exclusive arrangement with a majority owner who is there physically. An alternative is to have that person be a minority owner in the entire operation, including the US firm, but whatever their ownership stake, they must live and work there. In this example, our firm in Austin buys an existing operation in Colombia, for example, and they now work exclusively for the mother ship and are counted as part of the team. The primary difference is monetary: what you would pay $100,000 for in Austin can be had for $35,000 in Columbia and the quality of the work is equal, and that pay level supports a fair standard of living in each location.
• Offshoring is just like nearshoring, except that it's much further away. It would be similar to that Austin firm working with a dev shop in Ukraine or India.
• Shared economy firms (there's no industry standard term yet) are entities whereby excess capacity is bought and sold. They will screen applicants and then perform matchmaking services to your firm for a fully disclosed fee. Thus it combines some element of WeWork, 99Designs, and a traditional placement firm, but with more disclosure and choice and vetting and entrepreneurship. In theory, the agency gets more qualified people in a protected environment and the individuals get help with business development and paperwork.

Next some background. If you aren't a regular reader, you can catch up on what's happening in the client-side space here:

• Pretend That You're An Advisor to In-House Departments (article)
• How Client-Side In-House Departments Are Changing (article)
• There Are NOT Seven Reasons Why Clients Hire You (podcast episode)
• What Good Clients Are Really Looking For (podcast episode)

Forces Behind Staff Aug

What's driving staff augmentation? Largely it's driven by a client's need to stay within certain employee count mandates but address their capacity issues nonetheless. But it's also driven because they don't want to find and manage very specific expertise without knowing how long they'll need it. In this arrangement they are essentially leasing your employee for a minimum length of time: at least months, but often years.

So if you want to do staff augmentation, here's how to approach it in order to avoid some of the common errors I see and maybe even make a business of it:

1. You can mix and match traditional services and staff aug services. In other words, you can have traditional arrangements with your clients (retainer or project by project) while at the same time have a staff augmentation alongside it.
2. You cannot flip the same people back and forth between traditional employee and staff aug employee. Well, maybe you can do it once, but only with their permission, sought long before you promise anything to the client. Traditional work assumes a specific social contract. When someone comes to work for you, they rightly assume that they'll be swimming in your culture and rubbing shoulders with like-minded colleagues. They are working for you in part because they do not want to work on the client side. When you and the team member both decide that s/he wants to work in a staff aug arrangement, always start with a multi-month trial in case it doesn't meet everyone's expectations.
3. Staff aug arrangements often emerge from a client concentration issue that you have with an existing client. You are already doing lots of work for them (as a percentage of your firm's size), and the client is increasingly needing large amounts of implementation.
4. Speaking of that, staff aug will skew heavily toward implementation rather than consulting or strategy. Read more on implementation and client concentration).
5. The larger your operation (ca. >20), the more likely it will be that you should treat this operation completely separately. The legal entity is important early on, but somewhere around that 20 person boundary you'll need dedicated recruiting and a dedicated HR person. The same person might be capable of both duties, but each of those two duties is far more intensive than in your firm. You are looking for different people and their challenges are unique, too.
6. Assume that the staff aug arrangement with your client will drag on and on and at some point they will want to just put your employee on their payroll. Anticipate that and protect yourself by forbidding the client from hiring that employee. You can't typically forbid the employee from accepting an offer, so the arrangement has to be between your company and theirs. Better yet, don't prevent it—just specify a one-time fee, which will usually be 25-35% of the yearly fee that the client would otherwise pay under your existing arrangement.
7. What do you charge your client for staff aug? That's going to be dictated by the marketplace, but it will never be less than 150% of the employee's unburdened cost. As an example, say your team member is making $80,000 (plus taxes and benefits). The company would pay you at least $120,000, and you'd pay those taxes and benefits from the $40,000 delta. But it is hardly ever this inexpensive for the client. Using this same math, the client will typically pay 150-300% of their unburdened rate. Why would they do this? It keeps their employee count down, it adds a rare expertise that's otherwise difficult to find, and it will be easier for them to stop the arrangement with you rather than dismiss the employee if they were on the client company's payroll.

Finally

Should you do this? I wouldn’t do it unless it’s going to be your primary business, and then I would go all in, with a view toward an exit. But if you do tip your toe in staff aug waters, be sure that your team is fully on board or it’ll not go well.