Why Companies don't hire Consultants directly

Apr 15th, 2017
Why Companies don't hire Consultants directly

If a startup wants to hire a consultant, they just sign a ‘Work for Hire’ agreement and the consultant gets started. However, if you try to hire a consultant while working at a large company and you’ll discover it’s a very cumbersome process. Managers and consultants get frustrated by the bureaucracy and don't understand why its so complicated. Here we explain from the big company’s Procurement perspective why it is so difficult.

Large companies refuse to do business directly with individual consultants because of the administrative overhead and risks involved. To be paid, the consultant needs to be setup as a vendor in the company's system.

Administrative Time and Costs

Setting up a consultant as a company’s vendor includes the following tasks

  • A Hiring Manager filling out a multi-page justification form for why they want to use the consultant
  • Procurement verifying the requirement and approving the request
  • Procurement doing background checks, verifying references, checking business licenses, conflict of interest, verifying if they have business insurance, etc.
  • Finance collecting bank information and checking credit worthiness
  • Finance and Procurement setting up the vendor in the system

In terms of time that employees in different departments would have to spend on this would be roughly around 20-40 hrs. At $75/hr., this translates to $1500-3000 excluding any fees they may have to pay outside agencies like background checks, etc. The entire process may also take up to 2-3 weeks as contracts, etc. take time for approvals. So instead, Procurement managers often encourage routing the consultant to work through approved staffing agencies.


Higher Legal Risks

There are also more legal risks involved in starting a contract with a single person company. Often litigious individuals may try to extract more from the company or sue it for some perceived issue. Large suppliers are less likely to try such stunts because they worry about their reputation and have an eye on future business, Individuals are less likely to worry about such things.


Potential Liability

Dealing with one person consulting companies can also create liabilities. Most single person consulting companies don’t carry business insurance as it is expensive ($3K/year for premiums). There is always a chance something could go wrong because of the consultant, which creates liability for the company. For example- The consultant may be DUI and get into an accident on the campus hurting some workers.

Most large suppliers have business insurance to cover for such problems created by their workers at the client site. This could be under professional errors and omissions or even accident and other types of damage insurance. Sometimes the costs from incidents could run into millions. Large companies would rather not have such problems and it’s another reason they don’t like signing up with small consulting companies.


Potential for future Unauthorized Spend

Most Procurement departments don’t like adding vendors to their supplier base as it detracts from their main goal which is to spend more of their money with as few suppliers with whom they have negotiated discounts so they have more leverage.

If they setup a consultant as a vendor, it gives that consultant a vendor number and contract. This authorizes the person to do business with the company. This typically leads the consultant to start soliciting other Managers for business. If the consultant is well connected within the company, they may grow into another significant vendor.


How Procurement addresses this problem?

Pass Through or Payrolling: In a large company, this situation arises often enough that Procurement will ask the consultant to work through one of their existing staffing agencies or consulting companies and let the existing supplier charge an extra 10% or so for their troubles.

The manager gets to use you the consultant and Procurement doesn’t haven’t to get involved in setting up a new vendor for a one-time project. Sometimes the client may even have an agency they have setup for specifically this purpose. This is called 'payrolling' or 'pass through' and the Agency is called a ‘Pass Through’ Agency. Read more about how to find a pass through agency here


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