Business Model Selection: Contract Employee versus Entrepreneur

There are many former corporate employees in business for themselves today.  This number has grown recently due to the layoffs and business closings prevalent in today’s economic environment as is likely to continue growing in the months to come.  These highly skilled people are either finding it difficult to get a new job or have decided they are tired of “making other people rich” and want to pursue owning a business themselves.

The foundational premise chosen for a business model, however, can have a significant impact on whether or not the dream of riches will ever become a reality.  This post will discuss two different premises and the potential they offer for value creation.

Premise 1: Offer in the marketplace the services you performed for your employer (The Contract Employee)

The most common premise for a business model I hear from former corporate employees is that they will do in the marketplace what they formerly did for their employers. These accountants, consultants, HR professionals, marketing executives, trainers, web developers, IT specialists, etc. offer as a service the same duties found in their old job descriptions.  After all, they have years of experience at it and can offer it at a lower price point than could their previous employers and still make money.

It sounds good, is highly logical, but is fundamentally flawed as a value creating business strategy.

• It has limited revenue potential – Selling your time for money, which is the basis for all of these types of businesses, creates a cap on your revenue based upon the amount of time you have, how much of it can be spent on revenue generating activities, and the price your customers are willing to pay for that time.

• Never leave start-up phase – Because you can only service a limited number of clients at any given time, it is virtually impossible to always have your next project lined up.  It is the rare service business that has customers that will defer the start of a project a few months until the you can free up some capacity.  Therefore, you are continuously on the hunt for that next project.  Even with referrals, the effort looks very much the way it did when you started the business.

• Engaged in a job without the benefits – As an employee, a salary was given, sick leave and vacation were paid, health benefits and retirement plans were funded.  There was also room for advancement – career progression.  With the business strategy of doing for others what you did for your employer, you actually become a contract employee more than business owner.  You end up stuck at the same “job level,” typically with shorter engagements, and with no benefits.

Premise 2: Leverage your knowledge and skills to grow a business (The Entrepreneur)

Leveraging your knowledge and skills to grow a business has the potential to create the riches (and the lifestyle) desired by most business owners.

• Allows you to earn more revenue for your time – There are more delivery methods available for sharing your expertise than one-on-one service delivery.  Group offerings, training, products, books products, etc. all become viable means for earning income.  These other delivery methods allow you to either serve more people at once or create passive streams of income.

• Expands the growth potential of the business – With this approach to business, it is possible to build models and create systems that embody much of the knowledge you gained as an employee.  Having these systems and models shifts the focus of what you offer from you to the knowledge you bring.  Others can then be taught how to deliver services using your models allowing for business expansion.

• Has the potential to become a salable asset – After years of working in a business, it would be wonderful to have an asset that is worth something to others without your working in it.  Having products, systems, a loyal customer base, and capable employees increases the odds of someone wanting to purchase your business in a way that is not possible with the “contract employee” model discussed above.

If you are going to venture out into your own business, it is important to choose your business model carefully.  As with most people, you likely have much more knowledge than you are aware of that is valuable in the marketplace.  How you choose to monetize your skills and knowledge makes all the difference in the amount of value you can create with your business.

Cecilia Edwards

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