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When I tell people that I'm an independent consultant in software, I'm always asked the same questions: "It must be wonderful to work whenever you want to. How do you find clients?" "How do you set your rates?" And if the conversation continues, I invariably hear the inevitable: "I'd really like to be my own boss."

Anyone who's flirting with "going independent" must consider a number of issues. Contracting isn't just regular employment without a boss—it's qualitatively different from a W-2 corporate position, and not for everyone. If you give some thought to the 10 points of this article, however, you'll have a better idea of whether going it alone is for you.

1. Why Be a Consultant?

What inspires someone to walk away from the security of a W-2, salaried job? The answer varies with the individual. Some want more income, or more control over their professional lives. Others are running from a bad corporate position, or seeking a challenging, exhausting world of untapped potential. Still others are forced into the choice by a layoff. Regardless, you should examine your motives ruthlessly.

Survey the field in which you wish to market your services and ask yourself if it can supply your financial needs. In 1999, the Y2K problem put Cobol and RPG programmers in high demand, and many jumped to contract or independent work. But by the end of 2001, it was the end of the road for many of those who had only these skills to bring to the market.

Be brutal in your self-examination. Remember, you never "work whenever you want to"—you work when work is around, because it might not be available when "you want to." Are you willing—or capable—of tackling the marketing, sales, billing and office administration that must be done when you're the business? If the thought of cold calling gives you chills, perhaps you're not ready to take the plunge.

2. It's a Family Business

Unless you're a hermit, don't fool yourself: Consulting affects everyone in a family or close relationship. For 1099 contractors as well as W-2 employees, time away from home takes its toll, and in the expanding global marketplace, our industry requires more traveling than ever before. But this doesn't compare to the stress that comes at the end of a contract when no other opportunity is present. Essentially, you're out of a job—again and again. The stress of finding clients, negotiating fees, terms and schedules, and delivering what you promise can be a killer if you don't have confidence in your abilities and support from those closest to you. Assess yourself and your loved ones honestly. If you do decide to take the plunge, be kind: Make it hard on yourself, so they'll think it's a walk in the park.

3. First, Hire an Accountant

If you're a professional, I assume that you're very good at your chosen field. Because your area of expertise probably doesn't include accounting and tax regulations, you should hire a fellow professional—an accountant—to take care of this. Make sure to shop around and find one with at least some self-employed clientele. Like technologists and any other professional, accountants differ in their skills and specialties. My accountant makes more per hour than I do, and he's worth every penny. Each year, he has saved me money that would have otherwise slipped through my fingers.

4. Insurance—Yes and No

As an independent, you must provide for yourself and your family the health, life and disability insurance that W-2 employees get from their employers. You must also obtain coverage to protect your business practice. Insurance is a significant expense, and it's mandatory—you're conducting a business, not playing a game of chance. Coverage and exclusions vary widely, so shop around and make detailed comparisons of the coverage of each type of policy. You're tempting fate and gambling with your home, livelihood and future if you don't consider at least the following types of insurance:

General liability. This business coverage is absolutely mandatory—it'll protect you if you trip over a power cord and a client's SPARCstation hits the floor in pieces. It costs about $250 per year for $1-$2 million in coverage. Get a minimum $1 million per incident, $2 million in aggregate.

Disability income. This is another must-have. At any age under 65, your probability of becoming disabled is massively higher than the probability that you will die. Disability income insurance protects your income if you become disabled and are unable to work. Shop around and talk with many different agents and providers, because many insurers no longer offer this type of insurance, and the coverage that is available comes in many flavors. Disability without disability insurance means that you'll have no life insurance payoff (you're still alive), and you're a cost liability (you still have to be fed, bathed, cared for, rehabilitated and so on). Coverage is based on income, so plan to review your coverage once a year as your income changes.

Life. If you're single, make sure you have enough to bury yourself. If you have a family, have enough to protect them for the years you would have provided for them if you had survived. Too little insurance means your spouse may have to go to work or get a second job to provide replacement income for your children's education or other necessities. To determine how much you really need, explore available commercial and shareware programs and insurance calculators on the Internet. Term policies are cheapest for younger workers, but a whole-life policy may be more appropriate if you have trouble saving money on your own.

Error and omission. E&O, also called professional liability insurance, is very expensive, and in many cases, incorporation may protect you as thoroughly. Talk with a lawyer about this one.

Health. Though it's a necessity, health insurance frightens many people contemplating the move to independence. But it may not be such a scary proposition. It can be prohibitively expensive or unavailable if you have a history of medical problems, but if you're healthy, have few pre-existing conditions and are able to self-insure by carrying a large deductible, it can be surprisingly affordable. Again, costs and coverage vary widely.

A useful tip. A fellow consultant once gave me some great advice on insurance in general. Whenever a client insisted that he carry some obscure type of insurance, he would negotiate that the client pay for it for the duration of the project. Then it would be factored into the overall cost structure!

5. Rates: Don't Be a Cheap Date

This is neither a science nor a crapshoot. You can peruse some of the many books on this topic to learn exactly how to do this, whether you do fixed fee, daily rate or hourly rates. Here, I'll comment only on the pitfalls I've encountered.

You don't work every day. W-2 employees get up in the morning, go to work and come home in the evening. Every day. An independent contractor gets up every morning, but what happens after that is somewhat random. In a good economy, expect to be not working about a quarter of each yearyou do want to have some kind of life, don't you? Another way to think of this is that you work three weeks and have no engagement the fourth week of each month. Factor this down time into your price setting. And, in a bad economy, prepare for up to six months of downtime. In my worst year, I worked only four months out of 12. It was tough, but my past discipline in setting aside savings got us through.

Should you match the going rate? Finding the going rate for C++ development in Washington D.C. or anywhere else is easy. The Internet is the most available source, and recruiting companies often publish salary surveys organized by skill and geographical region (this magazine publishes a salary survey in each November issue). Starting out, be aware of what clients are paying both salaried employees and contractors. Independent contractors must cover business expenses that employees don't, and are expected to request hourly-equivalent rates from 40 percent to 100 percent higher than do W-2 employees—but you have to be good enough to justify these higher rates.

I've found value to be a tremendous factor in determining rate. Value is often equated with price, and I'm not the first person to note that when I increased my rates, I got more and better work because my perceived value increased. If you have extensive experience and real expertise, you can command higher rates.

Lowering your rate to get work. This is a disaster, both now and for the future. Small clients all want to get top-quality work for $25-$35 per hour. If you're willing to go that low just to work, I urge you to get a W-2 job that pays the same rate.

Paying your own expenses from your daily or hourly pay. I did this once—for four weeks. Never again. Now I bill for my services and invoice separately for my expenses, perhaps to an agreed-upon maximum amount. I don't even negotiate on any other arrangement. Unless you're bidding on a fixed-fee project, reputable companies who work with independents expect to pay services and expenses separately.

Nonbillable time. I was stunned when I discovered how much time I spent doing invoices, expense reports, cold calling, warm calling, organizing files and contact lists, learning new technology ... and I couldn't bill anyone for the time! Estimates vary, but an independent 1099 should plan to spend 10-20 percent of his week in nonbillable time.

The 2X/3X rule. Independent consulting is costly because you have to cover all your own expenses. That means you must consider yourself as an employer, and price yourself with the mind-set of an employer selling your services to a client at a rate that ensures a respectable profit margin. To this end, I offer up the 2X/3X rule, another piece of wisdom I received from a successful consultant. First, identify the amount you'd be paid as a salaried employee at a corporation doing what you do as a consultant. Doubling this number will provide you a break-even target as a consultant. But if you triple your salary figure, you'll be able to reinvest in your business and grow it. When I first started out and determined the doubled figure, I almost choked. But after just a couple of years, I learned how right he was.

6. Consulting Isn't a Job It's a way of doing a job
This came home to me when I read Alan Weiss's excellent book Million Dollar Consulting (2nd edition, McGraw-Hill, 1997). Essentially, we must have a field in which to conduct our consulting. You can choose to align yourself with a product, a vendor, a technology or a platform. But beyond those choices, you must also find a focus, which should become your mission statement. Without this, you'll never know when to say no to a job offer. And if you don't say no to the wrong engagement, you won't be available to say yes when the right one comes.

7. Don't Burn Cash on an Office

I was amused by a colleague who decided he should go into independent consulting and immediately spent $5,000 on a laptop, fax machine, new PC, answering machine, preprinted business forms with his color logo and a bucket of really marginal items. And he didn't have a job, or a prospect of one.

Build an office as you need one. I bought an answering machine first so I'd be able to return calls. When my first client called to say he had selected me and was faxing me a contract, I asked him to delay sending it until after lunch. Then I ran out and bought my first fax machine and hooked it up. I received the contract, signed it and faxed back the signature page. That machine lasted seven years, but it had to pay its own way first.

8. Sole Proprietorship vs. Incorporation

This is a hot issue. Incorporating gives you some legal protection, but it costs (extra accounting and filing fees, among other expenses). Some people incorporate right away. Others wait until they have an established business and want to shelter their income. Part of the issue is image (corporations have a cachet of stability), and part is cultural (some companies won't hire an independent, and work only with corporations). I was a sole proprietor for more than six years before I incorporated. This is a business and legal decision, and you should listen to your accountant and legal advisers here because they know more than you do.

9. Writing a Plan and Finding Work

Finding work isn't the same as waiting for work to find you. A business plan of "Make lots of money" isn't a plan—it's a desire. To become a successful consultant, you must have a plan. Think hard about what you do best, and build on your strengths. If you're uncomfortable around strangers or can't articulate in 15 seconds the value you'd bring to the client, attempting to be a lone-wolf 1099 is rather unrealistic. If you're not interested in marketing, bookkeeping or the many other nontechnical tasks required to run even a one-person business, plan on hiring—that means paying—someone to do these for you.

To find work, you must actively seek it out. This means marketing yourself—but don't limit yourself to the same channels; your options will change over time. When I started out, my first client literally fell into my lap. I invested 15 years with a well-known computer company until I received my severance notice, along with one-third of the plant. I hit the ground running, looking for a W-2 job, but I was overqualified for every position I interviewed for. Then a New York company heard about the layoff and contacted me because I had the skills they needed. For my next three to four engagements, I found work primarily through third-party groups who marketed me. On every engagement I met people and cultivated relationships. In a short time, those relationships became a marketing channel as I began obtaining work by word-of-mouth recommendation. By expanding my base from just programming and design to teaching OO technology, I aligned myself with several large OO consulting and training companies. When consulting positions were sparse, my training work served as a safety net. And, after teaching various OO courses—of varying quality—marketed by these companies, my dissatisfaction with them led me to start writing and marketing my own courses.

Then I attempted cold-call marketing, with limited success. At the end of 1998, I made a conscious decision to try a more aggressive marketing plan, and created a website. Then I started speaking at professional conferences. In 1999, I began writing magazine articles on object technology and OO CASE tools. As you see, I'm still writing.

My point is this: You must continually step out of your comfort zone. I'm not really kidding when I say that I'm now in my comfort zone only when I'm out of my comfort zone.

10. Dealing with Third-Party Placement

If you're an independent, this doesn't mean you'll always have to find your own clients. Especially in the beginning of your independent career, you may find ready-made opportunities through third-party placement or system integration groups. Some of my best work experiences have come in this way. They do the marketing, cold calls, payroll and other details; I do the technology. The only downside? They get paid from my pay.

Don't fall into the trap of whining about this, however. Recognize that the third party you're working through has to make money, too. After all, it's doing the marketing, bookkeeping, payroll and so on. Should you care what margin it's making from you? My position is simple: I have no right to know the margin, and I don't care what it is. If I decide to work at $45 or $75 per hour and discover that the placement group is charging $125 per hour for me, so what? If $45 or $75 per hour meets my goals, I'm satisfied. Grousing over someone else's margin is bad P.R., earning you the label of malcontent. Then you won't get any more work through that group.

Negotiate, never demand. Keep your eyes and ears open, and if you learn what the third party is charging for you, just sit on that information until the next contract renewal or project. Concentrate on what you must do to make yourself worth $100 per hour, and let the placement group worry how to pass on the increase to the client. That's what it's getting paid to do.

Consulting is a way of working that has become common in many industries, and seems destined to increase as our economy continues to mutate into integrated, electronic cottage service industries. It has tremendous reward potential, and just as much down-side. You can slice and dice your independence almost any way you wish, but you must also take care of business. If you really think you want to be independent, carefully count the costs, get prepared and charge ahead. It may change your life forever.

Gary K. Evans went independent in 1993. He's an object technology and agile process mentor for Evanetics Inc. in Columbia, S.C., a contributing editor for Software Development and a Scrum Master. Reach him at gkevans@evanetics.com.

Ask the Consultant Six independent players explain why they made the leap. David C. Hay has been the founder, president and sole employee of Essential Strategies Inc. in Houston for 12 years. He's the author of Data Model Patterns: Conventions of Thought (Dorset House, 1995) and a speaker at numerous conferences, including SD Best Practices in Boston. How did you get started? I spent 10 years in the corporate world before becoming a consultant at Oracle. This was in the late '80s, when Oracle was a new, exciting and somewhat chaotic place. Where in the corporate world, my relationships involved my making bosses happy in ways that had nothing to do with (and often ran counter to) exercising my skills, consulting meant that my main relationship was with clients who were specifically paying me for my skills. If I did work that satisfied me, I was likely to make the client happy—or at least he had to listen to me, since he was paying directly for my advice. I liked that a lot. I was fortunate. I left Oracle to work for a small consulting company in Houston. It was so badly run that by the time it finally imploded, I realized I'd been running my own consulting business all along. To simply hang up my shingle at that point was relatively easy. How have you grown your business? I seem to have rare skills in a profitable niche—it's another case of dumb luck winning over talent. I'm well enough known that (most years) I've been able to market myself by lying in the hammock in the back yard and waiting for the phone to ring—which is good, since (other than writing and going to conventions) most of my efforts to market myself have been totally ineffectual. There have been some skinny years, to be sure, but I'm fairly certain that I can hang on for the few more years I have before retirement (although in this setting, I'm not quite sure what that word "retirement" means). What are the pitfalls? When you're young and agile enough to go independent, you don't know anything marketable. I know—I tried it. When you finally acquire some skills, you've also acquired a mortgage, children to educate, and all kinds of other reasons why you can't take risks. The corporate years were when my children were young and I didn't have to travel very much. By the time I set up the company, they were teenagers and didn't care where I went. In fact, when I had a year-long gig in New York City, they came to visit for a week and had a great time. Open Source Success Bernard Golden, author of Succeeding with Open Source (Addison-Wesley, 2005), founded his Silicon Valley-based consulting firm, Navica, in 2002. His IT experience spans nearly two decades, including executive positions in such software companies as Informix, Uniplex Software and Deploy Solutions. What do you like best? It gives me an opportunity to work with many different organizations and continually develop my skill and experience base. It uses a broader set of skills than I'd get to exercise in a corporate setting. It lets me decide what areas to focus on. Why did you go independent? I recognized that open source would change the ground rules of the IT industry and there was a crying need for someone to offer strategic consulting to organizations about how to take full advantage of open source software. What's the most important lesson you've learned? It's vital to communicate a value proposition that's clear and can be easily comprehended. Otherwise, you face the danger of being lost in the everyday blur of clients' workload. Sparking Innovation Luke Hohmann is founder and principal consultant of Enthiosys, in Sunnyvale, Calif. In little more than two years, his firm has grown to five consultants, with a focus on new software product development. Hohmann is a frequent conference speaker and the author of Beyond Software Architecture: Creating and Sustaining Winning Solutions (Addison-Wesley, 2003). Why did you make the leap to independence? In late 2002, I was vice president of U.S. business development for Aladdin Knowledge Systems. Prior to that, I was vice president of engineering and product management for Aladdin Software Security Solutions. I decided to leave because I was planning a trip to Tel Aviv when it was clear President Bush was going to go to war. After talking it over with my wife, we decided that leaving Aladdin was the right thing to do. This was a somewhat scary choice, given the Silicon Valley economy at the time, and the fact that we'd just had our second child. I decided to try consulting, and sent an e-mail to about 40 people. One of them, a vice president and general manager at Qualcomm, responded, and I formally started consulting for Qualcomm in January 2003. I've been successful and growing ever since. I didn't go into consulting because I wanted to be rich or famous. I did think that my values and motivations were a good fit. This has appears to be true, and Enthiosys has been growing steadily and profitably ever since. What's the most important lesson you've learned as your own boss? It's always hard to delegate, but if you don't, you won't be able to grow. What you like best? That's like asking me which is my favorite tequila! I like many brands, for different reasons. That said, what I like best about independent consulting occurs after a client has worked with the Enthiosys team long enough for him to know that he can trust our judgment—that we're totally focused on helping his company succeed. This means that Enthiosys usually works directly with CEOs, presidents and general managers, tackling very hard problems related to corporate and product strategy. Why did you focus on consulting in your area of expertise? Trite answer? Because you have to focus on and dominate a niche. Marketing 101. Real answer? Our niche is helping customers who sell software or software-enabled products to better understand their customers, and armed with this understanding, to create innovative, profitable new products and services. What's the hardest thing about consulting? Sometimes my clients offer me jobs that are very, very hard to turn down. Agile Excellence Scott Ambler is a Newmarket, Ontario-based consultant with Ronin International Inc. He maintains a high level of visibility in the IT world as a frequent conference speaker, a Software Development columnist and the author of numerous books, among them The Object Primer: Agile Model-Driven Development with UML 2.0 (Cambridge University Press, 3rd Ed., 2004). What do you like best? Once you've gotten a nest egg in place, you can start choosing who you work for and the kind of work that you do. Why did you make the leap? I went independent in 1991 after realizing that being a small cog in a relatively dysfunctional machine wasn't for me. I then chose to join a really great consulting firm in 1995 to improve my consulting skills. I then left that to go out on my own in 1997—mostly to make a lot more money for the same work. What are the secrets to your success? Half of the secret is to provide great service to your customers, the second half is to continually market yourself, the third half is to stay current on what's going on in the industry, the fourth half is to recognize that not all clients want to do the leading-edge things that you're interested in, and the fifth half is to get better at math. I'm sure that there is an absolutely critical sixth half that I still haven't learned about. Seriously, though, you need to be prepared to do a lot more work as an independent than as a full-time employee. Also, pick up a copy of Gerry Weinberg's The Secrets of Consulting: A Guide to Giving and Getting Advice Successfully (Dorset House, 1986). Some of the most important advice is to have a nest egg to cover your living expenses for at least six months, and to charge three times what you think you're worth because you won't be employed 100 percent of the time. I think that if you enjoy what you do, you'll excel at it. Isn't that why your clients are paying you the big bucks? Selling Solutions Consulting full-time since 2002, Christopher Hawkins runs Cogeian Systems out of Tulare, Calif. What do you like best about consulting? In a corporate setting, you tend to get pigeonholed because each job is highly specialized: one guy is the DBA, one guy does QA, one guy manages projects, one guy writes specs. Now, I get to do all of that, if I so choose. Why did you make the leap? I worked for an $8 million company that was on the verge of closing its doors. In 2002, they laid off all but least-experienced employees. Finding a new job was difficult—nobody was hiring. I went out into the community and began making contacts; from those relationships, projects began to come my way. What's your specialty? I do custom development for different industries. But when clients find out I used to develop human resources applications, they always tell me about at least one HR-related headache that can be alleviated by custom software tools. So without meaning to, I've begun to do niche work in HR tools. In a nutshell, what is success? People don't buy technology, they buy solutions to business problems. Lose the geek-speak and tell your clients how you can help their businesses. —AWM No More Tolls Economically, it's somewhere between inefficient and foolish. You make 50 cents on the dollar of a salaried employee. You don't get paid to learn technology. You don't get paid to answer e-mail or read blogs. You don't have products to mark up and pad your profit. But if it was illegal to code, I'd do it anyway and I hope that on the day I die, I'll have written something. So what can you do? Also, I really, really hate commuting. —Larry O'Brien, Kailua Kona, Hawaii Mostly independent since 1996

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