Going Fractional: Part II – Unlocking the Earnings Code
During one of our unusually warm February days, I found myself with a friend—an executive in transition—around a backyard fire, swapping stories. With us was my neighbor who had recently inherited a vineyard from her family. With a passion for winemaking but less experience in business, my neighbor—Sophia—was left at a pivotal moment.?
Enter into the story an ex-COO with a talent for revitalizing heritage brands whom Sophia met at a wine-tasting event. His expertise and appreciation for wine made him the perfect ally in leading the vineyard toward a prosperous future. Together, they devised a plan where he would step in as a fractional leader, steering the vineyard through strategic decisions, from optimizing production processes to enhancing market presence.
As embers danced into the night sky, we realized the striking resemblance between her approach to finding help and my friend's own journey in fractional work.
Businesses, especially startups or those in transition, are increasingly drawn to fractional leaders for their mix of expertise, agility, and cost-efficiency. In my last article, we outlined the origin and rise of the gig economy. Now, I aim to dive into the value fractional leadership offers and how it translates into compensation.
Fractional work spares companies the full financial burden of employing full-time executives, offering significant payroll savings and reduced long-term liabilities, with some reports suggesting savings of 30-40%.?
Despite concerns about potential dilution of impact due to juggling multiple roles, the fact remains that traditional employment often entails considerable inefficiencies, with leaders feeling much of their time is spent on non-essential tasks (11% or more, according to one study tracking executive time by the Harvard Business Review).?
An article on SHRM1 (Society of Human Resource Management) underscored the transformative effect of fractional work on talent strategies, spotlighting a platform that swiftly connected companies with fractional experts in people analytics. This platform's rapid growth underscores the high demand for flexible, impactful work arrangements.
For those thinking about fractional work, the financial and lifestyle benefits are, well, enticing. This shift towards gig economy roles can represent not just a lateral move but a significant, sustainable step upwards, offering the freedom to set competitive rates and a diversified income that buffers against industry-specific downturns.
However, it's crucial to consider the risks: the absence of traditional employee benefits like PTO and health insurance, and the additional costs of self-employment, such as taxes and marketing. Properly pricing services, factoring in a 20-50% increase to cover these expenses, is essential.
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So, how do you translate value into those earnings? Aligning your fee with the client's needs can be challenging, but here's a quick guide to get you started. Whether you're partnering with a consulting firm or striking out on your own, understanding the basics of billing is key:
Which is best? For fractional professionals, billing Time and Materials (on an hourly, daily, or even weekly basis) often provides the needed flexibility. Incorporating a hybrid model, combining time-based billing with retainer or value-based pricing, can be a smart strategy.
The journey into fractional work has debunked the misconception that it's like conventional contracting. It's a more immersive, hands-on approach where professionals are deeply involved in both strategizing and executing projects.
Understanding the value and the ability to translate that value into compensation has been a significant step for my friend in realizing his goals. Yet, he also needed to navigate the decision of the best business structure for this strategy, whether an LLC or a sole proprietorship, which will be the focus of the next article in this series.
In conclusion, the exploration of fractional work unveils a reciprocal financial advantage: businesses gain access to premium expertise and flexibility in a cost-effective manner, while professionals forge diversified, fulfilling careers with compensation that mirrors their value.?
This left my friend pondering the risks involved—the absence of traditional benefits, the uncertainty of gigs, and the complexities of taxes. How do you mitigate these risks? As we look ahead, understanding the optimal business structure for fractional work, whether it involves partnering with an existing firm or forming a company, will be the focus of our next discussion in this series and will help address these concerns.
1 SHRM. (n.d.). How Fractional Work Is Transforming Talent Strategy. SHRM Executive Network. Retrieved from https://www.shrm.org/executive-network/insights/people-strategy/fractional-work-talent-strategy