Episode 1: Is Your Business Making as Much Money as You Think It Should?

Karen, William, and Laura talk about being a bad CFO, dealing with a disappointing profit margin, and the true price of growth: “I think our commitment to being cash-based and debt-free has been more important to me than the big number at the end of the year.” Plus: hiring employees vs. hiring contractors.

Is Your Business Making as Much Money as You Think It Should?

Guests:

Karen Clark Cole is co-founder and CEO of BlinkUX.

Laura Zander is co-founder and CEO of Jimmy Beans Wool.

William Vanderbloemen is founder and CEO of Vanderbloemen Search Group.

Producer:

Jess Thoubboron is founder of Blank Word Productions.

Episode Highlights:

Karen Clark Cole: “The best sleep I have ever had was the night after we hired our CFO.”

Laura Zander: “There’s part of me that just wants to grow, grow, grow and conquer the world… But then there’s also the side of me that has a 10-year-old son and a husband and two dogs…”

William Vanderbloemen: “If I wanted to do the money thing, we’d have a search firm for oil and gas… It turns out CEOs of oil and gas companies make slightly more than pastors do.”

Full Episode Transcript:

Loren Feldman:
Welcome to Episode One. Let’s meet our 21 Hats Podcast team. I’m not sure this name is going to stick, but internally, we’ve been referring to them as our “Mad Hatters.” That’s a play, of course, off our company name, 21 Hats. And it also acknowledges that the people who have agreed to do this with me are a little bit crazy, both for living the entrepreneurial life and for signing up for this project in particular. But they’re all smart and successful and willing to acknowledge and share the challenges that they faced along the way. I think you’re gonna like them as much as I do.

Laura Zander is CEO of Jimmy Beans Wool, a digital version of a neighborhood yarn shop that is based in Reno, Nevada. How’s it going, Laura?

Laura Zander:
Pretty well, thank you, especially now that you just called me “mad.”

Loren Feldman:
Great to have you here. Laura, give us some sense of how big a company Jimmy Beans is: employees, revenues. What are you guys?

Laura Zander:
Sure. We are pretty small. We’ve got about 40 people. Our revenues have been floating between like $7 and $8.5 million for the last couple years. Just one big building, couple office people, lot of warehouse people, retail people, marketing. Not a huge operation compared to the other people on the call.

Loren Feldman:
Well, everything’s relative. Karen Clark Cole is CEO of Blink UX, a digital research and design firm that’s based in Seattle. How’s it going, Karen?

Karen Clark Cole:
Good, thank you.

Loren Feldman:
Can you give us some sense of how big Blink is?

Karen Clark Cole:
Sure, we’re about 140 people. We’ve got five offices across the country: Austin, Boston, San Diego, San Francisco, and Seattle. We’re roughly about $30 million in revenue and we have grown fairly quickly in the last five, even 10 years. We’ve been around for 20 years. That’s getting to $30 million over that period of time. There’s been some fast growth years and some slower ones.

Loren Feldman:
William Vanderbloemen is CEO of the Vanderbloemen, a recruiting firm that specializes in conducting searches for churches. I like that: searches for churches. Do you use that, William?

William Vanderbloemen:
We do, from time to time.

Loren Feldman:
How’s it going, William?

William Vanderbloemen:
It’s going great, man. Really appreciate you including me in this group. I have a lot to learn from everybody on the call.

Loren Feldman:
I think we’re all going to learn some things here. William, give us some sense of how big Vanderbloemen is.

William Vanderbloemen:
I don’t know how to answer that, Loren. We’re a micro niche business. We help churches find their pastor and we’re an idea that didn’t even exist—the idea of executive search in a church vertical was unheard of. I don’t know how much listeners know about the church, but the church and new ideas are not exactly roommates. So it takes a little while for churches to take on to a new idea.

We have about 40 full-time employees here in Houston. We will probably run $7.5 million dollars in revenue this year. We’ve made some pretty intentional decisions to grow slower and do things—what we perceive to be right—and are choosing what we think we value over super fast bottom line growth. Having said that, we’ve grown every year, and some years faster than others. We’re about to expand into five new office locations over the next 12 months.

Loren Feldman:
Great. To get started, and to show our listeners that this isn’t the kind of happy talk public relations-driven conversation that we so often hear, I want to ask the three of you a question that I don’t often hear discussed.

Laura Zander, I’m going to put you on the hot seat first, if you don’t mind. Tell us, are you making as much money as you think you should?

Laura Zander:
Wow hot seat question, Loren, geez! I think the business should be making more and we’re working on increasing our profitability. I think personally, I am in… an unbelievably lucky spot, and no, I don’t think I should be making any more than I’m making.

Loren Feldman:
What’s holding you back, in terms of profitability for the business?

Laura Zander:
That I’m a really bad CFO, and that I need some more expertise and I haven’t been watching the numbers as well as I have. I say that my skills as a leader are not as refined or mature as perhaps they should be at this size. I haven’t managed the budgets very well. That’s all changing. This year is kind of the watershed year for us. I am growing up as an owner, I suppose, and have a really great leadership team, which I had not had for the past 17 years.

The other part, though, is I’m not judging myself very fairly, and that we’ve done a couple of acquisitions in the last 14 months or so. We’ve put a lot of money, a lot of capital, into inventory and manufacturing and we’re changing our business model significantly. That’s making the bottom line not look as great as it has in the past when we were able to just float through. We’re a retail business and retail has shifted, so we are now trying to shift with it, which is expensive. We’ve taken some risks, and some of them have paid off, and some of them have not, so we’ve lost some money in some different places.

Loren Feldman:
This is the 21 Hats Podcast, which acknowledges that to be a business owner, you have to wear a lot of hats. You made reference to not being as good a CFO as you think you should be. Have you thought about hiring a CFO?

Laura Zander:
Sure. I had somebody that has helped us for the last couple years on a part-time basis. But we’re just honestly not at the size where it makes sense to have a full-time CFO, and I haven’t been able to find a part-time CFO that we see eye-to-eye with that has the same kind of vision that we do. That said, I did find somebody about a year ago who has helped me tremendously and mentored me tremendously and set up a lot of processes and systems that I have been able to make great progress with. The last 18 months or so has been phenomenally different in terms of my CFO skills. I’m getting there, it’s getting better. It just took a while.

Loren Feldman:
William or Karen, before I put each of you in the hot seat, have you experienced the same thing that Laura’s going through?

Karen Clark Cole:
I can tell you one thing, is the best sleep I have ever had was the night after we hired our CFO. We were about 40 to 50 people at that size, and we had found somebody who worked on contract at first and then took some equity and a low salary and came on board full-time. That was the best investments we have ever made in the company. I really encourage you, Laura, to find one.

Loren Feldman:
Was it difficult for you, given your size at that time, to figure out how to afford a CFO?

Karen Clark Cole:
Yeah, like I said, he started on contract and then took equity and a low salary. He had to believe in the vision of the company and how he could help us and where we were going, which was really important.

William Vanderbloemen:
We don’t have a CFO. We’ve had one in title before, but not in function.

Loren Feldman:
That’s a job I want.

William Vanderbloemen:
Right?

Loren Feldman:
You get the title, but not the function!

William Vanderbloemen:
Loren, you’d have to be married to me, because it was Adrian, me, my brother-in-law, and one other employee, and we were just kind of handing out titles when we started. I mean, that was it. We were so stupid.

Loren Feldman:
What did you do when you decided it wasn’t working?

William Vanderbloemen:
I have a rather close relationship with the CFO, so we were able to work through it. We’re still married, and it’s great. No, she did a great job, but in terms of true CFO forecasting and that sort of thing, we have thought for a long time we needed one.

One of our clients—it’s not just churches, but all faith-driven organizations—but one group is this guy, I don’t know if you all know Dave Ramsey? He’s on the radio a lot, talks about money and not spending money that you don’t have and paying off your credit cards and all. He’s probably got 800 employees now. He told me not to spend money on a CFO until I had 200 employees. Find other people that have some forecasting ability. That’s kind of the route we’ve gone. Our COO, who is a true COO, has enough forecasting capacity that we can get by with a finance director in lieu of a true CFO for now.

Loren Feldman:
Karen, you’re next. Are you making as much money as you think you should be?

Karen Clark Cole:
I’m in a similar boat to Laura. I make a nice salary that I absolutely can’t complain about. We’re in a tight margin business, and we’re consultants, so we charge by the hour, essentially. Not really by the hour, but we need to be billing our time in order to make money. That’s how we run the business. It’s pretty straightforward in that sense.

The company as a whole, I would like us to be much more profitable, and that’s actually a big focus of ours right now. Over the last three to five years, we’ve been heavily investing in the company for growth. What happens is it comes right out of the bottom line. We have also done some acquisitions lately, which mostly eat into our cash flow, but they also cost a lot of money overall. It’s a long-term play. It’s a long-term investment for sure. We have good systems in place and we’re working to become more efficient as we get bigger. We’re sort of at a hard place right now. 140 people seems to be breaking a lot of our systems that we’ve had in place for many years.

Loren Feldman:
What do you mean by that?

Karen Clark Cole:
Resourcing is a key. It’s sort of the pivot of everything here and it really affects profitability if we have somebody what we call “on the bench” in between project work. All of our work for clients is project-based. We work really hard to not have gaps between projects, because if there’s a gap, then somebody is what we call “on the bench.” That means we can’t bill for their time. The company is just paying for their salary, which is very high for us. We can sustain that for a short period of time, but not for very long. If you multiply that by 140 people, all of a sudden, that’s a lot of hours on the bench, if anybody’s down for a couple of days.

We could manage that pretty tightly when we were smaller, but at 140 people, we have 50 projects going on at once and a lot of people to be juggling to get the right fit for the right project and the right expertise and the right cultural fit for the client. There are so many factors, that all of a sudden, what used to work where there was some tribal knowledge involved, it just doesn’t anymore. So that’s really a big focus of ours for trying to improve our profitability, is to have a different resourcing model. We’re trying out a bunch of different models right now to see which one we think will fly.

Loren Feldman:
Great. William, how about you? Are you making as much money as you think you should?

William Vanderbloemen:
Yes, but as my good attorney friend says, “Everything before the but doesn’t count.” I didn’t get into this for the money, Loren. I’m a recovering preacher, which probably means I babble. If I wanted to do the money thing, we’d have a search firm for oil and gas, because our fees are scaled based on the salary of the person we’re finding. It turns out CEOs of oil and gas companies make slightly more than pastors do.

Loren Feldman:
That’s why I asked if you’re making as much money as you think you should.

William Vanderbloemen:
Well, there are two answers. I got into this for a cause and I cannot believe the life that I get to live while working for a cause I really believe in. Having said that, we have been very careful. We have no investors, we’ve taken no venture capital, we have no credit at all. We’re a totally cash-based business, which slows growth, and we’ve known that going in. But it also means that anything we “make,” we need to pour back into the business to grow. Our margins we keep a pretty close eye on. Our goal is to be healthy, so that anybody would look at us—an investment bank or whoever—and would say, “Oh, they’re healthy, they’re not greedy and they’re not stingy.”

Loren Feldman:
How do you define healthy?

William Vanderbloemen:
I have some very smart friends who are really great management consultants that have told me, “This is the fairway for your net profitability.” We’ll stay pretty close to where we should be. I would like to see us grow more and see that growth happen more organically. But that’ll come with time. I think our commitment to being cash-based and debt-free has been more important to me than what the big number at the end of the year is. To me, the point of earning however much money I need to earn is for me to have peace and to sleep well. I think I sleep better making what I make now without carrying a debt load or having investors or stockholders to police than if it were the other way around.

Laura Zander:
William, you just hit the nail on the head. It’s the same with us. We’re debt-free. Doug and I actually share the CFO role.

Loren Feldman:
Doug is your husband?

Laura Zander:
Doug is my husband, yes. He looks at the cash flow, I look at the high-level macro view of the P&L and the balance sheet. It has been really important to us to not take outside funding and to not have a loan. Doug’s from Wisconsin, so it’s that Midwestern method of, “If we can’t pay cash for it, we don’t buy it.” So if we can’t afford somebody, we don’t hire them, and we have to figure out how to be scrappy and make it work until we can.

We were very lucky until recently, in that we’re in a business that doesn’t see a lot of funding and a lot of technology. The yarn retail business is a very nice kind of business to be in, so we can afford to do that and still be one of the market leaders, if you will. So, yeah, I hear you. High five to you, William.

Karen Clark Cole:
We also don’t have investors, and so over 20 years, we’ve never taken any outside investment. We do, however, have debt in the form of a line of credit at the bank. We have to operate with a couple of million dollars line of credit, and that’s based on our receivables. It’s not true debt, in that sense. Every time we can invoice a client, then we can borrow that receivable money from the bank so that we can operate with cash flow. Because for us, it’s invoicing, it’s paying our employees. Those are the two main in and out functions of our cash.

We did recently try to get some outside investment and it was very difficult to find the right match. So now we’re back to doing it ourselves, which can be difficult for sure. Particularly for us, we look really carefully at not hiring ahead of the curve. We want to make sure that we have work in the pipeline, and that we have people to do that work, again, because of our bench time and our resourcing concerns. For us, we use contractors to help with that ebb and flow if we’re not sure if this is a one-time spike in our busy cycle. In that case, we want to use a contractor to help with that load. But if this is the new normal, then we start turning them into employees or we start hiring people for that work.

Loren Feldman:
I’m curious, Karen, it sounds like you use your line of credit to manage cash flow. Would you consider taking out a loan to finance growth, or for some other purpose?

Karen Clark Cole:
Yeah, that’s what I was talking about where we were trying to find an outside investor, an equity investor, so that we could grow more quickly. That’s largely to take the market opportunity that we see right now in our field. The UX field is growing very quickly right now. The way I see it is, somebody’s got to be the nation’s and the world’s leading UX firm. Why not us? We’re perfectly positioned for it. We’ve been doing this for a long time. What’s happening right now, there’s a lot of consolidation with smaller UX firms. We get calls regularly from companies trying to buy us so that we can roll up and they can be bigger. My strategy is, “Hey, we’re going to do that.” So that requires serious capital. We’ve done some acquisitions with our own money and using our line of credit at the bank, but that has a limit, because then you’ve got to replenish it before you can get going again. There are a lot of pros and cons.

Loren Feldman:
Was that an obvious decision for you, in terms of looking at the opportunity out there and deciding, “Somebody’s going to do this. I want to be the one to roll up and grow and seize this opportunity”? Or did you give that a lot of thought?

Karen Clark Cole:
Not really. Maybe for a second. That’s sort of my style, though. Why not us? The work we do is so phenomenal. For me, it’s about reaching potential. And so I think, “Wow, if we can reach our potential as the best company doing this work with the greatest talent in the country, then we should try.”

Loren Feldman:
Laura, what’s your attitude toward growth? How do you look at it?

Laura Zander:
That’s a great question. I have a really bipolar attitude, a Dr. Jekyll and Mr. Hyde attitude, towards growth. There’s part of me that just wants to grow, grow, grow and conquer the world, and I’ve got all these ideas of how to be a household name and grow this thing as much as I possibly can. But then there’s also the side of me that has a 10-year-old son and a husband and two dogs and wants to have a lifestyle where I get to exercise and be outside, which is why we moved to this area in the first place, to go ski and mountain bike. I’m really conflicted. I go back and forth.

I guess I have this idea that to have really, really fast growth, you have to sacrifice, and there’s only so much time during the day. As I read a lot of business books and I read business memoirs, the thing that always sticks with me is as these guys—typically they’re guys, based on the books that I’ve been reading that were written 50 years ago—these guys are lying on their deathbed, and they’re like, “My only regret is that I didn’t spend enough time with my family, and that I didn’t watch my kids grow up.” I’ve been very, very conscious of that with our 10-year-old son. I figure, you know, in 10 years, if I want to work the way that I worked before he was born, then I can do that. For now, why don’t we just do sustainable growth? I won’t work more. I mean, I still work seven days a week. But I have to leave in an hour because he has a cross-country meet.

Loren Feldman:
10 years from now, you’re going to go to eight days a week or nine days a week?

Laura Zander:
Yeah, exactly. 10 years from now, I can work seven days a week, 12 hours a day. Right now, I’m only working seven days a week, maybe six to eight hours a day. I spread it out. But yeah, I should be able to double that and still work out, still exercise, and do all those things.

Karen Clark Cole:
I want to say that I work less than you and I have a 10-year-old daughter and I ski a lot and I run and I exercise and I get lots of sleep. So I think it is possible and it requires a lot of help.

Laura Zander:
Oh my god, you’re one of those perfect people. Can I get off of this podcast now?

Karen Clark Cole:
I tell you, the only thing that I don’t do is I don’t watch TV. I’m a little bit remiss even listening to the news. Because for me, it’s just focused, really focused priorities. It’s my daughter, it’s sleep, it’s exercise, and then it’s work. Because of that, I’m able to work more focused and I think I’m more efficient. I have a lot of help. That’s part of it. But yeah, I’m with you, I agree. I think if you’re not balanced, you’re going to die. You’re going to burn out.

Loren Feldman:
William, I think you gave us some sense of your thinking about growth, but listening to this, has it changed your thinking at all?

William Vanderbloemen:
No. We have seven children. So the whole work-life balance thing is… yeah, I know. You would think like every Mormon church would hire us, but they haven’t.

Laura Zander:
The Catholics?

William Vanderbloemen:
No kidding. Maybe we should think about that. For us, work-life balance is huge. But at the same time, Adrian and I started this together. It’s kind of what we do. I hope we’re not all at family day in therapy in 10 or 20 years about why we were always working, but I feel like we’ve got a pretty good handle on it. I think that this work-life balance thing is a total myth. There are times where we just have to drop what we’re doing and sprint for the finish. That’s just the way it is. There are other times where we’ve got to unplug.

I do try, Loren, to say, let’s do two things. I’m gonna give them in reverse order for annual review. One: did we grow this year? That’s not the top priority, that’s second. Two: did I make myself less essential to the growth and running of the firm? That’s the first and most important question in my annual review. We only named it Vanderbloemen because the name is literally so screwed up that you can mistype it into Google 100 different ways and you’ll end up at our at our place. It doesn’t need to rise and fall on my name. Y’all laugh, but oh my gosh, I went a little OCD. I think I bought 300 domain names. I have lifetime platinum status on GoDaddy.

Loren Feldman:
All for names that you considered for the business?

William Vanderbloemen:
Yes, and I told the SEO guys that study. I’m like, one rule: you can’t name it after me. That doesn’t work. Here are 300. You want a different one? I’m sure I can get a freebie out of them. They came back and they said, “Well, good news, bad news. Good news: we found the name. Bad news: it is your name.” And they said, “It’s because your last name is so screwed up.”

In fact, the only other William Vanderbloemen on the planet, Laura, is in Wisconsin. He’s a security guard and every time he arrests somebody, I get a Google Alert. This is a rabbit trail, but I kind of want to go to Wisconsin and have him arrest me so that can be the Google Alert.

Loren Feldman:
Good. So anybody listening to this podcast who wants to improve their SEO should change the name of their business to Vanderbloemen? Is that what you’re telling us?

William Vanderbloemen:
Something like that.

Loren Feldman:
Finally, I want to talk about an item that’s been in the news fairly recently. California has passed a law aimed at companies like Uber and Lyft that try to walk that fine line between hiring employees and hiring contractors. We’re talking about the gig economy, obviously. This is a state law that only applies to California for now, but there’s a widespread expectation that it’ll have implications across the country. In fact, New Jersey recently hit Uber with a $640 million dollar bill for allegedly misclassifying its employees—meaning its drivers, people Uber does not consider to be employees. I’m curious what you all think of this and whether you think the law is going to have an impact on your businesses. Laura, you are right on the California border, right?

Laura Zander:
We are, yeah, just a couple of miles down the road.

Loren Feldman:
Do you think this is going to have an impact on you?

Laura Zander:
No, but we don’t use contractors. Everybody is an employee, for the most part. The only contractors who we really use are professional services: accounting, legal, and high-level strategic help. I don’t really know how it’s going to impact us, to be honest.

Loren Feldman:
Is there a philosophical reason why you don’t use contractors?

Laura Zander:
Yeah, we want people to have benefits, we want them to be part of the team. We do hire temp employees during the high season, but most of the time, if they’re good employees or if they do a good job, we end up hiring them full-time as well. Ours is more of a long-term approach. When we have surges, we figure out internally how to handle that. Either overtime, or those of us who are on salary put in a few extra hours. We just kind of go with the flow that way.

Loren Feldman:
How about you, Karen? Do you think this is going to have an impact on you?

Karen Clark Cole:
Yeah, in fact, it already has. Our philosophy is similar to Laura’s, except because we are a professional services company, and the nature of the cycle of our work is that we have high periods and low periods throughout the year, if we hire for the high periods, then we have an issue when we hit a low period where we need to lay people off. That causes all kinds of problems with employee morale. It’s a lot of churn and it causes all kinds of issues beyond the obvious wanting to have people as employees. So what we do is we use contractors for those hot periods, and these are people who we interview and we vet, just like if they were regular employees. They have to be a cultural fit. They have to obviously have very high-quality work standards. We interview them ahead of time and then we talk about keeping them warm.

Loren Feldman:
What does that mean?

Karen Clark Cole:
That means that we have to know their availabilities. Because they’re contractors, they’re free agents, so they’re going to go out and likely get a job or a project somewhere else. We need to know, “They’re busy on a job, they can’t work for us,” or “They’re available.” It’s really a lot of work to manage that contractor pool, but the good side of it is that we get high-quality people who can come in and work with our teams. We know them. Ideally, they’re people who have chosen to become or be independent contractors. They don’t actually want a full-time job. They want to have flexibility between projects. They want to choose their projects. All the things that you don’t get to do if you’re an actual employee. So for them, there are some real benefits.

Laura Zander:
What kind of premium do you pay them?

Karen Clark Cole:
The rate is higher, but they don’t get benefits, because they’re contractors. For them, they have to pay their own income tax. They have to pay their own health care. It really comes out as a wash, at the end of the day for them, because they’re getting a higher rate per hour that we’re paying them. But in the end, they also have to cover their own expenses.

Laura Zander:
Do they get, let’s say a 20% bump above what somebody else would get, to cover social security and all the taxes and stuff, but then do they get another 40% because it’s not stable?

Karen Clark Cole:
No, we don’t pay extra for that and they don’t demand it either.

Laura Zander:
Oh, interesting.

Karen Clark Cole:
You do get people who are extremely highly qualified because it goes hand in hand. If somebody is confident enough to go out on their own and feel like they can get enough work to have a great living, they’re generally very good. They can demand a higher rate because of the quality of their work, not because they’re a contractor.

Laura Zander:
When I was in the software world back in the early 2000’s—and I know this was the height, so this is not a great standard to judge the current economy with—I remember the company that I worked for, I made $75,000 a year, let’s say, and then I switched over to contractor status to be more flexible, and they paid me $75 an hour. So I’m like, “Okay, I can either make $75,000 per year as an employee or I can make $150,000 a year as a contractor.” To me, it was a no-brainer.

Karen Clark Cole:
I think your taxes and your health care eat up a fair portion of that, more than you might think.

Laura Zander:
Yeah, good point.

Loren Feldman:
Especially health care these days.

Laura Zander:
Yeah, and I was 23, so I was more willing to roll the dice, I think.

Karen Clark Cole:
This law, then, is affecting our ability to run our business the way we need to, which is ebbing and flowing. Because if we hired a bunch of people for our hot times and then we kept them, which we would love to do, we would go out of business. We need income from our clients to pay for employees. It’s a very straightforward business: money comes in, money goes out. There’s very little at the end of the day, a very low profit margin.

As a result, we know our patterns, we know when our cycles are, we watch them carefully. We make sure that we’re hiring after we’ve been at a new elevated state. Our average goal is 20/80 contractor to employee balance. If we’re running at 25% contractors for several months, then we know, “Okay, we’ve hit a new level, our baseline is higher now. We can hire now and know and feel confident that we can keep those people busy year over year.”

Loren Feldman:
Is the law affecting you just because you have an office in California? Or is there another reason?

Karen Clark Cole:
It’s because we have two offices in California. Normally, we hire locally. We would want to have local contractors for some of the work we’re doing in San Diego and some of the work we’re doing in San Francisco. Although, we do have people working across all of our offices across the whole company on projects. That’s pretty common for us to have distributed teams. As a result, that’s how we’re going to handle it. Whenever we need a contractor, we’re just going to pull them from another state. Our biggest office is in Seattle. If Washington follows suit, then we’ll need to pull our contractors from Texas and Massachusetts.

Loren Feldman:
Can you have those contractors report to somebody in California?

Karen Clark Cole:
Yeah, I think so. When they’re a contractor, they’re not technically reporting to anybody, either. They’re working on a project team. They’re part of a team. There’s a project lead, but there’s no managerial reporting structure when they’re a contractor.

Loren Feldman:
That’s a really interesting line to walk. Obviously, you’re giving them assignments. How do you define reporting and not reporting, in a situation like yours?

Karen Clark Cole:
It’s in the project basis. To back up, reporting, technically for me, means you have a manager. They’re guiding your career path. They’re helping you with professional development. They’re basically taking care of your professional career in the company.

How we actually manage people on a daily basis is within a project. Somebody would be on a project for two to six months to a year sometimes. There will be a project team, which is specific to that project and that client, and there will be a lead on that project. That lead is the person who everybody listens to. They own the success of that project. Essentially, that team is reporting to that lead, although it’s not a direct report situation. And if that project doesn’t go well, that person is on the witness stand explaining why.

In that sense, that’s how our contractors fall underneath that. They would be essentially reporting to the project lead, who determines how that project is going to go and what are the decisions along the way.

Loren Feldman:
Karen, can you explain the mechanics to us? What does it do to you that makes it impossible for you to hire contractors out of your California offices?

Karen Clark Cole:
Well, I actually can’t explain the logistics of it. But I can tell you they have to have a certain number of hours. All I know is that they have to be an employee in order to do our work. That’s the limiting factor. And for us to define an “employee,” they are on the payroll, they get benefits, they get health care, all of that stuff. We pay their employment taxes. I don’t know, but I’m guessing the genesis of part of it is when somebody is a contractor, you don’t pay employment taxes on them. That’s lost revenue for the government.

Loren Feldman:
Sure. It’s also intended to protect people from not getting benefits, even though they’re doing all the things that an employee does. I’m not saying that’s the case with your situation, Karen, but obviously there have been abuses.

Karen Clark Cole:
Oh, I think there are loads of them, I’m sure. I don’t think it’s a bad law, honestly. I think there are probably a lot of really good cases and examples where it’s going to help a lot of people, and I’m fine with it. It’s going to be different for us.

Loren Feldman:
I don’t know how often the two of you take Uber or Lyft, but every time I do and see how inexpensive it is, I can’t help but think about it. You’d think they would have been able to figure out a business model that would allow those drivers—whether they’re employees or contractors—to get paid a little bit more.

Karen Clark Cole:
You also look at it on the flip side, and there are a whole lot of people who now can live the lives that they want, especially if you drive around in a Lyft in LA. It’s awesome. You’ve got writers and producers and they can live their dreams now because they can have this side job that allows them to pay the bills while they continue to pursue Hollywood, and it’s pretty incredible. They would not have been able to do that. They would have been working in a restaurant or other places where their hours are more limited. I had a long conversation with someone the other day about his writing career and how it allowed him to, if he had an idea, he could pull over on the side of the road and write for a couple of hours. I think there are a lot of upsides to it as well.

Loren Feldman:
Well, that’s a great point. Do you think you are losing the opportunity to work with contractors who liked the system the way it was?

Karen Clark Cole:
Absolutely in California. There are a lot of people who have chosen to be contractors so that they can be in charge of their destinies. They want to pick and choose their projects. They want to take six months off and do something else. They can’t do that if they’re an employee.

Loren Feldman:
All right, that concludes the very first episode of the 21 Hats Podcast. Thank you all for joining us Laura Zander, Karen Clark Cole, and William Vanderbloemen. We’ll be back next week.