New Year Challenges: Friend or Foe?
Firstly, Happy New Year to all of our Clients, Colleagues and Associates! Although, is it OK to use the word “happy” when we start a new year in lockdown?! (More on that to come in a later blog…yes, Project Slippers is back!)
This month, we have a guest blog from one of our Associates, Simon Knocker, from thebigteam; https://thebigteam.uk/
Simon discusses a matter which is close to the hearts of Contractors and Consultants; IR35.
Before we hear from Simon though, let’s quickly address what IR35 is.
IR35 rules are designed to assess whether a contractor is a genuine contractor rather than a ‘disguised’ employee, for the purposes of paying tax. For the work that Simon and I do, we are “outside of IR35”, which means we are not “behaving” as employees. We work with clients on specific pieces of work, with clear deliverables and timeframe, and we will often work with multiple clients or on multiple projects at the same time. We are a clear supplier, not an employee. Some people though, sell their “time” to a client, without clear deliverables. IR35 is intended to identify the different working practices, and ensure the client and the resource are paying the appropriate taxes.
So, onto Simon, and his blog, which addresses the question, “IR35: Friend or Foe?”
“Well, I guess it depends on who you are and how people approach it.
For me, IR35 is potentially a rather unexpected friend.
For many in the freelancer and interim community, 2020 was a challenging year as companies battened down the hatches and focused on survival. However, as we move into the bright lights of 2021, the vaccine's deployment and, hopefully, the demise of COVID-19, the freelance and interim community faces the next challenge - changes to IR35 legislation.
This legislation is already in play, but to make it more enforceable, the Government is implementing a small but very significant change. The change is in the accountability for determining whether an assignment is inside or outside IR35 in April will move from the supplier to the client. In the HMRC’s eyes, it is much harder to police the freelancer than the customer. The freelancers are small, and there are many. Their customers are much bigger and, in this area at least, more risk-averse.
I cannot help but think that whoever designed the IR35 legislation, and the implementation approach has little understanding of business, innovation, entrepreneurship or creativity upon which the British economy depends. The interim and freelance community's whole 'reason for being' is to give business easy access to the right skills when they need them; whilst not having to carry the employment liability. Interims and freelancers can move from organisation to organisation, challenge to challenge, allowing them to benefit from their knowledge and skills. They are one of the pollinators of British business. They have specialist skills, knowledge, and wisdom typically only required at a specific point in time and for a particular purpose. They are not needed for the day-to-day.
The issue is that there are too many 'contractors' who are, in all but name, employees. The contractors' client pays no employment costs whilst the contractor often benefits from the favourable status of a 'limited' company or being self-employed; in reality, many of these people should be employees. Legislation, rightly so, should prohibit these people from taking advantage of systems that should be rewarding the risk-takers and the pollinators not the '9 to 5' contractors. Contractors who invoice month after month, occupy the same desk every day, use the company’s equipment and facilities, and have little accountability; they often arrive and leave at the same time and complete timesheets for their attendance. The organisation effectively manages them and they are, to all intent and purpose, an employee.
For sure, the blunt tool that is IR35 will catch these people, and rightly so. However, the approach will also potentially drive risk-averse corporates away from engaging the freelance and interim community. This situation would prohibit them from temporarily accessing their specialist skills and experiences so freely available today; the legislation may well push those organisations into the hands of the bigger, and typically more expensive, consultancies who 'employ' these resources and hence remove the IR35 risk for the customer.
Of course, the irony is that the larger consultancies, by definition, suffer from the very same issue as the sourcing companies. Despite the over-marketed thought leadership articles and slick presentations, they can fail to offer the depth of capability in those assigned to deliver the very outcomes that their clients seek; and this experience can come at a high cost. One of the reasons might be that the very specialist skills or knowledge that customers desire are held by people who do not choose conventional employment. People that prefer the freedom, flexibility, variety and remuneration of freelancing; a way of working that builds their worth through a greater variety of experience and knowledge from difference industries, organisations and business challenges. There is a place for the larger consultancies as there is a place for the freelancing community. British business needs both.
I would argue that many of the best Interim/Programme/Project Managers prefer to live and die by the metaphorical sword of their reputation, their last piece of work and referral rather than be employed and managed. They have the self-confidence to survive, operate and thrive in the market environment and offer the organisations greater experience, capability and choice to meet their need.
In April, the IR35 self-determination decision-making, and with it the risk of whether to engage an interim or freelancer, will move into the hands of the corporate procurement. IR35 may to result in blanket policies that will either reduce or prohibit access to the freelance and interim community; companies will play it safe. Indeed, we can already see the evidence of this happening in the market.
Moving forward, if we are to live by the new rules of IR35 then perhaps those responsible for procuring resource will need to wake up to the fact that project and interim work if defined correctly, is almost always outside of IR35. By definition, projects are about change, they are temporary, unique, uncertain and cut across an organisation's functionals; so not someone's day job. Projects should always have a clear rationale, objective, scope and a set of deliverables; otherwise, why would you do them? So why do procurement teams obsess with day rates and numbers of days in proposals? They should focus on the deliverables and the value. Who cares how many days it takes when it is a fixed price to deliver by a specified date?
An IR35 compliant Statement of Work (SoW) should have no reference to effort or days; we should make SoWs deliverable- and value-based, and we should align payment schedules on deliverables not days done. The risk should sit squarely with the Interim/Programme/Project resource, and if it takes longer than the forecast, it is their problem. And yes, by carrying the risk they will build in contingency; however, the business gets greater certainty and greater accountability.
I believe that there are two issues with the implementation of this thinking, and they are:
Firstly, when engaging project resource, people need to understand the difference between project and role deliverables. They are not the same thing. The Business Sponsor is always accountable for the project deliverables; only they can be accountable for the business case and the elements required to realise it. The Programme or Project Manager’s deliverables are associated with the delivery of the methodologies, the processes and the governance that makes the programme or project work, there is a clear distinction. In eighteen years of delivering projects, many of which have been industry-firsts and award-winning, I have never seen a SoW structured in this way until last October when I wrote my first one! Quite an art.
Secondly, is getting people to even understanding what a deliverable is and how you define it. How often have I seen a deliverable defined by words such as 'Rollout Planning and Coordination'? This is an activity, not a deliverable. A deliverable would be the 'Rollout Plan' - something tangible, that can be defined, and the quality and acceptance criteria specified.
Recently, thebigteam conducted a review of over 100 'internally managed' business-critical projects project managed by over thirty experienced operational managers from nine different countries, and there were some fascinating results, as a summary we found:
- 80% of the projects did not have a clear objective that defined what the project was to deliver and by when
- For over 70%, the 'project managers' could not clearly describe what their deliverables were
- For nearly 50%, the 'project managers' could not articulate their scope
- For over 60%, the projects had no clear milestones to work to
- Over 80% lack clarity of understanding of how to define and manage risks and issues
Seems extreme, but in my experience, this is not uncommon. I can feel the risk logs of these projects bursting with colour – pretty much all of it 'red'. Imagine the cost of each of those projects, over 100 of them in one organisation alone, and the potential for not delivering on time or not delivering the right thing or, arguably worse, just not delivering at all.
To me, this illustrates the challenges that organisations face. Firstly, in trying to internally run programmes/projects without the right skill set or focus. Secondly, the challenge they will face in defining and structuring SoWs (or briefs) for engaging freelance Programme/Project Managers that are IR35 compliant.
Suppose organisations, senior stakeholders and their procurement teams take the time to understand and define what the deliverables are and how a SoW should be structured. If this is the case, we should not fear IR35. Indeed, we should embrace the opportunity to work smarter; IR35 will allow companies to access the fantastic pool of expertise that they so desperately need as, and when, they need it. The approach will ensure greater accountability and certainty of delivery for both strategic and tactical initiatives ... something that has to be a win for all.
And whilst we have already seen companies taking the blanket policy approach to IR35, there is also cause for optimism as there are a few companies that we are aware of doing the opposite. In my view, it is these companies that will continue to attract the top interim talent and be well positioned to deliver their strategic initiatives going forward. In the interim market we have also seen many of the leading interim agencies working hard to inform their clients of the changes and how to adapt to them, holding seminars and running workshops with both their clients and associates as all grapple with the new way of doing business.
My big concern is that the opportunity to work smarter is not realised in the short term and that British business will be all the worse off for it. Only time will tell.”
Thanks to Simon for his insightful blog. We’ll come back and revisit this subject later in the year to see how IR35 has impacted the project world.