CXO

Consider 'fudge factors' when valuing intellectual property

Placing a value on intellectual property can be a slippery slope. Use these tips from a TechRepublic member to evaluate your position and bump up your profits for unique solutions.


Editor’s note: This article comes from Tom Watkins, a TechRepublic member who responded to a recent IT Consultant article on accurately pricing intellectual property.

As a decision support analyst, I use lots of formulas to analytically dissect almost every aspect of my consulting services. Other factors play into my pricing schemes, too—I call these the “fudge factors.” I’ve developed these through a combination of experience, common sense and, sometimes, wishful thinking.

The fudge factors include issues such as these:
  • What the market will bear
  • The client’s level of desperation
  • The number of alternative solutions
  • The client's budget
  • The possibility of reselling the intellectual property (IP)

Using the example of custom software created for a client, the formula presented in this article used figures for the total cost of labor and development, costs of similar products on the market, and the client’s expected use and number of users to calculate the software’s value. Setting the price for creating a software product can be more involved than a simple formula allows and can result in substantially more income to the consultant when done properly.

Here’s how the fudge factors can dramatically affect the price you set for your intellectual property.

First of two parts
This is the beginning of a two-part series on variables to consider when pricing your services as a consultant. The second half of this series will discuss the client’s budget and taking advantage of resale opportunities.

What the market will bear
During the Y2K scare, companies were willing to pay premium rates for the delivery of solutions that might save them time, trouble, and money in the case of any Y2K failure. This kind of panic actually occurs fairly frequently in various forms in most companies. Most often, it happens when there’s a major hardware or operating system changeover and applications must be upgraded at the same time. With Microsoft making major changes every two or three years, for example, this has become a recurring theme.

Desperate clients
The fear factor, or desperation factor, increases the price the market will bear for a particular product. If your client is desperate and must have the work done by a certain date or to perform a critical function, you would be unwise not to take advantage of that situation. Your risk will be higher, and you’ll have more demands on your services, but your profit opportunity for such a project is greater.

If I’m doing something that has a higher risk or is more demanding than the norm, I charge a higher hourly rate or estimate more hours in the project bid. If I can be forthright with the client, I will state openly that this is “risk mitigation” cost.

If I think the client won’t understand this rationale, I simply add hours to the project that include tasks such as quality review, coordination, approval review, and draft submissions. I’ll also put more steps into the project that reduce my risk by having the client approve intermediate deliveries. Then my risk only extends back to the last approved deliverable.

The number of alternative solutions
If several alternative solutions are available to the client, you cannot max out your bid. On the other hand, if you know that you’re creating a unique solution to a unique problem, you can beef up your fee accordingly.

For example, if I know of a product on the market that will do part or all of the work that the client wants, I recommend it even though it might reduce my fee. I do this to build credibility with the client so he knows that when I do charge more, I do it for good reason.

If I’m aware that I’m creating a unique solution the client can’t get anywhere else, I can raise my fees in several ways: I may add in the cost of a full set of documentation at the user, operator, and programmer levels. I may also set up a retainer for future support, training, or upgrades.

I add fees to account for the legacy system analysis or the detailed development of the requirements, system specs, and interface design. If it is firm-fixed price (FFP), I’ll add several reviews and approval cycles into the tasks. If it is a time-and-materials (T&M) contract, I’ll insist that off-site labor and subcontracted analysis charges must be added.

In general, you have to consider that you’re more valuable to the client if you have the only solution available—then take advantage of that situation. On the other hand, you must offer competitive pricing if the client can easily switch to other solution sources.

Raising the client’s budget
When potential clients have a preconceived notion of what a solution should cost, what methods do you use to change their minds? Send us an e-mail or discuss your strategies below.

Tom Watkins is the CEO of Management Technology Consulting Council, Inc.

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