CXO

Converting from hourly to value-based fees

Many consultants have hourly or per diem fee arrangements with their clients. But columnist Alan Weiss explains why both consultants and clients could win by changing the relationship to a project- or value-based fee system.


A great many people ask me how to make the transition from an hourly or per diem fee arrangement to a project/value-based system. There is no easy way—once you’ve educated the buyer about the wrong way to do business with you. But there is a technique I’ve recommended that consultants agree has worked well.

Submit your proposal to the longtime client in the traditional manner, citing whatever your billing practice has been—$3,500 per seminar, $2,500 per day, $250 per person trained, and so on. Then explain that, in view of your excellent relationship, you’d like to provide an alternative fee structure whereby the client does not have to make an investment decision every time your assistance is considered. Therefore, you’re suggesting a monthly (or quarterly or semiannual or yearly) retainer that provides unlimited access to you for that period, irrespective of number of days, hours, or participants.

Make it an attractive option. If it’s reasonable to assume that the client would use you for a minimum of two days per month for at least one quarter at a per diem rate of $3,500, for example, then make the retainer $30,000 for the quarter. A slight increase of the original expenditure ($21,000) now allows the client to use as much of your talent as necessary.

How to ask for project/value-based fees
Before you press the panic button and say you can’t control the use of your time with a value-based arrangement, consider putting these conditions in your proposal. A value-based arrangement can work for you if you incorporate the following:
  1. State in the proposal that although the time required for the quarter is indeed on request, it is still subject to mutually agreed-upon dates. This arrangement allows you to continue to schedule your time proactively.
  2. Stipulate that the retainer is monthly, but payable in 90-day increments at the beginning of the quarter (the minimum period). This allows you to collect your money and use it, and it prevents the engagement from being cancelled. Allow the client an option to continue the arrangement through the next quarter if requested by the beginning of the final month in the current quarter. (In other words, you want to create seamless continuation, not renegotiation with the danger of a month or so falling between the cracks.)
  3. Finally—and listen to me on this one—stop worrying. No client I’ve ever worked with abuses such a system, just as no consultant is overwhelmed with visitors when he or she announces an “open-door policy.” Your clients will use discretion. (In most cases, I actually have to remind them about their access because they’re not using me enough, which also adds value to our relationship.)

It helps, of course, to charge fees high enough so that you are well compensated whether a client uses your services three days or twelve, wants 25 participants trained or 95, calls you twice a month or once a day. Don’t be timid. You can always revert to your old commodity fee structure. But you’ll never create wealth that way.

If the buyer says, “Why are you offering an alternative fee basis? We’ve worked on a comfortable basis for quite a while now,” respond: “I felt I wasn’t taking your best interests into mind sufficiently. There should never be a meter running in our relationship, and I don’t want you to make an investment decision every time I can be of help. Conversely, I don’t want to force one on you when I see areas which require further study.”

Make sure your objectives are crystal clear for the project. That way your time won’t be abused by “scope creep,” meaning that you’re asked to contribute to everything from marketing to window washing as long as you’re on retainer. Clear objectives provide a template you can use to determine whether a request is inside or outside the current project scope.

If you don’t try this approach with current clients, you’ll never know if they’ll agree to it. And I guarantee you’ll suffer lower margins from those accounts that, ironically, find the greatest value in your contributions.
Alan Weiss is the founder and president of Summit Consulting Group, Inc., a firm specializing in management and organization development. Summit's clients include organizations such as Hewlett-Packard, General Electric, The New York Times, Mercedes-Benz, Coldwell Banker, and more than 80 other organizations in four countries. He advises executives and consultants on business objectives and personal goals. He has also written 13 books, including the best-selling Million Dollar Consulting: The Professional’s Guide to Growing a Practice.Copyright 2000, Alan Weiss.

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