Those of you who have turned immediately to this chapter are welcome to my book. May I suggest that the prior chapters have some important information, and you should go back and read them before going on to Chapter 9. For those of you who have had the discipline to tackle this in sequence, let's continue along!
A fee is compensation that is paid to you in return for the value you are delivering to the client. That compensation may be in the form of equity, bartered services, chicken dinners, or future consideration, but 99 percent of the time it is (and had better be) in the form of hard currency. That value may be in the form of your talent, expertise, background, experience, contacts, or other attributes.
Consequently, value delivered that improves the client's condition should be rewarded with a fee. If we can agree on that, we can start down the road to preventing you from doing a lot of business for a little money.
Here is how I explain my fee basis to clients:
"My fee represents my contribution to the results of this project with a dramatic return on that investment for you and equitable compensation for me."
If you have a trusting, partnering relationship with a true buyer, you will receive zero resistance to that position, which is why this is Chapter 8 and not Chapter 1.
Most consultants in this country are using time as the basis for their fees, and most consultants in this country are not making much of a living in good economies or bad. Attorneys are the prototypical hourly billers, and the average private practice attorney in the United States (according to the U.S. Department of Labor) is making less than $100,000.[54] (And the average family practice doctor makes less than $150,000 if you want to really understand how lucrative consulting can be.)[55] Accountants fall into the same dreadful dead end. The reason is that there are only so many hours in a week and so much you can charge per hour (and limits to how much you can fudge the figures). These are two immutable caps on income if time is your determinant of your value.
In the best New York law firms, the most senior partners may be at $500 or $600 per hour (forget the promotional nonsense of the $1,000 an hour claims; no one is paying that) and, even if they magically bill 80 hours a week, that's still a weekly cap. Yes, you're saying, but that's a $40,000 weekly cap, which is a cool $2 million a year. But that 80-hour grind, with no personal life (if indeed the 80 hours are real), also requires a substantial staff and office support to deliver the $2 million. Yet I've consistently made a minimum $1 million every year working about 20 to 30 hours a week. (I'm currently breaking the $2 million mark with net decreases in labor intensity or travel.) I began my practice from scratch in 1985, after I had been fired as CEO of a consulting firm, and reached the seven-figure mark by 1991. Do I have your attention yet?
This hourly cap is insidious. Of course, most attorneys are lucky to get $200 an hour, and be billable for 30 hours a week, and that's only about $270,000 a year assuming vacation and holiday time off, and $100,000 ain't what is used to be. But that is a gross fee, before costs of doing business, staff, insurance, and so forth. That's why the really big legal earners are those who accept contingency fees—fees based on a sharing of the value gained by the client, often as much as 30 to 40 percent—and lawmakers are starting to consider limits on that huge share. Many people understandably feel that a dynamic in which the attorneys make more than the plaintiffs is essentially unethical and wrong.
(There may be hope. I recently keynoted for the Australian Legal Professional Management Association on revamping the profession and innovating. Value base fees was one of the topics.)
Aside from the concrete caps on amounts of hourly charges and hours in a day, there is a more pragmatic reason not to charge by the time unit—namely, that it doesn't represent true value. When I stand on a stage and deliver a keynote speech for 45 minutes for a fee of $15,000, I'm under no illusion that 45 minutes of my time is worth $15,000 (or that the same amount of Colin Powell's time is worth his rate of $75,000, as fascinating as he may be). However, my experiences, talents, background, and intellectual property, combined with my communications abilities and talents to convey a synthesis of that totality, plus the lingering impact, influence, and change within the client organization that follows my presentation, are worth far more than $15,000. The client feels as if it were a bargain, and I feel well paid.
The same dynamic holds true in our consulting work. It's not the day on site, the training program, the survey, the new IT program, or the new director of sales recruited,[56] it's the improved morale, the better teamwork, the faster customer responsiveness, and the higher departmental productivity that constitutes the real bang for the buck.
The reason that the chapters are in this order in this book is that, if you recall our discussion on input versus output, a sales training program is often sold by a trainer for $2,500 a day, or $250 per participant, or some such calculation. Suppose there are 60 salespeople nationally, who are trained in three groups of 20. Our daily per diem would generate $7,500 for three days of work, and our per head charge would generate $15,000.
Now, suppose that this sales training were able to increase sales by just 5 percent on an annualized basis (if not, why even do it?). If each salesperson were generating $300,000 in new business on average ($18 million in business), and you succeeded in raising the total to $18,900,000—a $900,000 increase—would the organization be prepared to invest in a 10:1 return? In other words, is a $900,000 first year (and continuing and annualized) increase worth an investment of $90,000?
It certainly is. And even if you took only 5 percent, you still have three times higher a fee than you did under the per head charges, and six times higher a fee than the per diem rate. In fact, even a 1 percent return on the increased profit is larger than the per diem rate in my example, and that per diem rate of $2,500 per day is higher than many consultants and trainers are currently charging.
Imagine: Many consultants are not working for even a penny on the dollar of client improvement, savings, and bettered circumstances.
If you're going to invest the hard work, discipline, talent, and dedication that this profession requires, let alone tolerate the travel, client demands, and tough environments, you might as well earn money commensurate with your talents and results. Otherwise, you're accepting all the risks and detriments without exploiting the rewards and benefits. You'd never advise a client to do that, so why do it yourself??
Two ironclad rules:
Always work on a project fee or value-based fee, period.
Always demonstrate to the client that this arrangement is in the client's best interest.
Oh, and one third point: Charging by the hour is ethically questionable and a direct conflict of interest, because the more you work, the more you get paid, and there really is no impetus or benefit to resolving the client issue rapidly. On the other hand, if you're paid a set fee, then you and the client will both be delighted if you resolve the issue as quickly as possible.
Do you really want the client to have to make an investment decision (start the meter running) every single time your advice and counsel are needed? Every time you have a question to ask your attorney, you know that those 15-minute increments are swinging into action. Does that prompt you to rely on that attorney more or less?
As we've established earlier, the basic conversations with a new prospect should be around relationship building, followed by conceptual agreement over objectives, measures, and value to the organization. This is a deliberate and pragmatic sequence. In focusing on objectives—outcomes—you enable the buyer to visualize and appreciate the end result of the project. The measures deliver a sense of security in understanding progress and recognizing when the objectives have been met. And agreeing on the value establishes early on, before the proposal, what is the worth to the buyer and to the organization of the new state created at the conclusion of the project.
The proposal, in its sequence, does not mention fees until after these points have been summarized and enumerated in writing, options of varying value have been provided for the buyer's selection, and a succession of small yeses has been created throughout the proposal. Then, when the buyer is ready to select an option of ultimate value, the proper investment amount can be chosen.
Here are some reasoning points to use to convince the buyer that a value-based fee is always in the buyer's best interest.
Twelve Ways to Convince a Buyer That Value-Based Fees Are Best
There is a cap on your investment. You know exactly what is to be spent and there are no surprises.
There is never a meter running. You do not have to worry each time my help is requested that I might be here for an hour, a day, or a week.
It would be unfair to you to place you in the position of making an investment decision every time you may need my help. Otherwise, you're trying to determine the impossible: Is this an issue that justifies a $2,000 visit or a $500 phone call, or should I just make my own decision? No client should ever be in that position.
Your people should feel free to use my assistance and to ask for my help without feeling they have to go to someone for budgetary approval. This only makes them more resistant to sharing their views, and at best delays the flow of important information.
If I find additional, relevant work that was unanticipated but must be performed, I can do it without having to come to you for additional funds. In those instances, legitimate, additional work would otherwise be viewed as self-aggrandizing and an attempt to generate additional hours or days.
If you find additional, related work that must be done, you can freely request it without worrying about increased costs.
The overall, set fee, in relation to the project outcomes to be delivered, is inevitably less of a perceived investment than hourly billing.
If conditions change in your organization, you won't be in the difficult situation of having to request that the project be completed in less time. The quality approach is assured, since the fee is set and paid. (And your project probably can't be canceled if it's already paid for!)
If I decide that additional resources are necessary, there is no cost to you and I can employ additional help as I see fit.
This is the most uncomplicated way to work together. There will never be a debate about what is billable time (for example, travel, report writing) or what should be done on site or off site.
We're trying to build a powerful partnership, and reliance isn't fostered when there is always a monetary consideration or a price.
You can demonstrate to the board, the shareholders, or anyone else required that there is a fixed investment and that budget has been allocated, and an expected return to justify the budget.
Feel free to add others to my list as you come across them for your practice. The important thing is that I introduce this concept early in my discussions, using as many of these arguments as I have to in order to persuade the prospect, and I do so in the relationship-building part of the sequence. In other words, although the prospect sees my fees for the first time in the proposal itself, the buyer is educated to the point that he or she expects to see a single quoted fee per option, and not a per diem or per head fee assigned.
The key to achieving any kind of interpersonal change is to convince the other person that the change is in his best interest. That's why you have to marshal your arguments around the prospect's improved condition, and the sagacity of using a project fee approach. Any and all work required in the early stages is more than justified by the outcome in the acceptance of the fee structure in the proposal. That's why preparatory work is so important in gaining business.
One more hint in buyer education. If the buyer says, "You're the first consultant to propose a single fee," or "We're accustomed to evaluating hourly fees for these projects," respond, "Exactly! That's what makes me different and so popular with clients. I've removed the uncertainty and questionable investments entirely. Here are some reasons that my approach works in your favor. . . ." Then go back to the reasons I've listed.
Whenever someone says that everyone else is doing it the other way, use that as a means to stand out in the crowd, and don't flee because you appear to be different.
If you buy into the concept strategically, then here are the tactics to help you continually raise fees. You might want to start applying Post-it Notes to the following pages.
Establish the fee collaboratively with the client. This means that you work through the objectives/measures/value sequence of conceptual agreement, so that the buyer is continually apprised of the results and the fee is simply the investment that will generate them.
Base fees on value, not tasks. Don't specify how many focus groups, how many classes, how much observation, and so forth there will be. Focus on improved sales, not sales training; focus on better communication of corporate values, not executive coaching; focus on highly productive and lean organizations, not reengineering.
Never, ever, use time as the basis of your value.
Don't stop with what the client wants, but pursue what the client needs. Every client will know exactly what's wanted ("better delegation skills") but few will understand what they really need (an environment that rewards risk taking and innovation). The difference between want and need is your value-added. No one knew they needed a Walkman until Akio Morita and Sony produced them. I've received some of my largest assignments by probing beneath the simplistic want (training) to find out the true need (a culture of less authoritarianism and more personal empowerment).
Think of the fourth sale first. Fees are cumulative, not situational. Don't get overly greedy. Get a decent fee and do great work, and you'll probably have significant additional projects far into the future. Plan for at least 70 percent of your business to be repeat business in this manner, because new business acquisition is always harder and more expensive. You're far better off receiving $100,000 from one company over two years than $10,000 from 10 companies over two years, because your costs will be far less, the time demands will be significantly lower, and you'll keep much more of the revenues from a single source.
Engage the client in the diagnosis—don't be prescriptive. An internist makes a lot more than a druggist. The former diagnoses, while the latter simply dispenses pills. Don't confront the client with set solutions, pigeonholed responses, and off-the-shelf products. Listen and converse. Provide the client with the opportunity to be your partner right from the early relationship-building process. If the client feels an ownership in the joint diagnosis of the issues, two things immediately occur: First, your value is perceived as much greater in the collaboration and, second, the resultant fee structure will be far more the result of your joint efforts. The best internists engage the patient ("Does it hurt here? How long has this been occurring? When did this first come to your attention?") and involve the patient's behaviors and lifestyle in the course of the treatment. When the patient buys into the regimen, the healing proceeds much more quickly.[57]
Never voluntarily offer options to decrease fees. I once had a member of my private mentoring program who was not happy with the fees she was able to generate. When I role-played a meeting as one of her buyers, we got to the stage when I said, "Joan, you're exactly what we need around here. How much would it be for that customer service program you outlined?" She replied, "Well, it's $7,500, but I could do it for less if that's a problem." (Who could make this up??) Whenever you offer a deal, you express two adverse conditions: The first is that deals are available, and there could be still more. The second is that you lack enough confidence in your own worth to suggest that the buyer should probably get a better deal. If you offer reductions unilaterally, you are undermining not only your fee, but your credibility.
Add a premium if you, personally, do it all. Most consultants operate in the reverse. In their options, they tell the client that if they have to bring in more people there will be additional charges. I tell the client the opposite: The fees assume that I'll use whatever resources I need to without additional costs. However, if the client wishes that I do all of the work personally to reduce the number of outsiders, maintain a single filter, keep the same level of quality for all officers, and so on, then there will be a 10 percent premium for my total, personal involvement. In other words, I cost more, not the hired help. I've gained 10 percent on six-figure contracts through this offer. And it's not surprising, since I'm the one who has established that all-important relationship with the buyer early on.
If you are forced to consider fee reduction, reduce the value commensurately. Sometimes a buyer will say, "Alan, we just love option one, but we don't have the discretionary money right now. Can we do it for $20,000 less?" And I reply, "Of course we can. What value shall we take out? Should we remove the international surveys?" ("No, international always feels left out.") "Should we remove the one-on-one interviews?" ("No, we need that measure of personal feedback.") "Or should we remove the communications with former customers?" ("No, how else will we know why they left?") Prospects love to reduce fees, but they hate to reduce value, and given this dynamic will probably find the extra money somewhere. But if you reduce fees without a commensurate reduction in value, then the question is simply, "Well, how low can he go? There was certainly enough padding to get a quick reduction with no problem." Don't do anything for a sale. Build a relationship.
Provide options every time—the choice of yeses. Do this for a couple of reasons:
Clients believe they get what they pay for.
The choice becomes "how to use Alan" not "whether to use Alan."
Buyers tend to migrate up the ladder of choices (which is why you should lead with the least expensive and proceed to the most expensive).
Never allow a prospect to have a go-no go decision.
Always provide an option that is comprehensive and over any stated budget. In many instances, a prospect will share a budget amount, candidly stating that the proposal should stay within the bounds of the available funds. One of the advantages of providing options is that you can provide one that is deliberately over the budgetary limit. By providing two or more within the limit, you give the prospect the opportunity to make a choice of how to use you within current parameters. But seeing one that is packed with value over the budget, the buyer might just say, "You know, option 4 is so attractive that we're going to invest more money to have you implement that one." You never know until you ask, and no prospect will ever say, "Make sure one of your options is over our budget limit." Yet we all control more aspects of the sales process than we suspect, and this is a wonderful device that will result in much larger fees every once in a while. If you position it correctly—"I just wanted you to see what we've done for another client at a higher level"—you can do this quite gracefully.
Ensure that, as early as possible, you've asked the Question Guaranteed to Result in Higher Fees: "What are your objectives?" Always begin with end results that can be equated with a value and demonstrable return to the client. When a prospect asks early on, "How much will this be?" or "What are your rates?" gently turn the question back and reply, "I can answer that specifically when I understand what's to be accomplished, so perhaps you can start by explaining what results will represent an ideal outcome?" Never discuss fees before value, period.
Broaden the objectives as appropriate to increase value. When a buyer says, "We need better sales training," ask, "Why?" The buyer is likely to say, "We have to accelerate the time it takes to close new business, because we're losing ground in compensating for attrition." Your response can then be, "Well, would it also make sense to take a look at the attrition you've accepted, to see if it's reasonable, can be reduced, or is being reported incorrectly?" Every buyer who states early that he or she has an alternative approach in mind, rather than objectives to be met, is usually taking much too narrow a view of the issues. The time to broaden these is before the proposal and the fees, not after the narrow project has begun.
Ensure that the client is aware of the full range of your services. Many times you will be inadvertently typecast as a trainer, or a survey specialist, or a coach, simply because that was an early role for the organization, or because a source who referred you knew you only in that capacity. Early in the conversation acquaint the buyer with the gamut of your abilities, not by citing a laundry list of options, but rather by providing examples of how you have worked (or are capable of working) with other clients. For example: "I can certainly prepare an approach to coach your sales directors, and I've done that in the past in conjunction with helping clients recruit new sales directors when there are no incumbents capable of doing the job."
If a minor part of the proposed project is not within your competence, talents, or interests, don't abandon it—subcontract it. There's a key distinction here. If the entire project is financial in nature, and you know little about financial analysis or balance sheets, you're best off by referring the buyer to someone who can better handle the project. However, if that financial analysis is a minor part of a larger project—say, analyzing customer buying habits—then you should pursue the project with the knowledge that you'll find a competent subcontractor to handle the aspects that you can't. My rule of thumb: If your competence can accommodate the majority of the project, then attempt to own it; if your competence can accommodate a sizable minority of the project, then attempt a collaboration; if your competence isn't relevant for the project, then attempt to refer it to someone else as a professional courtesy to the client and the other consultant. Even this last effort will return dividends from two grateful parties at a later date.
Always ask yourself, "Why me, why now, why in this manner?" If you are virtually alone in your ability to provide a service—due to unique talents, experiences, timing, or whatever—you are much more valuable than if any number of readily available people can accomplish the same ends. If timing is key, or the use of an external resource is mandated, or the client has continually failed in the past trying to resolve the same issue, your services are more valuable than otherwise. This is neither mercenary nor greedy. If your particular talent and assistance at a specific time are extremely valuable to the client, you are entitled to charge commensurately for that value. Hotels charge more for the exact same rooms around the holidays. It's more expensive to have someone meet you on the road and tow your car than it is to have preventive maintenance done at set intervals. Timing and need are important indicators of value.
Determine how many options the buyer perceives, other than you. If you are the sole source being considered, you're quite valuable. If you have to take a ticket in the waiting room that says "212," you're not very special. Don't forget, you may find that you're also competing against internal resources. Understand the nature of the competition to better understand your own potential value.
Use proposals as confirmations and summations, not explorations. As described in Chapter 7, the proposal is not a negotiating document. The fees established in it should be based on prior areas of conceptual agreement. In the worst case, if options are desired but fees are considered too high, offer to reduce value, not unilaterally reduce fees.
When the buyer insists on nailing down rates, use the magic response: "I don't know." The buyer says, "You must have a daily rate. All consultants do." You reply, "Well, I'm different, and in your best interest, I don't have one." Then the buyer says, "Okay, but you can at least give me an estimate of the costs here." And you reply, "I will once I learn more, but I just don't know at the moment. I haven't enough information about outcomes to know what methodology might be most effective, and I'm not sure about scope. It would be irresponsible to quote you any fees without knowing more, but I can get them to you as early as tomorrow in my proposal if you can provide me with some basic information (objectives, measures, value) while we're together." There's nothing wrong with a good old "I don't know." At this point, you're supposed to have questions, not all the answers.
If you must lower fees, gain a quid pro quo from the buyer. You will sometimes feel that it makes sense to accept a lower fee: You want to gain entry into an important and potentially long-term client; you know for a fact that money is temporarily tight but will flow again in the new fiscal year; you want to do a favor for someone in need. In those cases, seek a nonfinancial reciprocity. This might be in the form of bartered merchandise, company stock, complimentary services, access to company functions, printing of your materials, an endorsement or testimonial, recording or videotaping of your presentation, and so on. Some of this value might be even higher than the partial fee you're sacrificing. Think in terms of value to you and your career, not just money.
Do not accept troublesome, unpleasant, or suspicious business. Annoying prospects inevitably make for worse clients. The chances are that you're going to have trouble collecting your money, or that there will be demands that far exceed the original objectives, or that you'll be blamed for problems that the client should have been accountable for preventing. The only thing worse than lost business is bad business. Every consultant who has succeeded in the profession agrees with me on that one. Stay away from the quicksand and landmines. You'll lose money, no matter what fee you cited.
When collaborating or subcontracting, use an objective apportionment. This will keep all parties confident that they're treated fairly, and will allow fees to flow unhindered. Here's my rough rule of thumb: The business acquisition itself is one third, the methodology or technology is one third, and the delivery is one third. That means that if you acquire the business and provide the methodology, and subcontract for someone else to deliver it, you keep two thirds of the fee and pay the subcontractor one third. If you were to share the delivery equally, then you'd each receive one sixth. Use whatever categories and breakdowns you like (some people believe that the business acquisition aspect deserves more than one third in my breakdown, for example), but make them manifest to others and gain their full agreement before proceeding with any collaboration.
Any highly compensated employee must bring in new business. Many of you will be prone to take on partners or employees quickly because you prefer to work with others. If you are paying anyone a salary or any fixed income at all of substantial amount, that person must be accountable for new business acquisition. If people are merely responsible for delivery that you can't personally handle, pay them market rates, which are relatively low, because delivery people are in abundant supply. One of the biggest errors of new consultants who quickly generate business is that they build staffs that do not add to business growth but only represent overhead. Do not pay highly for a commodity, but only for unique talent.
Seek out new economic buyers laterally during your projects. The time to build new projects and additional fees is while you're visibly on site and providing results, not after you've packed up and gone. That doesn't mean blatant promotion. It does mean mentioning to the vice president of European operations that you're going to be traveling to Europe for other reasons, but while you're there you'd be happy to provide some feedback on market conditions, if desirable. Or you can share with the director of human resources some nonconfidential practices you've seen elsewhere or read about. There are scores of economic buyers in most organizations. You can reach out to them while implementing in a professional and helpful manner.
It is better to do something pro bono than to do it for a lower fee. When there is a significant fee problem and there is no middle ground, consider doing a small project on a pro bono basis to build goodwill, rather than be seen as a consultant who will accept virtually any amount of money. However, here is my ironclad guideline: I'll do pro bono work for nonprofits, but never for profit-making organizations.
Fees have nothing to do with supply and demand, only with value. Some experts will tell you that you should raise your fees when demand exceeds supply. There are two massive problems with this superficial philosophy. First, demand will never exceed supply, since being employed every working day during a year is both unlikely and impractical. Second, who wants to work that hard? Isn't the idea to work smart, not hard? Raise your fees when your value increases, due to developing expertise, experience, accolades, publishing, unique approaches, references, and so forth.
Find out what consultants are charging and what clients are paying. In your networking, reading, and discussion, determine what the ranges are in the marketplace. Then decide whether you want to be the low-end provider to gain volume, the mid-range provider to compete in a wide spectrum, or the high-end provider to be the "Mercedes-Benz of the business." It's difficult (and self-defeating) to set fees in total ignorance of what the market is currently sustaining, irrespective of whether you seek to be below, at, or above current averages.
Psychologically, higher fees create higher value in buyers' perceptions. Buyers don't brag to colleagues that they've managed to hire the cheapest consultant around, who has no other business, and was just waiting by the phone. Their own egos are very much involved. They prefer to say, "Listen to this person. We're lucky to have her, and we're investing a small fortune because of the kind of help she can provide. Do everything you can for her." Higher fees enable the buyer to both fulfill personal ego needs and make a stronger case for supporting your project.
Value can include subjective as well as objective measures. Increases in sales, improvements in retention, and more rapid response times are measurable and clearly objective standards. However, a buyer's comment that "Improved teamwork would be invaluable" or "Higher morale would be priceless to me" is also quite powerful. Your fees can be based on a buyer's admission of more confidence, reduced stress, renewed focus, and so on.
Introduce new value in existing clients to raise fees within those accounts. Too many consultants agonize over how to raise fees within existing clients, because they want higher fees for doing the exact same thing they're already doing. The client is understandably not interested. However, if you introduce additional value—in the form of integration into business plans, comparisons to best practices, creation of a longitudinal validation study, and so on—then you can raise fees based on the additional value.
Do not accept referral work on the same basis as the referent. That means that just because the person who recommended you has accepted client business on an hourly basis doesn't mean that you have to. If the client says, "But your colleague always worked on an hourly rate," simply reply, "I know that, but he and I work differently and I've always maintained that my approach has some unique benefits to the client. Let me explain what they are. . . ."
When forced into phases, offer partial rebates to guarantee future business. Sometimes, justifiably, the client will say, "Our organization needs to take this slowly. Let's begin in one department and then see how it goes." I like to offer a series of phases in these cases where I'll always provide a rebate in the form of a lower subsequent fee if the client agrees to go with phase two before phase one is completed. This is especially helpful when you're forced to begin with a needs analysis prior to embarking on the major project. If you charge $15,000 for the needs analysis, and $45,000 for the major project, offer to do both for $50,000 if the project is accepted at the time the needs analysis is concluded. This could preempt another consultant being sought at the last minute.
At least every two years, jettison the bottom 15 percent of your business. Particularly when entering the profession, you'll be tempted to stay with original clients, interventions that you can do blindfolded, and relationships that are comfortable. The problem is that your early business is seldom representative of the future business you'll need, and unless you consciously abandon the bottom rung of your business you'll have no room to reach out for new business. This is extremely important. Treat the older clients well, provide them with a smooth handoff to someone who will appreciate the business, but do not continue to service clients who are not paying you well, from whom you are not learning, and who are tying up time that should better be used to penetrate larger organizations and more lucrative markets.
Start with payment terms maximally beneficial to you every time. Ask for full payment in advance, with a discount option to make it attractive. Otherwise, demand 50 percent on acceptance, and 50 percent in 30 days. The payment schedule does not have to match the work schedule at all. The faster you are paid, the more valuable your money. Never wait until the project is completed. (When you order something over the phone, you're asked to pay by credit card at the time.) If you start with tough terms, you can at least compromise on pretty good terms (50 percent on acceptance, 25 percent in 45 days, 25 percent in 90 days).
Offer incentives to accelerate payments. Fast pay is the equivalent of more money in your pocket. We've discussed offering an incentive for full payment at the outset. You can also offer a one-time fee of X that will include all expenses, thereby removing the need to create more billing and delays. You can offer a 2 percent discount for any fees paid within 10 days of your invoice date. Think about win-win situations that will appeal to the buyer or the accounts payable department.
Never accept payment subject to conditions to be met upon completion. Many clients—particularly small businesses and family-owned concerns—will insist that final payment be contingent upon a final output or product. Don't do it. The client will often find something wrong and, since you've already done all the work, you have no bargaining chip at all. There will inevitably be variables that you can't control in any case, sometimes the buyer's own errors. The way to avoid this is to never agree to it at all.[58]
Focus on improvement, not problem solving. Anyone can solve problems, including most internal people. There are highly methodical approaches to problem solving, and the result is the restoration of prior standards. Frankly, that has limited value. However, raising the bar—creating still higher standards of performance—is extremely valuable. So, don't merely offer to "fix the performance evaluation process," but suggest that "we will link performance evaluation to succession planning in an integrated manner for the first time."
Provide proactive ideas, benchmarking, and best practices. Suggest to your buyer that if the two of you are going to intervene in the organization anyway, why not do so with the idea of becoming industry or market leaders? Stretch the buyer's imagination and goals. Any change involves some risk, so why not plan for a higher return based on that risk?
Practice stating and explaining your fees. Do this alone until you're completely confident stating, "I'm not sure what the fee will be until I learn more, but these projects have typically required an investment of between $35,000 and $65,000. Does that present any difficulty?"
Always be prepared to walk away from business. Ironically enough, few behaviors will tend to secure business as much as your readiness to walk away from it. If the buyer realizes that you're serious in your approaches, and are intent to protect the client's and your best interests even to the point of refusing the business, your credibility will soar. So expect at times to have to say, "I just can't take this project on within these constraints, and I'd rather be considered for future projects on better terms than take this on unfairly to you. But I do appreciate the opportunity to have discussed this with you." The buyer will often reply, "Well, wait a minute, let's talk some more. . . ."
If value differs, fees can differ. Just because you're doing the exact same thing for two different clients doesn't mean the fee must be the same. Coaching a vice president running a $200 million division and coaching a manager running a $350,000 sales center have two vastly differing outcomes, even if the coaching regimen is the same in each case.
Forget about what's happened before. It doesn't matter if the client has always paid by the day for a certain type of help or if the client places limits on fees for consultants. No one needed a fat pen until Mont Blanc produced one. If you allow yourself to be guided by the client's history, you're helping neither the client nor yourself.
Practice stating high fees. That's right, practice saying, "It will be between $150,000 and $225,000" out loud. When you say these things matter-of-factly, the client assumes that he is out of step if the amount sounds high. If you giggle or turn red, you lose a certain amount of credibility.
Don't use round numbers, but don't be ridiculous. It's probably best not to position options at $100,000, $125,000, and $150,000, but it's also ridiculous to cite $123,687.90. The client is going to want to see the worksheet that generated that kind of precision. Remember, if the client walks away thinking that the value was a bargain and you walk away feeling that you were paid well, there is no third consideration.
Engage the client in the diagnosis; don't be prescriptive. The client perceives much greater value when you and the buyer are jointly diagnosing the issues, instead of you prescribing some off-the-shelf medicine. Internists make much more money than pharmacists because they are so much more valuable in diagnosing illness. And when the patient is involved in the diagnosis and the ensuing course of treatment, the quality and success of the treatment are greatly enhanced. One simple way to do this quickly is to provide a process visual and let the buyer decide where the organization belongs. See Figure 7.1 for an example. Ask the buyer to profile the organization for each factor.
Never deal with a purchasing manager or accounts payable. If the buyer suggests that "finance will take it from here," insist that you and the buyer absolutely agree on the fees and the payment terms. Emphasize that the handoff is fine if finance merely implements the paperwork and generates the checks but that in your experience, such people often try to show their worth by pressuring for a better deal. Obtain firm agreement on your agreement while you and the buyer are together.
Remove fees from all printed materials. Purge any reference to fees in your printed, Web, and other promotional materials. Make sure that old testimonials do not inadvertently provide a fee schedule (for example, "Joan was expensive at $5,000 per day but a bargain in the long run!").
When asked prematurely about fees, reply, "I Don't Know." Don't be cornered. Simply tell the buyer that you can't quote a fee until you have more information—in fact, it would be unfair to the prospect to do so—but you can have the options ready within twenty-four hours. When consultants allow themselves to be forced into fee quotes prematurely, they almost always quote too low, and the prospect expects to negotiate down from there.
Respond to scope creep with "I'll Send a New Proposal." Whenever the client requests work clearly outside the objectives of your original agreement, accept it graciously provided that you can send a new proposal—with new objectives and new fees—to cover the additional work. Regard your original project objectives as lines in the sand, and don't allow them to be blurred.
If you do something pro bono, send an invoice. Show the pro bono client what your actual fee would have been, and then waive it, showing a net of nothing due. That way you've established your fee for that particular project in the mind of that buyer and of anyone else on the board, on the committee, or in the room. (Note: This does not constitute a donation or a tax-deductible item under current IRS rules, so don't attempt to use the invoice to justify a deduction.)
Stay acutely sensitive to margins. It's not what you make but what you keep that's crucial. You may actually be increasing your fees while increasing your expenses at a faster clip. (This tends to happen as we become flush and invest more in marketing and client acquisition.) Analyze how much you are keeping, and adjust your fees or your expenses accordingly to maximize margins.
You control the education of the buyer insofar as your fees and value are concerned. Many consultants are performing excellent work for $15,000 when they might have done the same work for $45,000 without any protest from the buyer. However, they've now pegged themselves at a certain level that will stay with them forever within that organization, and probably with references from that organization.
If you leave $100,000 on the table each year that you could have charged for but did not, that's one million dollars you will never see again and can never recover. Now is the time to prevent that.
The ideal project is one after which the buyer says, "That was a bargain," and you say, "I was well compensated." If you follow the advice in this chapter, that reaction can occur every single time.
Final thought: You deserve your fees in return for the value you are providing. If you don't perceive your own value, you will never demand high fees. The sales start with you.
Q. What if I judge things incorrectly and my fee is simply too high? I need to close some business since I'm new to the profession.
A. That's why we talked previously of options and a choice of yeses. The buyer can choose the appropriate investment given the return that is likely. I would agree that you never want to present a take-it-or-leave-it proposal.
Q. The client tells me that consultants are hired by purchasing or human resources and a strict average hourly payment schedule is universally applied. How do I deal with this?
A. Deal with it by finding a true buyer. Buyers have budgets that they can spend in a manner of their choosing. Human resources, believe me, doesn't tell them how to run their profit center or division or company. Anyone who refers you to a low-level person to consummate a deal with is not a true buyer (or one you want to be working with, in any case).
Q. Are you serious that it's unethical to charge by the hour? Do you think a client actually believes that?
A. I've been charging this way since 1985, so we're not talking about some crazy theory I've just developed. Moreover, I've helped people all over the world raise their revenues by a combined $600 million, with ecstatic clients asking for repeat work, so listen carefully: The best result for a buyer is a speedy resolution. Yet if you resolve something worth $5 million in just one hour (I've seen it happen) you charge, what, $250?!! In an hourly situation, you're best served financially by staying forever. Why do you think the Big Four consulting firms, which all come from an audit mentality, descend with a hundred junior partners and stay for a year? Do you think the client is well served that way? I don't.
Q. Is the value you're talking about the same as my value proposition we discussed before?
A. No. Your value proposition is an indication of the type of result you create. But the value for a client (following objectives and measures of success) is a specific rendition of the likely results of the project in question for that buyer. You appeal to people on the basis of your value proposition, but you charge clients on the basis of a great return on investment given the actual value you and the buyer project as likely for the project.
Q. How do I determine if I should have charged $125,000 or $135,000, or $145,000? Isn't that like leaving money on the table?
A. No, leaving money on the table occurs when you only charge $45,000 for the example you cite. As long as the client is overjoyed with the return on investment, and you are equitably paid, don't worry about relatively small differences. Your options in the proposal will take care of major differences in investment. In this system, the entire fee is also profit. Don't be greedy, and never beat yourself up. You're making more money than 99 percent of the population in any case.
[54] Even in major law firms or consulting firms, the top graduates are receiving $125,000 or so to join and may well advance to strong six figures if they are not washed out in the rat race to make partner. But that is before-tax money and requires 50- and 60-hour weeks. Good luck with that.
[55] Most general practice doctors I meet complain about reimbursement, insurance companies, malpractice threats, pressure to provide inferior care, costs of staying in business, and so forth. Many tell me they are retiring early and there are parts of the country, including major urban centers, where it's tough to find young doctors going into private practice.
[56] Although you'll note that the best and most lucrative recruiting firms generally charge a set fee that is equal to about a third of the new hire's first-year total compensation, meaning that a first-year salary and bonus of $250,000 for a vice president will immediately net the search firm almost $85,000, or about the full year's earnings of a typical private practice attorney.
[57] I'd also like to point out that no one with a serious illness goes shopping for the most economical surgeon. What they say is, "Get me the best heart specialist in the East and we'll figure out how to pay for this later."
[58] And by the way, if any client is not conforming to your payment schedule or is seriously in arrears, stop work. It's your only leverage, and some clients will continue to pressure you with "just one more month" during which you'll be throwing good money after bad. The time to deal with late payments is as soon as they're late.