The proposal philosophy, examples, and techniques you’ll find in subsequent pages are all based on the premise that you and I work for a fee based on value, not time, materials, numbers of participants, or other commodity determinations. It’s worth taking a few minutes here to dwell on this considerable distinction.
The value of your collaboration with a client is based on the contribution you make to improving the client’s condition. The buyer and you agree to what you deem that to be in the conceptual agreement aspect of the proposal. Having established a trusting relationship, you both intend to partner to each reasonable objective with conservative value attached. (The questions for ensuring this appear in the next chapter.)
I have heard consulting “experts” claim that the formula for fees should be your monetary needs divided by the hours you have available to consult, providing you with an hourly rate. There are only 600 things gravely mistaken about this notion, but here are the most important:
- No one wants to work the maximum hours available in a business that demands physical presence and commensurate travel. •Your presence is not your value in any case, because it’s often irrelevant to the results (the objectives).
- Pricing by participant, time unit, or materials provided is a commodity mind-set that invites comparison to others, and you will never be the low-price provider (or at least not be the low-price provider and establish any kind of decent lifestyle).
- Wealth is discretionary time, so the idea is to maximize discretionary time through non labor intensive work, which is antithetical to hourly or daily fees.
- Your strategy should be one of markets served or services offered, but not production capability, as if you were a steel mill or a paper plant. The huge monolithic
- Consulting firms such as McKinsey and Deloitte are production- capability driven, meaning that they’re paying people $350 an hour and must bill them out at $550 an hour to make a profit. That’s why the “Big 8” of years ago is today about a “Big 3.5” and diminishing. It’s an antediluvian business model.
- The client is best served (remember about “improving the client’s condition”) by a fast improvement or resolution, not a slow one. But time-based billing rewards sloth and lethargy. Billing by the hour or day is intrinsically unethical. That’s right, I said it: unethical. Lawyers traditionally bill by six-minute intervals, and we all know how much we trust lawyers.
- You don’t want the client to have to make an investment decision every time your help may be needed, nor do you want to be seen as self aggrandizing if you realize that you need to put in more time.
- Your value is in your advice, not your presence. Otherwise, why would anyone pay for a retainer, which is the ultimate relationship with a client. (Of no small irony is the fact that a lawyer’s “retainer” is nothing more than a deposit against subsequent six-minute billing totals.)
I’ll skip the other 592 reasons out of respect for your time and the length of this book, but I think you get the idea.
The value distance in Figure 1.2 shows how much we can demonstrate value when we adapt this approach. The worst position for a consultant is to be seen as a commodity, readily comparable to others.
This is why your initial approach to all prospects must be with a value-based mentality. That may take some reeducating on your part with buyers, because they’ve been miseducated by countless consultants before you. But if you use the bullet points on the previous pages, this is easily accomplished. Here is the standard language I use when asked about my fee “basis”:
Glossary Value-based fees are the remuneration you receive as your contribution to the value derived by the client as a result of meeting agreed-upon business results (objectives). They provide a dramatic return on investment for the client and equitable compensation for the consultant.
My fee is based on my contribution to the value we have agreed should result from this project, representing a dramatic return on investment for you and equitable compensation for me.
What is “equitable compensation”? It’s based on that dramatic return. I’ve found that if you can provide a 10:1 return with the involvement of the buyer in conceptual agreement about objectives, measures, and value, the client is overjoyed. (Where else is the client getting that kind of return?) When I helped a manufacturing consulting firm shift to value-based fees, the owners told me that a 3:1 return for their clients was considered outstanding.
Value is in the eye of the beholder, which is why it is reached collaboratively with the buyer in conceptual agreement. However, you can suggest and propose additional value as you get to know the buyer and the organization, before creating the proposal. That’s what the value distance is about. Remember, too, that behind every business objective is a personal objective, and this is equally important.
As a buyer, my wish to create better teamwork to avoid work duplication and establish a more seamless customer interface is a lofty organizational need. But behind that might well be my personal need to escape spending so much of my time “refereeing” among warring teams and committees. These personal objectives should be discussed because of the increased value they generate.
The total of tangible benefits (which are often annualized), intangible benefits (which have emotional impact), and peripheral benefits (valuable “extras”) create a potent value equation. Money is a priority issue and not a resource issue, so the more ROI you present the more likely money will be moved your way. And because we are dealing only with economic buyers, the authority to move that money is present.
When you have a trusting relationship with a true buyer, there is no reason to go anywhere else, to conduct a needs analysis, or to interview bystanders. So let’s make sure you know how that’s best done.
Notes
1. If you’re pricing by time and materials and intend to continue doing that, you don’t need this book and I’m frankly surprised you can afford it. A simple letter of agreement can adequately address these relationships.
2. For examples of questions to ask throughout these steps see “101 Questions for Every Sales Situation” in the online appendix for this book.
3. Any current business has these two vital components. See my book, Million Dollar Referrals (McGraw-Hill, 2011).
4. Though I’m happy to report that even the legal profession is moving toward value-based fees, and I’ve had correspondence with the Chief Justice of Western Australia, who is a proponent of this approach. See my book from John Wiley & Sons, Value-Based Fees.