Time-based and contingency fees are both revenue-limiting and unethical. The ideal win-win scenario is when consultants get paid for the perceived value clients receive as the result of the consultant's engagement. “I do not prize the word cheap. It is not a badge of honor... it is a symbol of despair. Cheap prices make for cheap goods; cheap goods make for cheap men; and cheap men make for cheap country!” ~ President William McKinley

Why You May Want to Read This?

A survey a few years ago on the consulting profession examined 76 consulting practices and established the following results:

* Service professionals working exclusively on time-based fees had 87% lower profits than those who worked on fixed fee basis.

* When profits and salary were added together, the time-based fee group had profits and salary that were 95% lower than their fixed fee colleagues.

* For those professionals using time-based fees, profits were 32% lower, and profits and salaries 36% lower than the ones using both time-based and fixed fees. And these fixed fees are estimated on the amount of work to be performed. That is, you are higher paid than with time-based fees, but you are still getting compensated as an outsourced labourer for the manual work you do.

When you change this paradigm, so that your compensation becomes a function of the qualitative and quantitative improvement your clients initiate to their companies leveraging upon your skills, wisdom, insights, instincts, counsel, etc., both your profit margin and fulfilment level will increase beyond your wildest imagination.

By nature we tend to take our skills and expertise for granted, thus undervalue them. So if even we undervalue ourselves, what is the logic in basing our fees on this undervalued entity, while expecting others to value our service high? How do you feel when your prospect says: “Knock $50 off your hourly rate and I consider your offer.”

The bottom line is an hourly fee is the most demeaning, demoralising and humiliating way of charging for your work. You get instantly regarded as a labourer.

Conventional Wisdom

There are several problems with time-based fees:

* Instead of focusing on providing value to your client, you try to arrange the maximum number of working hours in order to generate maximum fees. * If your value to your clients is simply a matter of how many hours you labour for them, you are traded as a commodity, that is, just like sacks of potatoes. There is no perceived value attached to your service, only a price tag that can be haggled over.

* When you start out, regardless of what value you bring to the table, you are considered as a newcomer, thus forced to charge accordingly. There is no way we can charge the “going rates”.

* Time-based fees can also damage client relationships and cost business, because clients must make a budgetary decision every time they need help. They may not call you every time they need assistance.

* With time-based fees we set an artificial limit on your earning potential:

Limit 1: here are only a certain number of billable hours

Limit 2: There are “going rates” in each industry, which are hard to go, even when you become well established. So now multiply your limit 1 by limit 2, and you get the maximum amount you can ever bill. It may be $1-200,000 per year, but it is still a limit.

Time-based fees make you follow some kind of workhorse principle: You can earn more only by pulling a heavier load. But then you are not a consultant but an outsourced labourer. Also, there is not much creativity in saying that year after year you make more money by working more.

Value vs. Price

One lucrative way to break this limit is to start billing by the value you bring to the table. Let’s face it, there are two reasons why professionals get hired:

* to assist clients to make more money; * to assist clients to save more money.

This means there is a value of improvement for every intervention. When you emphasise to buyers the value you bring to the table and juxtapose your fees against the projected improvement or reduced or completely eliminated loss, your fees are basically peanuts in comparison to the improvement you cause, and smart buyers would not argue with that.

As the saying goes: Beauty is in the eye of the beholder. Well, so is value. But it is up to us to be able to present this value. As a service professional, clients hire you to enable them to add more profits, sooner and with more certainty than clients would be able

Value-Based Fee-Setting

Now take a project you have done before, and quantify the impact your contribution made on the client’s bottom line. And look at what you were paid. Are you happy with your compensation in the light of your value? It is highly unlikely.

So, let’s look at a simple process to establish your fees based on the value your intervention adds to your client’s bottom line. Note, that you lead the whole program with questions. Go in with a clean slate, that is no assumptions, no expectations. There are some sample questions and then do your own questions.

Step 1: Identifying a True Economic Buyer

You want to make sure that you are talking to the right person, that is, the person who has the authority to start projects and sign cheques. Far too many professionals waste far too much time meeting people who cannot make decisions and end up in a situation like “send me a proposal and I’ll show it to the boss”. Be very careful with overimportant managers whose budgetary authority is limited to purchasing one stale muffin.

Examples:

* Whose budget will support this initiative?

* Who, at the end of the day, will make the final decision?

* If you and I reach agreement today, can we shake hands and begin tomorrow? (The Handshake question)

Step 2: Asking about Outcome Based Objectives

This section establishes of the strategies of the project, that is, what exactly to achieve as a result of the project. It outlines the specific business outcomes. Unless these outcomes can be achieved, there is no point in investing in change. Also, clear objectives protect you from “scope creep”. Example:

* How would conditions ideally improve as a result of this project?

* Ideally, what would you like to accomplish?

* What would be the difference in the organisation if we were successful?

Step 3: Asking about Measures of Progress

These are the progress indicators. These can be progress reports or other objective and subjective indicators. Ask about both quantitative and qualitative improvement.

Example:

Here you discover how to measure progress and implementation. * How will you (the buyer) know we have accomplished the objecctive? * Who will be accountable for determining progress, and how will they do it?

* How will you be able to prove to others that the objective has been met?

Step 4: Asking Questions to Establish Value

This section establishes the exact projected value your intervention brings to the table. Without this section you have no basis of comparison for your fees. Enumerate each piece of value. Put a dollar value against every problem the project solves. Example:

* What does this project mean to you, personally?

* What is the difference for the organisation / customers / employees?

* How will this affect performance and productivity?

Step 5: Asking Questions to Establish Client’s Readiness

Organisations may be ready for a change, but people may not. You have to make sure that clients are willing to make commitments to putting in time, effort and money to realise improvements. Without this section the whole project can turn into a horror story. Your client loves you and your solution, but for various reasons s/he is not ready to move forward. Find out why. Check several issues around the client, like corporate culture, core values, overall client motivation, etc.

Summary

As a professional you are hired to improve your clients’ circumstances, so you should be paid for the new performance capabilities you build in your clients. If they choose not to use the tools you have provided, and nothing happens, that is fine, but you are still entitled to be compensated for the value you created, regardless of how much time it takes. You are not an outsourced labourer, who gets paid for manual labour. You are a trusted advisor. Check this method on a small scale first and see how it works out for you. You will enjoy more time with your family and higher income.

For more on fees you can request the author's FREE Booklet on fee-setting.”

About the Author

Tom "Bald Dog" Varjan helps service businesses to improve personal and organisational performance. Requests his FREE fee-setting guide "Why Most Service Firms Grossly Undercharge for Their Services?" by sending an email to booklet@di-squad.com with "booklet" in the subjectline.