Fixed Price, No Haggle

We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

There are three methods that I’ve seen clients use and each has their advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at charging for production.

Not charging for time

At some point, most service firms decide they need to find another way to charge their clients besides hourly billing. They can do this by defining the beginning, middle and end of a project, or by using some type of retainer/fixed-monthly-fee arrangement.

The idea here is that a client has an easier time determining the value they will receive from a project. So, instead of working out what it will cost you to complete a project, you can calculate what value the client will receive and see if we want to do this work for that price. Project pricing then provides incentive for the service firm to complete the work at a value that ensures the client will earn a return.

In order to do a good job of creating the project plan (which is critical to determining whether we can deliver the project at a price that represents a good value to the client) we need to have a very good understanding of the state that the prospective client is in. If we agree to a project fee, and then find out that the client doesn’t have much of the basic information available that we need, then the cost for the project can skyrocket; but the compensation is fixed (bad deal). So whenever you are planning a fixed fee project it’s imperative to have an “assessment phase” on the front end, where all the inputs to the project can be gathered and you, and the client, can clearly determine what needs to be done, by whom and with what result.  This process is usually too extensive for the service firm to do for free, but can be done for a reasonable (fixed) cost.

When we charge a project fee we preserve the upside (if we finish quickly we earn more money) but accept some downside risk.  Of course negotiating change orders as the project progresses can mitigate that. One of the biggest advantages of project billing is that it requires the advisor to constantly be communicating with the client about how the project is going, warning them when it could be getting off track, and identifying risks and mitigation strategies. This is also the major downside to this payment mechanism. It requires a skilled account manager/project manager to stay on top of changes in scope and negotiate associated changes in payment.

If you charge a retainer (e.g. a fixed monthly fee that represents the expected value that the client receives) you may not get paid for every hour although not every hour you spend on a project creates value. So, sometimes you will have to over-deliver in order to deliver value, and other times you will deliver TONS of value in a few minutes and therefore be able to push more work out into the future and make more money per hour. In most of the firms that bill this way, they schedule a list of deliverables to be completed this month, and have some forecast for what might be completed in the coming months, but it retains flexibility to use the brain of the advisor in any way that is needed. This works best for smaller firms or where the client is “renting” the advisor’s brain. The advisor remains in control of the “effort” they are delivering (you can always set deadlines in the next month) the client determines if that “effort” produces a good value. Again you need to be in constant conversation with the client about what value they receive to ensure that you are meeting their expectations.

Have you tried project or retainer billing? What has worked or not worked for you?

Each method of billing for services has  advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at charging for time.

Many firms start out by charging for their time because it’s easy to track, it ensures that you make at least some money for the work you do, and few clients will argue with time-based billing (as long as the rate isn’t too high). Hourly billing is ideal in a situation where neither you, nor the client, have a good way to predict what needs to be done to accomplish what they need. And lets face it, when we were getting started that’s exactly the situation we were in!

After working this way for a few months (or years) you may discover a few problems with time-based billing.

1. If things take too long, you can’t usually charge all the time (some of it gets “written off,” effectively lowering your hourly rate). But if things go really well, and you brilliantly get something done in half the time, you can’t charge more. This is the “heads they win, tails you lose” element to hourly billing. Some clients go further by mandating that you bill hourly against a cap or maximum project fee. This is the ultimate set-up for they win (if you are fast and efficient), you lose (if you run into a roadblock or things don’t go as planned).
2. Sometimes you work extremely hard all day on a project, and for whatever reason the client doesn’t see the value in it. Other times you are daydreaming while waiting for a stoplight and you have a breakthrough idea that is worth a mint to your client. How do you bill for either of those events? Hourly billing does a poor job of aligning payment with value.
3. When you bill for time, clients avoid spending time with you. This is not a good thing. If you want to be a trusted advisor for your client, you want them to call you with challenges and opportunities as they come up. That way, you can have more influence and discover additional projects and ways that we can help them.
4. The better you get at things the less you earn, so you have to raise your rate. This is okay if you are able to hire cheaper resources to do the more mundane work. But it often results in pushback from the clients about your rate. “Why am I paying $350 an hour for you to do that?” Again, more time gets written off.

So, the upside to hourly billing is that you make “something” for all the work you do, but as you can see, write-offs erode that value and in trade you have clients who don’t want to talk to you. Further you lose the potential upside of those brilliant ideas you have that don’t take any time. In order to make money you have to give time.

My main objection to hourly billing is that it shifts the cost risk from the service provider to the client, and in most situations the service provider is the expert! You should have a good idea of how long it will take you to complete the work and what value the client will get from the project. You are in the best position to decide what you need to earn and what they should be willing to pay. If your not, you need to be (maybe an assessment phase could help?). If you are the expert and you know (approximately) what it is going to cost and (about) the value the client will realize for your work, then hourly billing really does a poor job of aligning the client’s needs with the provider’s needs.  In fact, it puts you at odds with your client. Your client wants work done quickly, and expertly. You want to take more time, and explore every option.

How has hourly billing worked for you? How has it worked against you?

Photo courtesy Dave Dehetre via Flickr

This is Part Two in a series of posts about how service firms bill for their services following yesterday’s introductory post. From hourly billing, retainers and project fees to alternate billing methods, We will be looking at each method and its strengths and weaknesses, and also some alternatives.

But before we get into comparing these method, let’s first review one billing method that every service firm should use; the assessment phase. For most service firm engagements, the beginning is usually the toughest. You have a pretty clear idea of the services you offer and the value the client should receive, but at the beginning it’s a little fuzzy to understand the totality of the client’s situation, their capacity, and how much value they will likely gain from your services.

Your clients have a similar issue. They know their problem intimately, but they don’t always understand your services, how you work, what you will require from them, and the results they might achieve. Further, neither of you knows what it will be like to work with the other. This gap in understanding prevents a lot of service work from being sold. The solution is an assessment.

In an assessment, the service provider agrees to provide a small amount of value (usually in compiling the data and framing the work to be done). This should be something that provides real value for the client, but not something that “solves” their problem. The service provider spends substantial time and effort in this stage to learn the business and situation that the client is in. During this phase, I like to say the client and service provider are “dating.” At the end of assessment, the service provider knows in much greater detail what the client needs, what assets they have to work with, what obstacles there are to overcome and what results are achievable. The client knows better what their situation is, how trustworthy and reliable the service provider is, and they may gain a more realistic view of the outcome of a longer engagement.

This assessment works best when it’s short in duration and scope, and priced low enough that it’s a “no brainer” for the client. This sets the stage for a more in-depth and credible proposal for the longer project, and increases the likelihood that the client and service provider will agree on the value of the work to be accomplished.

An Assessment phase lowers the risk for both the client and the service provider by helping each to more clearly uncover and understand the strengths, weaknesses and capabilities of the other. They also mitigate many of the risks and weaknesses of the pricing structures we will address in the next several posts.

Do you use an assessment phase in your work? What are the benefits? What are the risks?

Ideally, clients and professional-service firms would both like to have some kind of system that ties fees to the results delivered. The client takes your advice, the advice works, the client makes lots of money – and they, in turn, are happy to pay you a lot of money. I mean, wow, it works for everyone! Unfortunately, this isn’t as easy as it sounds. More often, the client waters down your great idea, their team modifies it (or, in many cases, they just ruin it), and the market affects the result. In the end, you can’t tell exactly what effect you had on the business or the project’s results. So, if you charged for end results, you wouldn’t get paid for the work you did … and that’s a problem!

But, the concept of clients valuing your work, and you getting paid for that value, is every professional-service firm’s goal. So, how do you do that?

If you know me you know that I have a lot of ideas on this issue. I started writing a blog post on it and it turned out to be enough material for 4 posts (or maybe 5, we’ll see). That’s OK, because there’s a lot of ground to cover here, I’ve written one post on each of the three most common billing structures (hourly billing, project or retainer billing, and alternative billing), their advantages and disadvantages, and where each might have a place. I’m putting up one per day this week so stay tuned.

In the meantime, what challenges do you face in how you charge your clients? What methods have worked best for you?

At the same time, businesses that cut staffs, salaries and hours are starting to see demand return. As it does, the reduced staff is overworked as they struggle to deliver goods and services with the same level of service and timeliness that the clients expect. Clients are beginning to notice that the company is not as responsive as it used to be.

Business owners are caught in the middle, unsure that the demand is “real.” They hate to hire back more workers, but their teams are stretched and tired. They feel unappreciated and restless. And yet, the business needs more production.

I am seeing this more and more. Just as sales are starting to pick up, a key person jumps ship – the competition just gave them a 20 percent raise and a promotion. Now, the company is forced to serve their customers with a skeleton staff, without their best person, all while having to recruit a replacement. It couldn’t get any worse!

If you find yourself in this situation, there are a few things you can do.

1. Appreciate the team you have. If you are still on reduced hours or haven’t restored your pay cuts, do it now. Other companies have not only restored what they took away, but they are hiring new team members and they are looking hungrily at your people. But just giving back what you took away isn’t going to gain you much loyalty. You need to do more. Are there key employees who have really stepped it up when you were short handed? Are they ready for a promotion and a raise?
2. Be on the lookout for good talent. There is still some good talent available, but it’s going fast. Do you need to backfill some experienced talent? The time is now.
3. Put some fun back into your workplace. Have a party, find a way to say thank you to appreciate those who stuck it out with you. What about movie tickets, an extra day off or a day at the ballpark with the families?
4. Fill those holes. If you are experiencing defections, this is a time when getting help from a recruiter can really pay dividends. There are still lots of candidates and you don’t have time to sort through 200 resumes to find the 20 good ones. Get some help.

Those are some tangible things, but it’s also important to address the intangibles. When the economy went bad, some of us tended to “hunker down” in our offices or we were on the road trying to sell something. Our people felt disconnected at a time when they really needed to know what was going on. If this happened to you, it’s time to reverse the trend. You still need to be in front of the customer but your people need you too. They need to know you are looking forward, that you have a plan to get the company back to a place of strength – and that you can talk about that with them. Get back to having company meetings, reviewing the numbers with them and generally including them in the process of rebuilding and moving forward.

It may be that the recovery is as difficult as the fall, balancing the increasing demand with increasing costs. But putting in some time to make sure your people are happy and content will ensure that you are going into this time with the strongest possible team behind you.

Image courtesy of jean-louis zimmermann via Flikr

When you are in a service business and you are selling your knowledge, talent and creativity a big hurdle you have to overcome is skepticism. How does the prospect know that what you have to offer is really relevant to them and their situation? We’ve all heard it, “My business is different…” (but we know it’s not, right?) How do they know that you can help them. Unfortunately, you aren’t the most credible source of reassurance for them – since you stand to gain financially, they assume you will tell them all about how credible and reliable you are. It’s much more powerful to demonstrate your expertise than it is to talk about your expertise. This is why case studies, testimonials and articles are such powerful tools for service firms. These are situations where you aren’t directly selling, but you can help people to understand who you are, and what you are all about. They are opportunities for your prospect to get to know you before you even meet them. If they find you relevant to the challenges that they are facing; if you are credible in the advice and solutions you offer, they will believe that you can help them.

Seven years ago I started writing an email newsletter about leading and growing your business. When I first started out I had a backlog of ideas I wanted to write about, but as time went on I had to work harder to find material. Until I realized, any time I’m having conversation I’m having with a client or prospect for the second or third time, is a topic that I could write about. These are the things that my clients are dealing with now, so other business owners who are in the same situation might like to hear those things too! You can’t get more topical or relevant than that!

Since then my newsletter has been one of my best sources of leads. Nearly every lead or referral that comes from the newsletter says the same thing, “I swear you are writing about my business.” I don’t have to listen to all the reasons that their business is different, they know I can help them and we can just get started.

If you are doing a good job of writing material that is relevant to your audience it should also attract a search audience. When you solve one person’s problem there are likely thousands of others out there with that same problem. Writing a case study or and article describing your advice or solution should attract many more who are searching for that same solution. These are leads that are coming to you that you haven’t done much to attract, and they are coming knowing what you do and how you do it; they are pre-qualified to be looking for what you do! The only thing that’s left to decide is price. That’s a pretty good lead.

Once you’ve been writing articles or blog posts for a while, you can start to reuse that same content. Take 4-5 popular blog posts and turn them into a speech or presentation. Create a short video with some of the highlights from a popular post and upload it to YouTube. Or gather a larger number of articles together to form the basis of a book. This kind of content, that’s relevant to your target audience, reveals that you know their challenges and opportunities and presents your opinion, your angle on the potential solution has got to be the most powerful form of marketing for any service business.

If you want to hear more about this topic, I’m part of a panel discussion on June 10th where Andy Crestodina and Kevin Masi and I are going to each talk about our takes on how this kind of content strategy can build your business. To find out more, or to register visit: contentstrategy.eventbrite.com I look forward to seeing you there.

When the time comes when you have really given up on one of your team members, you know it’s time for them to go, that sense of dread starts to set in. Maybe you are dreading the actual conversation, or maybe you are dreading having to search for someone new, but we all tend to procrastinate having this conversation. To Jerry’s credit he didn’t – as soon as possible after the season ended he sat down and had a conversation with Vinny – and we should too. Any time that you spend avoiding the conversation is only going to make it worse. More time would have just left Vinny hanging in uncertainty and a cloud over your head.

Once the decision has been made, have the conversation. The conversation you are going to have should be brief; “I’ve made a decision, we are going in a different direction. Let me review this paperwork for you about what this means for you…” This isn’t a time to recount what went wrong, or a list of their failings. To do that just invites a conversation and a debate, when in fact you are delivering news. If they want to go over reasons for your decision offer to make an appointment next week to sit down and do that, but the purpose of your meeting is to inform them of your decision and it’s implications (e.g. turn in your keys, your health plan is… Your severance is…) By all accounts Jerry didn’t do this, but wanted to rehash all that lead to this point. As a result Vinny made his pitch for why he should stay, when in fact the decision was already made that he would go. This is a waste of everyone’s time. Just deliver the news and move on.

Helping your employee to move on should be a key part of the goal of your conversation with them. They are fired, that’s a fact, and no amount of rehashing (with you or in their own head) is going to change that. In the Bull’s situation any time that Vinny spends trying to defend himself, or recast the story of the firing is wasted time. He needs to concentrate on where he will be coaching next season; and the Bulls should do everything in their power to make that happen. This is why some companies will supply outplacement, the outplacement counselor’s job is to move the employee through the transition as quickly as possible. I thought Gar forman did a great job of not dwelling on what was wrong with Vinny and instead looking at what the Bulls need to do going forward. He did a great job of that and so should you.

Terminating an employee is a bad day for everyone; and no one wants to be an “expert” at it. But if you are going to lead a team, enforce standards and build an environment that fosters success for everyone you need to be ready to have conversations that eliminate the poor performers. If you do it well it’s not less painful, but the pain doesn’t last as long for you, or your employees.

Image courtesy of Goldmund100 via Flickr

Once you’ve been doing something for a while you start to figure out what works and doesn’t work.  You know when the “conventional wisdom” is right and when it’s bunk. Having tried all the “short cuts” you can tell people when they really save time and when they don’t. Experts have found not just good ways to do things but also good ways to explain them to other people.  Experts, if you get them talking about their areas of expertise, are interesting.

Moreover, the best experts have opinions that are different, that stand out. No one asks you to come to a conference to espouse the same ideas you can find in a Marketing 101 textbook. You get invited to speak, and people read what you write, when it’s something contrarian, unexpected, or contains particular insights. It comes back to being an expert. Experts know something that not everyone knows; and they have the courage (almost a need) to share that knowledge with others.

This is why writing and speaking (and increasingly video) are key parts of every professional’s business development toolkit. People want experts, people who know that they know. The best way to demonstrate that is to show up somewhere (either in person or virtually) and demonstrate your expertise. Talk about what you know (in person or on video), write about what you know (articles, books, blogs, etc.) show others that you know what you know.

Doing this over and over not only sharpens your skills; makes you more sure of what you know.  But it also helps you to fine tune your ability to communicate it.  You find better illustrations, you develop new ways to answer questions or overcome challenges. You become a better expert.

So many professionals see speaking and writing as a big chore. “If I’m such an expert why do I have to demonstrate it all the time. If I’m good, work will come to me.” But speaking and writing is more than business development, it’s also personal development. Honing your message and sharpening your presentation doesn’t just attract clients, it makes you better as an advisor.

Photo Courtesy Stuart Pllbrow

As we saw in a prior post, Budget problems abound.  Our Government budgets are in deficit, many personal budgets are in deficit, is it any surprise that our business budgets may need some attention too?

Budgets involve much more than a once-a-year commitment. For real value, you have to review it every month. Now that we have a couple of months of data to look at, let’s go over how you might do that!

First, let’s look at where  you hit (guessed right) and where  you missed (guessed wrong)? The difference between what you budgeted and your actual results are known as “variances”. Run your finger down your Income Statement and look at what categories had the highest “variances”. (Better yet create a budget report with budget in one column, and actual in the next column, then subtract Budget from Actual, the result is a variance column.) What happened here? Sometimes it’s just timing, an item that only occurs once or twice a year and it showed up all in one month, but you budgeted a little each month. Other times you will find places where your spending is just a lot higher (or lower) than you thought it would be. Why is that? What changed? You need to think about changes you want to make to get back in line with your budget.

Next let’s look at the important numbers. Are your sales over or under budget? Again, why? Did you get more leads than you predicted? Is that going to continue, or was it due to some kind of one-time event (trade show or promotion)? Are you closing them at about the rate you expected? Is your average sale higher or lower than you thought?

If your sales are under your budget, then you need to make sure that your expenses are under budget too in order to protect your profits. Do you need to reduce expenses to align them with your sales performance? This is always a judgment call. How do you decide that it’s time to make cuts, or more sales are right around the corner? Evaluating your budget and results monthly forces you to look at the data and decide. If month after month you are behind, it’s time to make some cuts.

Now that you’ve reviewed your major categories, let’s look at other assumptions. Are you thinking about hiring new people? Are the sales there to support new hires (or leads to support a new sales hire)? Thinking about more office space, or investing in new equipment? What are the key indicators that tell you that those investments are needed? Are you hitting those numbers consistently? Then invest with confidence.

If you are consistently looking at your numbers, and really looking at why they are better or worse than your projections, you create a frame for any decision in you business. It can even set your priorities. If sales are behind, you need to address that. If they are ahead, but profit’s not, then expenses are out of control… You get the idea.

Your budget provides you a measuring post by which you can compare your actual results and decide how you are doing. It also provides you with a tool to play “what if” and decide if you like the results.

What numbers do you look at that tell you how your business is doing?

So what’s wrong with this picture. Zappos is a high profile account with a $7M budget, not a huge client, but a sizable budget. They send out an RFP and over 100 firms respond! Zappos narrows it down to 22 agencies that will each give 90 minute presentations. Let’s say that the average RFP response takes the equivalent of 40 hours to prepare. Does that seem like a lot? Look at this quote from the Adweek article:

“One shop that failed to advance submitted a reply to the RFP that totaled nearly 80 pages. Ten to 15 agency staffers worked on the submission during a two-week span, including three creative teams, said a top executive at the shop.”

So using my guess of 40 hours at a cost of $100/hr that’s a cost $4000 per RFP response, or $416,000 worth of agency time (remember there were 104 responses) just to get through the first round. Now they are bringing in 22 agencies for a 90 minute presentation, and likely a 3rd round after that. It wouldn’t surprise me that when all is said and done these agencies collectively spent over $1 million to win $7 million dollars in business. This is crazy.

But let’s look at it from the side of one agency. If I have some spare bodies that aren’t busy, why wouldn’t I put 40 hours into pitching Zappos? Well, let’s assume that all 104 agencies have equal shots at the business (a crazy assumption, most that don’t already have a relationship have a much lower percentage) that means that the likelihood of any one agency getting the business is less than 1%. Are you telling me that there is nothing better you can spend your time on than a pitch that has a 1% chance of success? That’s like saying that there’s nothing better I can do with my money than buy lottery tickets!

But we still haven’t looked at this from Zappos side, the client is poorly served in this equation too. They received 104 responses, they can’t possibly review each of them with care. (That’s the source of Ignited executive creative director Mike Wolfsohn’s gripe.) If they spent 30 minutes looking at each that’s 52 hours of review, per person doing the review. Now what criteria will those reviewers use to scale and grade these submissions?

When you hire a service firm, of any type, there is a lot of trust involved. You are hiring this firm because they are (presumably) better at this than you are. The client needs to trust that the service firm his their best interests in mind and maximizes their effectiveness. But how to do you evaluate whether a firm is trustworthy in an RFP process? The RFP process is supposed to allow apples to apples comparison, but does it? The more standardized you force the responses to be, the more all the providers look the same, so price becomes the differentiating factor. But is that really the most important factor in the decision?

RFPs are broken, we just need to decide not to play.

You may be asking, “What are my alternatives?” Stay tuned, that’s the subject of a future post.