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?

Photo Courtesy of a4gpa via Flickr

It’s ok. We all did it. When things got tough, our mindset got pretty tactical. We weren’t thinking about taking over the world anymore – we were thinking about making it through to lunchtime. Instead of looking for where we wanted to go, we started looking for how we could survive. Where once we were building our dream team, for the last year or so we’ve been holding onto whomever we can.

But the clouds are starting to break up, the wind is dying down and we are starting to feel a little better. It’s not all better – our bank balances are still a little lower than a comfortable level, customers are still pushing for better deals and demand is still uncertain–but it’s getting better, slowly.

The tactical work that we have been doing has made it possible for us to survive, but it’s not the work that’s going to help us to get healthy again – we need to start thinking some bigger thoughts, and dreaming again.

Tactical thinking is good for keeping things the same, for making small changes to keep us on a path – but during the “great recession” things have shifted, and unless we can step back from the day-to-day, assess the situation, and make a new plan we are going to miss the many opportunities out there. Whenever there are major shifts, opportunities are created. Change creates new market opportunities, and products and services have to be created that can meet those new opportunities. If we spend every day with our nose to the grindstone and our hand on the tiller, we are not going to do the THINKING that we need to do to find those opportunities.

Am I suggesting that you launch out in a new venture, or invest a ton of money in a new campaign? Not necessarily, but I do think it’s time to step back, do some review, and press the reset button on your strategy. That means taking some time away to review three key areas:

1. What does my competitive environment look like? What has changed for my clients and prospects? How is their mindset different than it was 18 months ago? What are they worrying about now that they weren’t worrying about then? Who else is in their ear?
2. How have we changed? What have we learned or developed while in survival mode? What have we jettisoned? How have our competitors and strategic partners changed? Where do our strengths lie now?
3. Based on our competitive environment, and our current situation, what things CAN we commit to that will start to move our business forward? What things can we try, experiment with, or test out that could be the next big move for our company?

Once you’ve answered these questions, you can dig in and make a plan – specific tactics that you can commit to that will make your dream into a reality.

Building a plan like this shouldn’t be work you do all by yourself, your team needs to start thinking big again too. I doubt that they joined your company to be a “survivor” or grow by 3% year on year.  They want to know that they are on a mission with you; and if they aren’t, they are going to start looking for someplace else to work.

What are you doing to think bigger?

Photo Courtesy "The Unamed" via Flickr

When I talk to business founders about why they made the leap to working for themselves I often hear them talk about the draw of entrepreneurial freedom. I sometimes reply with a lame joke about how entrepreneurial freedom means you can set you own hours, work any 100 hours of the week you want to… But the truth is that being your own boss does bring freedom; but that freedom means different things to different people.

To some Freedom means….

• Saying no
• Never having to worry about a merger, or buy-out making you “redundant”
• Being able to decide what your time is worth
• Being able to set your own priorities, tea party with the toddler on a sunny day, or time in the office
• Choosing who to work with, and being able to work only (or mostly) with people you like and respect
• Taking the vacation of your dreams while you’re young
• Being home for dinner every night

What does entrepreneurial freedom mean to you?

Sometimes when I have this conversation with a business founder it can be kind of a downer. They made the leap to have freedom, and they may have had it for a time, but they’ve traded some of that freedom for more success and business. Some of the work I do is to try to help businesses continue to grow so that the founders can get more of the freedom back.

Are you living the dream? What enabled you to stay with the dream, or what’s keeping you from living in the freedom you had in mind when you started out? I’d love to hear about it in the comments.

Photo courtesy of flickr.com/photos/yourdon/

Is this worthy of my full attention? I’ve been asking this question a lot lately.

It started when I saw a number of articles about the high cost of multi-tasking. There’s this study out of London that found “Those distracted by incoming email and phone calls saw a 10-point fall in their IQ – more than twice that found in studies of the impact of smoking marijuana”. Or this series from the New York Times about the dangers of parenting while plugged in which says that “feelings of hurt, jealousy and competition [from their parent's technology] are widespread”. Lastly there was Peter Bregman’s blog post at HBR.org in which he describes his process of giving up multi-tasking. Working with a single focus enabled him to make significant progress on important projects, reduced stress, and improved patience. This all sounds good!

So if the benefits of paying attention to what we are doing are high, and the costs of multi-tasking are severe, why do I keep trying to do things while I’m distracted? The sad truth is, I multi-task when I get bored. That’s right, if I’m  on a conference call (even with you) and the conversation strays to a topic that I don’t need to be 100% on top of, my eyes will flit to my twitter stream, or I might check my email (it’ only takes a few seconds, I won’t miss anything). When there’s a lull in our dinner table conversation; maybe I’ll check the weather for tomorrow… It’s insidious. It’s so easy to avoid even a moment of boredom that I will do it almost every time. The problem that the “escape” to technology poses is that instead of choosing what to do with that moment, I spend that time scratching my anti-boredom itch.  Do I need to know what tomorrow’s weather is? Are those updates in my twitter feed really that important? What if instead I listened to the conference call to see if there is something I can add? Or if there isn’t excuse myself to get something more important done, or redirect the conference call to matters that are truly valuable and engaging to everyone on the call.

When I flit to technology to easy my boredom everyone loses, I’m not present, I’m not giving my energy and attention to the conversation and if we all do it, then someone rambles on with no one listening, and they get no feedback that they are boring. Yikes!

This is why I’ve started asking the question, “Is this worthy of my full attention?” If it’s not I should move on, if it is I should pay attention. Nothing is worthy of my partial attention, nothing.

I need to be clear and set good boundaries, either this is worth my time or it is not.  But beyond that, there might actually be a value to being bored. Peter Bergman again:

“Being bored is a precious thing, a state of mind we should pursue. Once boredom sets in, our minds begin to wander, looking for something exciting, something interesting to land on. And that’s where creativity arises.

My best ideas come to me when I am unproductive. When I am running but not listening to my iPod. When I am sitting, doing nothing, waiting for someone. When I am lying in bed as my mind wanders before falling to sleep. These “wasted” moments, moments not filled with anything in particular, are vital.

They are the moments in which we, often unconsciously, organize our minds, make sense of our lives, and connect the dots. They’re the moments in which we talk to ourselves. And listen.

To lose those moments, to replace them with tasks and efficiency, is a mistake. What’s worse is that we don’t just lose them. We actively throw them away. ” (From “Why I Returned my iPad” on Peter’s Blog)

Is being bored worthy of my full attention? Sometimes it is.

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.

First get the Facts
There are always some facts in every deal, and we need to know the facts to be able to make a good deal.  There are facts that we know, but the other side doesn’t; facts that they know, but we don’t and facts that we both know.  The best deals are built by teams that have all the facts on the table, so sharing some of what you know (but they may not) can build trust and help us to reach a better agreement. We can’t share all our facts if they aren’t reciprocating, so try offering up one of yours and see if they will respond with one of theirs.

So for example, the longer lead-time in our proposal may be due to some turnover we’ve recently experienced. Sharing this could help alleviate concerns that we can’t deliver, or that this is a normal lead-time. It also could signal that we aren’t likely to drop the price because we have a good backlog right now. Of course it could create other concerns…

Next there’s the Story
Facts aren’t the only thing that influences our negotiation, there is also the story that we tell about the facts. Stories are about the emotions that the facts evoke. When we don’t have all the details (which is all the time in a negotiation) we tend to fill in the blanks with stories. The truth is that the stories are usually more about US than they are about your negotiating partner. So when someone doesn’t call back right away, we might worry that the deal is off, or that they are talking to someone else. These stories reflect our uncertainty and anxiety about the deal. It could just as easily be that they got distracted, or had a deadline on another project.

In our example our revelation that we’ve had turnover could initiate a story about whether our firm is stable. Why are so many people leaving? We may need to calm those fears before they run amok.

Lastly, there’s the Deal
We really have to get the facts on the table, and deal with the stories that we (and the other side) are telling about the facts to come to a compelling mutually beneficial deal. There’s lots of advice out there about how to perform the “horse trading” part of the negotiation. I have two tools that have really helped me. The first is a table that lists all the issues we are discussing (and yes, there is always more to discuss than just price) with a column for “their position” and another for “our position”.  It helps me to keep my eye on the big picture and understand where I can ask for them to give if I’m going to give in on an item that’s important to them.  It also helps me to keep track of how close we are to done; and how many items are left open.

The second tool is an intermediary. It’s so helpful to have someone who can help with the negotiation who won’t be around to service the account or work with the employee long-term. Sometimes you need someone who can deliver the harsh truth, or press hard for your advantage and in doing so they may ruffle a few feathers. That’s OK, once the deal’s done you can come in and play “good cop”, apologize, and go back to delivering exemplary client service, building a great team or otherwise creating good feelings for the life of the relationship.

So don’t let this time of flux catch you unawares. Find the facts, separate the facts from the story that’s being told and then get down to the business of making a deal.

How do you keep your head and get the deal done?

On top of that I fell into a bad habit. As the business hit it’s bumps I put my head down and worked harder. I have good people on my team, but instead of reaching out and asking for help, I hunkered down, communicated less and pushed harder. So as the challenges mounted I took a lot of that pressure on myself and that’s taken its toll.

By Friday I just didn’t want to be here, I didn’t want to make a call or write anything. I shuffled papers on my desk for a while before i realized that it was time to make some changes.

First, I checked my goals and surprisingly, I’m not doing that badly.  I got the book out, I’ve done 7 speaking gigs, I’ve tried some new pricing strategies, and started my recipe blog. I had taken retreats early in the year (but missed my last few) so I scheduled a retreat for the weekend to try to get some clear headspace.  Seeing all that had been accomplished felt good, there was more progress than I was recognizing.

But there were other areas where things are still not where I want them to be, so I took my retreat day and started making some plans. How are things going to be different. Not general plans (work harder!) but specific tasks and to-dos.  I loaded them up in to Omni Focus (which I had also neglected during this period) and it’s given me some renewed focus.

Lastly, I took some time to reconnect with my dreams. Why am I doing all of this anyway? Beyond the business, and the clients, what’s this all about? Looking at that big picture is helping me to find the joy in moving forward.

So I’ll be taking some long weekends this summer, and I’ve scheduled more fun into my weeks, but I’m also going to be more productive with the focused tasks in my to-do list.  I’m feeling a little better. I’m excited to get started with some new clients this month and spend more time with my team brainstorming and sharing the situation.

What do you do to avoid, or recover from burnout?