| There are many service professionals out there | | | | with a company, you are a partner. And advisor is |
| who offer a broad range of compensation | | | | an advisor, not a partner. The owner of the |
| strategies for their work, hoping that prospects | | | | company must give you a non-executive director |
| will find one of them more attractive than the | | | | position, so you have a say in company matters. |
| others and then they are more willing to engage | | | | Insist that you must be involved in every single |
| these professionals.While some of these | | | | decision and you have unlimited rights to inspect |
| fee-setting methods are good for certain | | | | the books. Remember, you are not afully-fledged |
| situations, some of them are plain duds and can | | | | decision maker but not a passive observer |
| land you in really nasty situations.So, let us review | | | | either.You also create an agreement that you are |
| here some pricing methods service professionals | | | | not responsible for anything that is going on in the |
| use, and we look at both the pros and the cons | | | | company, and you take no responsibility for the |
| of each method. Some methods are great but | | | | company's debt either now or in the future. You |
| the problem lies with their interpretation.Let's start | | | | just use your director position to make certain |
| with a common belief. Many professionals | | | | that some anal retentive cost conscious bean |
| guarantee results and try to use this guarantee to | | | | counter doesn't undermine your lead generation |
| entice clients from competitors. This is the same | | | | initiatives by cutting budgets. Let me know if you |
| as guaranteeing to your spouse that your | | | | need some help in this area.Equity/Stock PositionI |
| marriage is for life and nothing can end it except | | | | would avoid this method like the plague. Let's face |
| death.So, the essence is that we cannot promise | | | | it. Some 98% of all businesses fail before their |
| definite outcomes, unless we control every | | | | tenth year in business. So, if you enter a stock |
| aspect of the client relationship. And there are | | | | option agreement, you have only 2% chance of |
| just a very few professionals who can do that. | | | | emerging as a winner being rewarded for your |
| They are gravediggers, embalmers, autopsy | | | | expertise. I may not be a mathematical genius, |
| doctors, and other professionals whose clients are | | | | but even I know that if I have only 2% chance |
| fairly cold and fairly horizontal. When I was a | | | | of reaping the rewards, I had better not take |
| gravedigger and embalmer, I was in charge and | | | | 100% risk. It is just not a sexy ratio.Also, when |
| my clients were pretty passive. They gave me | | | | business owners offer you something in the |
| the right to make key decisions.Personally I | | | | future, they try to abdicate the risk onto you. At |
| believe it is unethical to guarantee outcomes when | | | | the same time, just take a quick look at the cars |
| you work collaboratively WITH clients.It may | | | | they drive and the homes they live in. They don't |
| work a bit better when you work as an | | | | want to sell their cars in order to inject some |
| outsourced labourer and are expected to produce | | | | money into their own businesses. They ask you |
| results FOR your client.So, let's see these | | | | to inject your own money as a "partner". They |
| fee-setting methods.Flat Negotiated Fee (Project | | | | are having a great time, while you are hoping and |
| Fee)In this method professionals usually calculate | | | | praying that you see some money for your |
| how many hours it will take to do the job and | | | | work.But then you could start the same business |
| how much you have to fork out on materials, and | | | | as a competitor, push that idiot out of the |
| quote a price accordingly. But from the client's | | | | market and then you keep 100% of the profits. |
| standpoint the "I run a team building workshop for | | | | It is a lot better deal.Especially high-tech leeches |
| you" is as useful as a chiropractic clinic en route to | | | | have been famous for this before the dot com |
| the gallows. Clients want to reduce talent attrition, | | | | blast, but even now. They know they can have a |
| boost sales (strategy) and the way (tactic) to | | | | great life using some venture money. We just |
| achieve it is improving team performance. But | | | | must make sure we don't descend to the |
| how you improve team performance is absolutely | | | | stupidity level of some "investors", and don't |
| irrelevant. If it is a workshop, be it a workshop. If | | | | invest our hard-earned money and talents in |
| it is removing some team members, that is fine | | | | these lunatics' adventures.But if you feel |
| too. If it is feeding them some pancakes, that | | | | passionate about what the company does, go for |
| works too. The means are irrelevant as long as | | | | it, but demand a non-executive director position |
| they are legal, moral and ethical.If you can say | | | | on the board. Again, accept no responsibility |
| that that let's work together to reduce annual | | | | against losses, but make sure your voice is heard |
| talent attrition by 25%, that is a valuable | | | | and you are involved to a certain extent in |
| proposition. Can you see the difference? If it | | | | running the show.CommissionsThis is a fixed |
| takes 10 minutes to remove some prima donnas | | | | percentage of profits on specific sales and it |
| from the team and improve performance, why | | | | sucks.Imagine that your efforts result in $1 million |
| the cricket would you bother to run a workshop? | | | | in monthly sales. Great. You estimate a great |
| The real performance improvement takes place | | | | commission cheque.Then comes the business |
| right after removing the troublemakers.You can't | | | | owner and announces that using this $1 million he |
| improve the overall performance of the fire | | | | wants to buy a new house and a new Ferrari. All |
| brigade by running workshops on the physics of | | | | in all, after all that hard work the $1 million is gone |
| fluid dynamics. Hey, they don't need to know that | | | | and you are there with pennies in your pocket |
| aspect of water.Since this approach is about | | | | because your commission is payable on profit.And |
| working hours, there is a tendency to include | | | | since you have no say in company matters, all |
| heavy reports and tonnes of unnecessary | | | | you can do is to grit your teeth, tighten your belt |
| memos in the agreement.Monthly RetainerThere is | | | | ready to face some starvation and look forward |
| a huge misunderstanding here. For many service | | | | to the next month, being terrified of the boss' |
| professionals, retainers mean a certain number of | | | | next whimsical decision.Besides all that, this |
| hours of pre-paid manual labour. However, I | | | | compensation method is highly unethical. It forces |
| believe that buyers use service professionals for | | | | you simply to sell more not to improve the client's |
| what they know, that is, brain power, and not for | | | | condition. It's short-term focused with no regards |
| what they can do in the form of manual labour | | | | for long-term strategy.Imagine that you go to the |
| (brawn power).Just imagine a financial advisor. She | | | | store to buy a simple computer for word |
| takes care of your assets for a certain annual | | | | processing, but the sales clerk is trying to sell you |
| fee, but if you try to convince her that "Hey, I'm | | | | a top-of-the-range all-bells-and-whistles computer. |
| too busy, here is some money, go to the bank, | | | | He doesn't care what you want or need. He cares |
| stand in the queue and pay off my VISA card, | | | | about what he needs: More sales to be able to |
| since I pay you anyway", she may recommend | | | | pay the mortgage.Some people may say they |
| you a check-up from the neck up in the local | | | | don't do this. Look, we are humans. If the road is |
| mental hospital.Also make sure you get paid in | | | | clear and there are no cops around, we all exceed |
| advance and provide unlimited access to you. You | | | | the speed limit. All in all, when the temptation is |
| also have to stipulate who exactly has access to | | | | there, we can easily fall for it. So, the best bet is |
| you. There is no point in charging one single fee | | | | to remove the temptation itself.Do you |
| and allowing a whole corporation to call you | | | | remember - from the movie The Exorcist - when |
| whenever they need your help.Again, your | | | | the young priest, Father Karras is preparing to |
| retainer is compensation paid to you for access | | | | meet the possessed girl, and Father Merrin, an |
| to your smarts and talents for a pre-specified | | | | experienced exorcist, warns him, "Fo not listen to |
| period of time. The retainer is not a pre-paid | | | | anything the demon says. He will mix lies with the |
| hourly rate that is drawn against as dispensed | | | | truth to confuse you."The commission structure is |
| billable time. You are not a human vending | | | | the same. It mixes so many lies into the equation |
| machine.There is no project in retainer | | | | that the good intentions just vanish. Just keep |
| agreements. There are no specific objectives. The | | | | away from commissions.Oh, one more little thing. |
| emphasis is on having access to your smarts and | | | | As a service professional you are supposed and |
| counsel. The value of the retainer agreement is | | | | expected to be unbiased. When your |
| not a function of your physical presence either. It | | | | compensation is directly attached to the outcome, |
| is the client's responsibility to contact you | | | | you will be everything except unbiased, thus you |
| whenever your advice is sought.Fixed Fee With | | | | automatically become useless.It reminds me of |
| Exposure OpportunitiesThis is when clients say | | | | the police force in the old communist Hungary, |
| "Although we pay you only peanuts but you will | | | | where the cops were paid bonuses based on the |
| get millions of dollars worth of media exposure." | | | | fines they collected. Guess what? They ruthlessly |
| This is retarded.Imagine going to Safeway | | | | fined every warm body with a pulse. And the sad |
| (Grocery store chain in North America, the UK | | | | thing was that they made up rules on the fly as |
| and maybe elsewhere too) and refusing to pay | | | | they found it most beneficial to themselves. And |
| full price, arguing that "I offer you exposure by | | | | when the poor victims tried to argue their sides |
| carrying my groceries in your shopping bags". | | | | of the story, the cops often just beat up their |
| What do you think would happen? The cashier | | | | victims. It happened to me a few times too. Then |
| would call the nearest lunatic asylum to book me | | | | they forced me to sign a document that I had |
| a place.Push back to buyers and tell them that | | | | fallen down the stairs. Then they dumped me in a |
| unless they only want "exposure to value" not the | | | | dark alley and that was it.BarterIn this setup you |
| value itself, they had better cough up the dough. | | | | are supposed to exchange services, but there is a |
| Imagine, you go to a restaurant starving, order | | | | problem here.Let's say that you are a private |
| teriyaki elephant tail, and the waiter does a nice | | | | tutor and your client is a car mechanic. So you |
| PowerPoint presentation on how teriyaki elephant | | | | teach his kid and he fixes your car. Is that fair? |
| tail is cooked. Then he happily brings you your | | | | On the surface it is. But let's dig a bit deeper.The |
| discounted receipt. You have just been exposed | | | | mechanic fixes your car, which is a rapidly |
| to value but did not get it. You are still starving. | | | | depreciating liability anyway.However you are |
| How would you feel? Still starving? Then watch | | | | tutoring the mechanic's daughter, so she can get |
| the presentation again and pay the discount rate | | | | better grade, she can go to a better university, |
| again.You offer real value, so you must only | | | | she can get better recognition as a professional, |
| accept real dough. Wherever in the world you live, | | | | so she doesn't have to slog her way through all |
| I find it hard to believe that the reining currency is | | | | the drudgery her parents went through. All in all, |
| called "exposure". But check it with your | | | | you offer the mechanic's greatest asset (her |
| mortgage company. I may be wrong.Cost-Based | | | | daughter) an opportunity to become all she can |
| FeesThere is a problem here. In this braindead | | | | be and achieve more then her parents have ever |
| situation you are supposed to be paid based on | | | | achieved.Is this barter equal? Not exactly. Who is |
| your costs. As a service professional, you can | | | | offering more value in this equation? I vote for |
| offer advice worth of thousands of dollars in ten | | | | the tutor in spite of the fact that teachers earn a |
| minutes at very low costs. So, why should you | | | | tiny fraction of what car mechanics earn.I know |
| be penalised just because your overhead costs | | | | people who barter their professional services for |
| are so low?When you were in the phase of | | | | computer parts, groceries and other tangible bits |
| collecting your knowledge, you paid both for your | | | | and bobs. That is, they turn their own services |
| schooling and your education. (The older I get the | | | | into cheap commodities by bringing them down to |
| more I realise the difference between the two.) | | | | the level of a bag of potatoes or a hard drive.Can |
| Nobody came to you saying, "Let me help you to | | | | you imagine the lawyer saying, "Replace my |
| pay your tuition because a few years later I want | | | | computer's hard drive and in return I get your |
| to hire you and need you to be as knowledgeable | | | | uncle out of prison." Something is seriously wrong |
| as possible".Contingency FeesThe mistaken idea | | | | with this picture.Hourly FeesThis is concentrated |
| behind this payment method is that every dollar | | | | stupidity of the highest degree. It is basically giving |
| your expertise brings to your clients' businesses, | | | | your life away piecemeal. And I don't care how |
| they pay you a percentage.Once I had a woman | | | | high your hourly rate is, it is just plain negligent to |
| who wanted to hire me to help her with weight | | | | tie your income to such a finite entity as time. If |
| loss. (I am a certified personal trainer and coach | | | | your value is simply the function of the time you |
| some businesswomen over weekends on fitness | | | | spend in your client's company, you may just turn |
| and lifestyle issues. You can call it a paid hobby.) | | | | into a lapdog, and at least you will be more highly |
| But instead of paying me my normal fees, she | | | | appreciated.There are so many problems that it is |
| wanted to pay me for the lost weight. I told her | | | | just hard to express in one short article, but here |
| that it was up to her how well she would adhere | | | | are some.First here is an exercise for you. |
| to the programme I design for her, and she | | | | Average North American consultants invoice |
| would start shaping up accordingly. She insisted on | | | | some 1,144 hours a year. Multiply this number by |
| the pay for performance (lost pounds). So I had | | | | your hourly rate, and what you are staring at is |
| no option but to tell her that I could push her to | | | | the absolute maximum you can earn.Per Diem |
| the brink of certain death to achieve maximum | | | | fees......inflict an artificial upper limit on your earning |
| weight loss, but that would not achieve what she | | | | potential...make your income subject to "going" or |
| was seeking. Although she saw the point and was | | | | "competitive"(ly low) rates...present you as an |
| willing to accept my normal fees, but I decided to | | | | expense, an impediment...damage your market |
| reject her as a client. A troublesome prospect | | | | positioning and create a space for price |
| most often becomes a bat out of hell (hello | | | | objections...force clients to make too many |
| Meatloaf!) client.How stupid do you think a mother | | | | budgetary decisions, and create too many yes/no |
| would be if she paid a babysitter for the | | | | situations...do not require your clients to fully |
| poundage of flesh she has to babysit? Just a | | | | commit to the project, because they know they |
| thought.Business owners all over the world are | | | | can end it anytime...lock you into a "commodity |
| pounding on their chests that they have no | | | | trap". You are just one of the crowd....take your |
| money to waste and they only pay for | | | | focus away from creating and delivering value |
| performance. This statement is also bullshit. They | | | | because you always try to sell more deliverables |
| have already wasted a boatload of money on | | | | and tasks regardless of improvement in the |
| their own stupidity and underperformance, called | | | | client's condition.SummaryThe way I see the |
| "figuring it out", instead of hiring some help.Far too | | | | situation is that it is me who takes a risk by |
| many business owners call in external advisors | | | | running in my own business. I am willing to take |
| too late. Just imagine. What is the point in hiring | | | | this risk knowing that I am the owner and the |
| the best ship consultants to save your sinking ship | | | | ultimate decision maker of this business.Whatever |
| after she hit an iceberg and is already 9/10 under | | | | happens in my business, I am single-handedly |
| water?My view on contingency payment is that I | | | | responsible for the results.But while I am willing to |
| don't want to take 100% risk and then be | | | | take this risk in my own business, I am not willing |
| rewarded with a 10% of the rewards, while the | | | | to assume risk in other people's businesses. Yes, I |
| business owner is having a great time, knowing | | | | guarantee my work but I cannot guarantee |
| that she abdicated all the responsibility to an | | | | results, simply because I am not the decision |
| external helper.This also reminds me of how so | | | | maker.Here are some questions to consider:Can |
| many professionals live their lives. They are willing | | | | military generals guarantee victory? No.Can airline |
| to sacrifice their own health for the sake of | | | | pilots guarantee safe arrival? No.Can surgeons |
| chasing more business, and from their 50s they | | | | guarantee survival for their patients? No.Even |
| spend all their hard-earned money on remedial | | | | Harvard Business School cannot guarantee that, |
| measures to re-build their health. Does it work? | | | | after completing their MBA programme, you will |
| No. You simply cannot put in what is not there. | | | | have a guaranteed position at McKinsey & Co. or |
| Once your health is gone, it is gone forever. It is | | | | any one of the large accounting firms. But I have |
| so simple.All right, business owners may cry that | | | | also heard that you have to pay the - obscenely |
| they are only willing to pay for results. Then how | | | | expensive - tuition in advance with no guarantee |
| come that they have been paying themselves for | | | | for getting a job at all. How is that?As a service |
| years and years for their own mistakes and | | | | professional, all you can do is to bring a lot of |
| underperformance? Maybe they should pay back | | | | your past experience to your engagements to |
| all that money and now there is money for a | | | | improve the client's condition. The client must take |
| competent advisor.This method doesn't work in | | | | responsibility for getting the greatest possible |
| consulting, which is all about collaboration. It is | | | | result from your advice.In my view the best way |
| about WE create something amazing here, not | | | | of setting fee is based on perceived value. Yes, |
| YOU do this and I do that. The synergy lies in | | | | you can stick a price tag against tasks |
| "we" not in "you" and "I".But for example if you | | | | (conducting workshops) and deliverables (business |
| do lead generation FOR a client and you are in | | | | plans), but they are just that, prices. Just as |
| 100% control of the whole lead generation | | | | beauty is in the eye of the beholder, value is in |
| process, then contingency may work out. | | | | the eye of the buyer.So, everything you do |
| Nevertheless, you still have to demand a certain | | | | should revolve around perceived value as received |
| "setup" fee payable in advance. Also note that | | | | by the client. Hint: It does not make 20 times |
| you don't get paid for the sales, but you get paid | | | | more money to make a Ferrari as it takes to |
| for the sales leads. Converting those leads into | | | | make a Ford.Ford sells four wheels, some |
| clients and customers is not your problem.If you | | | | upholstery, an engine and a radio for $20,000, |
| are a DJ and play a popular song, you have to | | | | while Ferrari sells success, style and prestige for |
| pay royalty on the song even if the whole room | | | | $400,000. Go figure.Organisational Provocateur |
| is empty. It is your responsibility to bring in people | | | | Tom "Bald Dog" Varjan of Dynamic Innovations |
| with pulse and money not the musician's.The | | | | Squad helps providers of professional services to |
| other place when contingency compensation | | | | achieve the income and lifestyle levels they desire |
| works is joint ventures (JV). However, if you JV | | | | through high-trust high-impact client relationships. |