The Case for Value Based Fees in “Stubborn” Professions

This is an article I published recently in Rob Nixon’s “Proactive,” June 2009, in Australia (info@RobNixon.com).

The Case for Value Based Fees
In the “Stubborn” Professions

Alan Weiss

Value-based fees are becoming increasingly popular with consultants, since I pioneered the movement in the early 90s with the publication of Million Dollar Consulting, now in its fourth edition, and reinforced with Value Based Fees a few years ago, now in its second edition.
A “value-based fee” is a fee that is based on your contribution to the results the client achieves. Specifically, when asked about the basis for fees, I reply, “My fee is based on my contribution to the value you’ve stipulated you’ll be receiving, providing an excellent ROI for you and equitable compensation for me.”
That’s how partners treat each other.

Why doesn’t everyone see the light?

If you leave $50,000 “on the table” each year because you’ve failed to charge that equitable compensation, in ten years you’re a half-million dollars poorer, and that is revenue you will never, ever recapture. If that number is $100,000, then you’re a million dollars poorer.
Moreover, billing based on hours, days, or any time unit is inherently unethical because it is in conflict with the client: The client is best served when issues are resolved and improved quickly, but the service provider is best served when the time involved is lengthy. Solving a problem or improving a condition in a half-day is extraordinarily valuable for the client, but impoverishes the service provider who is billing by the time unit.
Time-based billing is based on the inherently ridiculous notion that one’s time is valuable. Consequently, an attorney diligently tracks every six minutes (which, in turn, takes another minute!) as if that time looking up an address or reading a letter is as important as the time convincing a jury or achieving a settlement.
In the US in the past year, the average attorney was earning less than $100,000. That’s after four years of undergraduate school, three years of law school, and the appropriate start-up, and with a ton of debt. (The average general practice physician was earning $125,000, and the average surgeon—non specialist—was earning about $200,000. These are not extraordinary salaries by current standards. I earn seven figures as an independent consultant working out of my home 20 hours a week.)
Why is it that all service providers don’t move toward more lucrative and equitable fee standards?

Origins and self-worth

One problem is that the origins of accounting firms (and many consultancies grow out of accounting operations) are based on hourly charges. Partners have fought their way up through that structure, and are not about to change it once they are in the corner office or sharing in major bonuses.
But what stops smaller, boutique shops or even solo practitioners? I’ve observed that it’s usually a function of poor self-worth. When you don’t consider yourself a peer of the buyer and you don’t establish a relationship of equals, then you tend to rely on less personal representations of worth: methodology, hours, materials, reports. The problem is that everyone does that, so it makes you a commodity subject to tremendous price pressure.
After all, if you’re going to audit my books, and so is she, then why shouldn’t I simply find the cheapest hourly rate? When things are reduced to a commodity, we lose sight that all service providers aren’t equal. Take the attorneys: Some charge much more by the hour because they have better reputations, win more cases, went to better schools, have more support. Yet they simply raise the hourly rate rather than charge based on results. (With the exception of contingency fees, where attorneys try to circumvent the limited hourly billing by taking a “piece of the legal action.”)
Accountancies and accountants bring varying value and can differentiate themselves from the competition IF they take the time to establish peer-level relationships AND charge based on their differentiated value, not the same hour that everyone else is using.

What to do?

Take a tough look at your practice. Understand the potential value you uniquely possess, and then help the client or prospect to understand the value of meeting the objectives the two of you will work to achieve. Treat every new client this way, and try to transition every existing high-potential client, by providing more perceived value (e.g., proactive intervention, unlimited access, etc.).
You’ll find that you’re able to provide dramatic results, with less labor intensity, with no “meter running,” and with far greater profitability. And you’ll no longer be in potential ethical conflicts with your own clients.
Believe me, that’s worth more than an hour of your time.

Alan Weiss, PhD has visited Australia 14 times among his 57 countries, and has the strongest independent consulting brand in the world. He has authored 32 books appearing in 9 languages. You can find his work on http://www.contrarianconsulting.com or http://www.summitconsulting.com, and you can follow him on Twitter: http://twitter.com/BentleyGTCSpeed.

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34 Responses to The Case for Value Based Fees in “Stubborn” Professions

  1. Jason Burke says:

    I agree with your concept of value-based billing, with one caveat: you mentioned the professionals who keep meticulous track of their time. The two tasks (tracking hourly time and billing hourly time) should be kept separate and addressed differently.

    More experienced consultants – especially those solo practitioners – may not need to track time as closely, since they have a good feel for the scope and cost of particular services. Others just getting started, however, greatly benefit from knowing just where all those hours go. Even if you don’t bill that way, you need to know that your hours are being fruitfully spent and that when all is said and done, you are making the best, most efficient use of your time.

    In a way, it goes back to the social networking argument. If you know you spend X hours per week on MyFaceTwitterSpaceLinkedBook with a resultant benefit, that produces a metric against which your alternative endeavors can be measured. Drucker strikes again…

  2. Alan Weiss says:

    I don’t agree. You can become obsessed about time, and some people work at different rates than others. The key is to focus on RESULTS, an output, not time, an input. You know if you’re working well when you produce desired outcomes, such as a sale, a completed project, a new book.

    I wrote Getting Started in Consulting, the most successful Getting Started book in Wiley’s history, and it’s in its third edition. My conclusions come from over a decade of mentoring solo practitioners at all levels.

  3. I think the trick is getting the clients to understand that. Problem is, everyone else is billing by the hour (especially in my field) so if I come in with value-based pricing it’s tough for them to compare. I would definitely like to perfect that though – I’m far from there at the moment.

  4. Alan Weiss says:

    You should read my books and listen to my CDs. The fact that everyone in your field is doing it wrong makes you more valuable. I have accountants, architects and even attorneys billing based on value. Join my Forum or Mentor Program.

  5. Hmm, good point – I’ll do it. I should re-read what I’ve already read, and then read the rest. Especially if I can learn to compete with what everyone is used to.

    Reminds me years ago when I almost hired a guy to help me with some marketing who tried to sell me (poorly) on his value-based pricing. I had never heard of it, was completely confused about how he worked, and thought he was way over the top expensive. Obviously NOT how to do it. He should read your stuff too.

  6. Alan Weiss says:

    That’s right—there has to be manifest advantage for the buyer.

  7. Elliot Ross says:

    Sigh –

    Count me in – I will find the books –

    I see the concept – but assigning a ‘value’ in any particular project must be difficult.

    Because it assumes that the client will follow your recommendations on a particular improvement that **may** save x hours per week …..

  8. Alan Weiss says:

    You’re being way too analytical. It’s art and science. If the client doesn’t follow your recommendations, then it’s not your problem is it?

  9. Elliot Ross says:

    Then I assume that is all up front based on estimates

    because if they don’t – no (or tiny) value = no or tiny revenue

  10. Alan Weiss says:

    You really need to read my stuff carefully. You establish a relationship, then objectives, measures, and value WITH the buyer. Simple as that. You’re treating it as if it’s an adversarial relationship. I can’t teach you value based fees in the commentary section of my blog!

  11. John Felkins says:

    I’m new into consulting but really see the wisdom in the the value based fees approach. Most of the “veterans” I run into think I’m crazy when I talk about this. Once I’m successful they won’t! Now, about that….

  12. Alan Weiss says:

    Right on!! A lot of those “veterans” are not very successful and are actually afraid to admit they’ve left all that money on the table for all those years. Most solo practitioners are not good business people, which is why my communities are so attractive, because I treat this as a business.

  13. value based fees is the best piece of advice I have received on the mentor programme. Don’t make it complex follow Alan’s advice 1. Objectives? 2. Measures of Success? 3. Value to the Client in a relationship of equals? = Value Based Fees. My own fee income is 50% up after adopting the 3 simple questions plus options in the proposal.

  14. Alan Weiss says:

    Shout it out!!

  15. Warren Beam says:

    I conceptually like the value-based fee model because it moves consulting from an earned income to a semi-passive income dynamic. Leverage is created by breaking the direct link between hours worked and dollars earned. On the other hand, value-based fee seems to be a form of fixed-price contract where the contractor (consultant) bears the risk of the unknowns. How do you mitigate this risk to ensure reasonable compensation relative to the actual time spent?

  16. Rob Nixon says:

    Alan
    Your article has created a stir amongst my community as well. Thanks again for writing it. Not sure if I told you this but I just signed a $375K value based fees project. Before I met you and subsequently got into your material (2 years ago) I would have charged $50K for the same project. Your philosophy has changed my families life! We all say thank you.

  17. Alan Weiss says:

    Warren, You’re thinking ALL wrong. This is based on a relationship and partnership with the buyer, not a vender and subordinated relationship. Your actual time spent is immaterial. You need to “renorm” your mindset. You’re thinking life a vender.

    You don’t want to work the maximum time you have available. Also, if you’re charging, say, $150,000, and you wind up working a week less or a week more than you estimated, who the heck cares? See Rob Nixon’s post beneath yours.

    You need to read my books.

  18. warren if the client wants to rescope the project halfway through…no problem I simply rescope the fee, after all we are partners.

  19. John Shaver says:

    Alan,

    I think one of the fundamental shifts in thinking that needs to happen in a Professional Knowledge Firm (PKF) is the realization that none of us are in control. We’re not in control of our employees, our customers nor our vendors. Anyone who thinks they are has lost their minds!

    Time sheets and billable hours give the illusion of control. They attempt to control what cannot be controlled.

    We trashed our time sheets and billable time almost 2 years. Our customers are overjoyed. They don’t care how long it takes us to complete a project; they just want it done and they want it done effectively.

    Notice that I said effectively and not efficiently. A good consultant understands that effectiveness trumps efficiency every time.

    So, my recommendation is to stop using tools that simply give the illusion of control and start using tools that provide predictive management as to whether a project is on track or not.

    Concerning Warren’s point: of course the consultant should take the risks. Why in the world would the customer take those risks?

  20. Alan Weiss says:

    “Professional knowledge firm” is a bit grandiose for me. As my sole mentor, Ben Tregoe, remarked to a reviewer about one of his books in 1975, “Calling what I’ve done ‘research’ is a bit of an overstatement I’m uncomfortable with.”

    There are only two kinds of consultants: Those who think the input side is important, who stress methodology and bill by the hour; and those who think results are important who stress outcomes and bill based upon value contribution. The former are lucky to make $250,000, the latter make seven figures. The former are known for their implementation, the latter are known as thought leaders.

  21. John Shaver says:

    Alan,

    Yes, I completely agree with you concerning the two types of consultants. It’s all about the value created by the consultant. The customer really doesn’t care about anything else.

    Regarding PKFs, I’ve been reading and talking with Ron Baker quite a bit over the past 2 years and I picked up the term from him. For me, it’s a good description for anyone who is differentiating between selling a service and selling knowledge. A consultant who implements ERP software is selling a service. However, a consultant who adds value to their customer’s business is selling knowledge and has evolved into a PKF.

  22. Alan Weiss says:

    I just hate acronyms the the average person wouldn’t recognize and that don’t really add to understanding, but tend to reduce it.

  23. John Shaver says:

    Yes, I understand and agree. Acronyms should never be used in conversations with customers.

  24. John Felkins says:

    While I agree with your assertion I don’t see how to get to a tangible value with services such as organizational development or training. How can you generate hard numbers on services that improve soft skills?

  25. Alan Weiss says:

    I can’t teach you value based principles in blog commentary, you’ll have to do some reading. But, briefly: You must be kidding. I don’t believe in the arbitrary designation “soft skills.” Morover, if training, for goodness’ sake, isn’t to change behavior to improve performance, what’s the use of it? OD work is done to create improvement. What’s the issue?

    You have to ask the client: What improvement, why, and what’s the impact? Impact can be qualitative or quantitative. The reason that HR and training departments are mostly worthless is that they pay no attention to value (output) only to the task of training people (input). That’s also why Donald Kirkpatrick’s “four levels” of training measurement, which they STILL talk about in the current issues of training magazines, is so infernally dumb, just as it was 40 years ago!

    The only thing that matters is some kind of improved condition. And if you can’t identify it, how do you know it’s been created?!

  26. John Felkins says:

    I’m not kidding. I’m just learning. I have just purchased your book Value-Based Fees. I’ll go read and come back for my next lesson. I’m not yet a “going concern”. I’m in the “figure out how to put food on the table” stage. It would take a big book to hold all the stuff I don’t know! I’ve never even heard of Kirkpatrick but maybe that’s a good thing! Thanks Alan.

  27. Alan Weiss says:

    Fair enough, then don’t skip ahead with the questions. Start with the basics. I’ve written big books!

  28. John

    You can show significant value and an ROI to any consulting assignment.

    Best thing that I have learned is Output not inputs……results not methodology. It works for my clients.

  29. John Felkins says:

    Graham,
    I know that is true! There are so many “veteran consultants” that claim it’s impossible. It’s funny that many of them are the ones still cold calling!

    Alan,
    I’ve read Getting Started In Consulting and that’s given me the frame work for my firm. What should I read to learn HOW to consult? Thanks.

    John

  30. Alan Weiss says:

    Process Consulting and The Unofficial Guide to Power Management.

  31. John Shaver says:

    John,

    And attend as many of Alan’s workshops as you can.

    As the great musician Robert Fripp likes to say: do you want to look at a picture of the girl or go on a date with her?

    Not that I’m calling Alan a girl! But you get the idea.

  32. Alan Weiss says:

    I’d better stop staring at Michelle Pfeiffer’s photo and get moving….

  33. John Shaver says:

    Alan,

    I have a question for Rob Nixon pertaining to his comment #16.

    Rob, that’s awesome about the project. What a great example of how moving from billable time to a value-based pricing model changes your entire world for the better. My family totally agrees with yours.

    Here’s my question: Since you are using a fixed price approach for this project, will you still use timesheets on it? I’m curious to know you thoughts on whether timesheets would still provide value to you or do you think it’s best to throw that part away too.

  34. Rob Nixon says:

    John – I do not use time sheets.

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