Value-Based Fees. Alan Weiss
worth a great deal to the beneficiary of such expertise. How much? Well, far more than a couple of hundred dollars an hour, that's for sure.
In one class-action lawsuit against a Fortune 500 company for some kind of minor technical charges, the lawyers collected millions in fees, and each member of the class action suit received $2.85.
The Chief Justice of the Supreme Court of Western Australia, having read the first editions of this book, wrote to tell me that he thought it was inevitable that the legal profession would have to turn to value-based fees. That was a decade ago.
Accountants
Since these folks are fixated on neat boxes and clear rates as a professional pathology, it's not surprising that they cheat themselves out of their fair remuneration.
These are people who balance books, save tax dollars, highlight areas of enhanced profitability, set up effective retirement plans, provide investment advice, and generally help you exhaust every legal nook and cranny to keep your money where it belongs—in your own pocket. For the glory of providing this value, they charge under $100 an hour. An accountant with less than 20 years of experience in the United States in 2020 averaged $70,000.9
CPAs don't get it (although more and more financial planners are beginning to). They see their value as tasks performed, which are tightly tied to and choreographed by time involved. They even have fee schedules for their various tasks, on the assumption that they can pretty accurately forecast the amount of hours needed for each task. And they probably can, which is neither here nor there.
I love the people who do my taxes and financial planning, who may have saved me hundreds of thousands over the years (and kept me out of jail in the bargain). But I'm glad they don't read my books—because if they did and decided to change the billing basis, I'd have no choice but to go along.
I'd have to pay more. I have no fear about printing this here. I'm sure they will never read it!
Search Firms
I include these folks because they think they're smart and believe they've devised a billing basis that overcomes time units: a percentage of first-year compensation. (And some of these firms are contingency firms, not retainer firms, meaning they don't get paid unless they produce.)
I ask you to simply consider this: a search firm placed Lou Gerstner at IBM when that company was severely suffering. During his tenure, CEO Gerstner increased the stock price, improved the value of the company, gained market share, boosted both revenues and profitability, found new sources of lucrative business (for example, IBM consulting services), and provided a host of other important improvements. His net contribution to IBM's well-being is in the billions of dollars.
And how was the foxy search firm paid that placed him at IBM? It received about a third of his first-year total compensation. Let's say that was as much as $500,000, which I doubt. Even so, is a half-million fair compensation for a consulting firm that produced billions of dollars in improvement? I wouldn't accept it. It seems to me that $100 million or so is reasonable and cheap at twice the price.
CASE STUDY: ARTHUR ANDERSON
Back in the pre-Accenture days when Arthur Anderson had a consulting division, I was hired to help it's placement practice convert to value-based fees. The partner in charge was highly amenable, and so were his people.
At one point we finally landed a huge account for over $400,000 with a value-based fee. The company's accountants refused to post the business, and insisted on hourly fees that could fit inside their “standard boxes” on the spread sheets. Using the old hourly billing, the sale could only be justified at $157,000. The managing partner asked what he should do.
I told him to go to his boss, the managing partner, and ask if he'd prefer $157,000 in neat boxes, or a messy $400,000 with a lot of footnotes all over the spread sheet. His boss opted for the mess and told the accountants to make it happen.
Taking a percentage of some arbitrary figure is no better than time unit billing. Why not be paid for the true value you bring? If you don't believe that, the client won't either.
Professions that focus on commodity billing—be they legal, financial, architectural, search, design, consulting, or any other—are those that don't believe their own value proposition in terms of client outcome and therefore can't adequately make a case for it.
EDUCATING THE BUYER INCORRECTLY
An inherent problem in the lunacy of time-and-materials billing is that we educate the client incorrectly from the first meeting. Buyers are willing to believe that we operate in certain ways—just as the client does—and that those methods of operating will somehow have to be accommodated.
Yet we often show up as supplicants and fawners, obsequious in our determination to get the business. We position ourselves as vendors and “salespeople” from the outset, not as credible peers of the buyer with our own valuable trove of expertise.
Hear this: In true client-consultant partnerships, neither party wants to put the other at a disadvantage. Partners simply don't do that to each other. But in superior-subordinate relationships, the superior usually doesn't care, either out of callousness, noblesse oblige, or indifference.
Our job is to educate prospects from the outset about how we operate. That means that certain steps are important to take and others important to avoid. Use the following as a checklist to assess your own effectiveness in educating buyers.
Prospect Education Checklist
1 Never quote a fee before project objectives and their value to the client are stipulated (we'll discuss this in a bit).
2 Don't quote any time unit basis at all.
3 Explain to the client, if pressed, that single, value-based fees are in the client's best interests.
4 Resist comparison to other consultants by pointing out that your potential client probably also operates differently in many respects from his or her own competitors.
5 Never commit to arbitrary amounts of time for the accomplishment of objectives.
6 Focus on results, not tasks.
7 Never accept a prospect's conclusion—stated or implied—that you will constantly be onsite or that you're available “on call.”
8 Emphasize results, not deliverables; in fact, minimize deliverables.
9 Don't accept contingency fees or “pay for performance”; you're not a seal. Variables are often outside your control, and besides, you're being paid for your best advice. It's up to the client to implement it effectively.
10 Provide value immediately. Shift the focus to how much value you provide, not how much work there is to be done.
I've found that in most cases, consultants create their own quicksand by undermining any possibility of establishing value-based fees at initial meetings by ignoring or acting contrary to the rules just stated.
If you explain to the client that you're a performing horse, the client will understandably ask you to jump over hurdles and stand on your hind legs. If you explain that you're a partner interested in helping generate results, the client will understandably ask, “How do we do that best?”
Two parties are concerned about maximizing results—you and the buyer. But only one of you is concerned about maximizing your fees. If you emphasize the former, the latter will occur. But if you treat these as two separate considerations with the buyer, that person will try to maximize the former and minimize the latter every time.
Wouldn't