How do you handle when your client asks you to share the cost savings rather then paying you the fees?
I want to ask about a specific situation I faced with a prospective client. My client asked me to be a advisor to look for problems in two of his company departments and then work as a solutionalist to implement my recomendations. This is all fine, but he wants to share the cost savings from my recomendations and not pay my fees for this activity. What would be your advice in such a case? Wish you all a good day. Regards Puneet
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May 9, 2016
Your intellectual property and knowledge is valuable.
First decide if you want this person as a client. Is he your ideal client? Does he have access and influence over your ideal client or target market?
If so - there may be a way to get exactly what you want from this person, and stay within his pay scale.
If he can not pay your fees upfront for this activity, than maybe he can pay it in some other way: 1) Refer paying clients to you, 2) Place your advertisements in his brochures, newsletters, facebook mentions, social media mentions and any other marketing he does for his company. 3) Introduce you to his clients as your solutionalist and recommend you to them.
Make a list of things that are valuable to you and put a $$ amount or Fair Market Value on those items. Then equate them to your normal fee for services. This way you can negotiate a far price for your services while he stays within his wage budget.
Hope this helps.
May 9, 2016
Thanks Laura, great ideas and like @ellen says these are practical and possible.
May 10, 2016
Puneet and I have been discussing thi offline. Here's my comments.
A number of factors are involved:
1. Do you have confidence that you will generate savings?
2. Do you have FULL authority to implement the change? If YES, accept the deal. If NO, walk away.
3. Will they implement the change in YOUR timeframe? If YES, accept the deal. If NO, walk away.
With NO, above, you can also position it so that the difference between the full savings and what they do get because of not implementing or not implementing timely you split. If savings means reduction of staff, are they willing to accept that?
Any time that you consider a deal like this there WILL always be a considerable bump (double) in fees to make it worthwhile. Example, let's say that your fees are $100 per hour (for ease of calculation) and you will need to spend 100 hours on the project, then your fee would be $10,000. If they want to wait to see results, it would have to be realized within one year, and only if you can get $20,000 out of the deal.
This concept was championed many decades ago by Alexander Proudfoot who founded a management consulting firm that later merged with Kurt Salmon and is now Management Consulting Group, PLC listed on the London Stock Exchange. They believed that the workforce was significantly unproductive due, not to the fault of employees, but rather the fault of poor or faulty management. They would come into a company and take over all levels of management, effectuate change, improve productivity and profitability in a short, fixed period of time and then turn the business back to company management. I had the pleasure of working on one engagement with them many decades ago.
May 9, 2016
Puneet, if I read this correctly the client wants to pay for results achieved. There are many considerations here so I'll choose one path and play it out. Let's assume: 1) this prospect will provide great visibility for you and is worth your while to engage with, 2) the project is well within your sphere of expertise and is desirable to you on it's own merits, 3) you are in a financially stable place and 4) building credibility is important to you.
With those assumptions in place here is a suggested offer to the prospect: propose that you do the project at a cost equal to 50% of the fee you would have charged and stipulate a % of the resulting cost savings be paid upon successful completion of the project (here you have to estimate the projected savings- you also have the potential to make more in the end than you may have with a straight fee). Unusual approach, maybe, unorthodox, not at all. It is something to consider.
May 9, 2016
Try to negotiate a low entry retainer fee (I agree with Ed's 50% of estimated total fee; yet, totally up to you) to be credited towards final success fee (which can be 100% of results achieved ... or more!). This is common practice in Financial Advisory when charging M&A or Debt or Equity raising.
I have tried it in Business Advisory with great results. Hope this helps.
May 9, 2016
Fernando I appreciate your add-on as I think you have helped to sort out my own thoughts :-)
May 9, 2016
Thanks Ed, I intend going in for a minimum fee with a % of share in savings. Your assumptions are quite close.
May 9, 2016
Without knowing the economics of your business, this is tough to answer. Some businesses are built totally this way, getting compensation only if they get results.
Philosophically, you are bringing expertise that is worth something AND there is a risk that they do not do everything right. I would recommend in a worst case charging a lower fee and then also a small percentage of the savings, making sure you have a nice higher upside if you get good results.
May 9, 2016
Thanks Wayne for the reply, I intend going in for a minimum fee with a % of share in savings.
May 9, 2016
With respect to all, We do work with clients and we do get paid base on our performance. almost in 98% of times we saved costs. in terms of payment we charge clients 50% of what we saved them. However, we agree and sign a contract before we start. I think if you have confident that you can save them, go ahead they will be happy to pay 35 to 50% of the saving. But if your client is a start-up or the revenue is under 10 million annually, I would coach them how to do it in the first place and charge them for the program and if they require consultancy service after coaching, later on , I would charge them base on Hurly or Daily rate.
May 10, 2016
Your customer business should not engage you for services unless it is clear that they will benefit more than it costs. Likewise for you and your business. This is the classic supply and demand model where you need to find an intersection.
Laura Rose has good suggestions of ways of viewing the costs and benefits.
While I would want to work for a share of the benefit, you then have to determine how you will compute the benefit, and how long a period of the benefit you will get.
I think you can come to an agreement, but the negotiations may take a long time. Be sure you have a well documented agreement.
May 9, 2016
Money for him must be very tight. Tell him you have a floor and as well as a ceiling - a minimum charge - as there cannot be arrangements for your transport, food, and weariness on small amounts of money. The cost of turning up and turning over many people's habits requires money. No going below a certain level.
May 10, 2016
Puneet I would suggest consideration into the relationship you want to develop with this client. One of the best parts of working independently is we have the option to tailor fees and such with each scenario a client may present. Developing that customer relationship is about how does each client fit your business plan now and forward into the future.
I would ask the client for more discussion as to the details of their position. As you seek to understand the client's position do not omit that you do have some fixed costs you need to cover and anything above that you would consider passing on to the client.
It really all leads to customer relationship building.
May 9, 2016
A consulting engagement is very much a partnership between the consultant and the client. Each has to share in the risks, and share the rewards. This client is asking you to work on a contingency basis, without having any of his own "skin in the game". I would be very careful dealing with this, but if you agree to it, ask for an up front payment, or a guaranteed minimum.
Personally, I only accept contingency deals when I can clearly define the savings in advance, but still ask for minimum payment to start.
May 9, 2016
Hello Puneet,
First of all you are offering a services for free this does not add any value to your client. You can not call him client if you are not charging any fees in official terms.
Just make your self clear to him that this is not a volunteer job or a good will to offer your services which will save him money in tow his company departments where in you are not the employee.
I would let him straight upfront that one time I can save him some money, then the rewards will go to your account. However, next time onward you should have clear solution for him to save some money only if he is ready to pay. This is not good will or volunteer work.
.
May 9, 2016
Hi Puneer,
The fee and terms are agreed before commencing the assignment. If you are at the fee negotiating stage then I would suggest that you agree on a base fee ( lower than your normal charge out rates) and a share in the cost savings. As you don't have a control over implementation of your recommendations, the client should allow you to oversee the entire process and again pay you for your time at a lower charge out rate.
Fasahat
May 9, 2016
I agree with you, control over implementation is big question as that inolves the organisation structure.
May 9, 2016
No doubt you need money for ‘now’ but for ‘sustainability’ you need reputation more than anything else. However, there’s no such thing as a free lunch. Combine these two principles and you will get the answer that will lead you to the strategic partnership with functional privileges enabling you to practice what you preach. All the best and way to go…
May 9, 2016
Your clients don’t know how much work goes into doing what you do. And they don’t know how long it took you to become a capable who can create that work.
Frankly, they don’t care. All they care about is getting the job done as economically as possible.
It’s your job to charge a fair price that reflects the work you put into it.
If you don’t set your rates, clients will do it for you by telling you how much they can pay. And that’s never a number to get excited about.
Don’t ask for the client’s budget. Instead, quote an amount to your client. You can only do that when you’ve figured out your rates.
May 10, 2016
Ask if this client wants you to be a partner in his/her turnaround......You are being offered payment on a contingency type sales commission type basis. Figure out whether you want to be a partner with this company, and going forward make sure expectations are fully understood...
May 11, 2016
There are multiple challenge with that "pay for performance" scenario. In nearly every case and for every recommendation the client will be responsible for the implementation. If the client fails to follow through, follows through only partially or improperly, the savings are never realized and your compensation is never paid. The other serious challenge is that the accounting for the savings is usually out of your site and control adding to the danger for miscalculation and also making it easy for the client to "round off" in their own favor.
Your ability to verify the performance, the measurement and the proper payment would be the critical determining factors in this billing/payment model.
May 9, 2016
Being a fellow Indian, I guess you have doubts as to whether you are going to see the money, as otherwise you would not have raised the question.. Tell me, how do you calculate the cost savings? The inventory and effort may be old or new-it will be a tough to measure savings exactly and put in a contract. In fact it's impossible. Say you say you are saving on power, you can claim that. But he can say look at the total cost. You can't argue out of that one. Ask for a high rate and tell him that you can take the savings but your stomach won't wait and obviously he would not want a dead consultant as the savings will only come from a live one. Or, tell him that is fine and you will reimburse him when his savings start coming. This guy is a con artist, Puneet. Remember, you don't need to have a large fork to be a imp. Modern imps make do with miniature versions of these and they fit your pocket.
May 12, 2016
Your question raises a question for me: What kind of cost savings are you projecting that the client might see as a result of your input? If the cost savings are substantial then sharing them with the client might result in much higher fees then the rate you were planning to charge. Are you willing to shoulder some of the risk for a potentially (much) higher reward?
Another way to structure your engagement might be to charge some fixed fee for your advice (as a base payment), and then some percentage of the cost savings. Again, the idea would be that you will make more then if you had just received your standard fee. Since you are bearing some of the risk you should also be entitled to more reward.
The bottom line is to see what you can negotiate with your client that makes the project a "win" for them and a "win" for you.
May 9, 2016
I don't have a problem sharing cost savings. However, I normally charge 1/2 the normal fee (as recommended by others) and make sure that if I deliver the promised results my income is substantially higher than if I had just charged a fee (to account for the risk). In many cases I end up with more money and a happier client than with a fixed fee.
May 13, 2016
Hi Puneet,
1stly you are not a charity and as previous answers stated, your time and expertise are valuable. You have invested great deal of your life to come to a point where you are now.
There are two solutions to this.
One is to say no if the customer is not valuable to you.
Second is that you charge them in a different ways - but not as a cost savings share.
So, I would ask them if they would hire a "more famous" consultancy would they accept this?
Lets stay in touch,
Roman
While others gave good insight, your answer is practical and actionable. It is the best answer in my humble assessment.