Million Dollar Consulting,New and Updated Edition: The Professional's Guide to Growing a Practiceby Alan Weiss
ills needed to market and grow a successful practice. Weiss breaks down each aspect--from setting fees and acquiring personnel to identifying new clients and obtaining capital--into easily understood segments with specific examples. Illustrations.
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Chapter 8: Establishing Fees: If You're Charging a Per Diem, You're Still Just Practicing
Formulaic Methods to Establish Per Diem Fees
For those of you who have turned directly to this chapter, let me apprise you that there is some material in Chapter 7 that has a bearing on fee structure. By way of review, here are some instances and conditions that night justifiably cause you to cite fees at levels below your usual level.
- To gain access to an industry or client with large long-term potential
- As a subcontractor, who is experiencing no marketing expense
- As a referral, who is experiencing no marketing expense
- For a long-term client asking you for special consideration
- For pro bono work, or work for nonprofits and public agencies
Note that none of these reasons includes "tough times" or "business is slow." Whatever your fee structure is-and we'll examine several alternatives in a moment-you must adhere to it. If you do, you'll find your business steadily growing over the long haul. If you don't, then your approach is "whatever the market will bear," and your short-term income "I be at the expense of long-term wealth.
Fees are part and parcel of your overall strategic approach to your market. They should never constitute your single driving force, nor should they be dictated by the - client or competition.' Moreover, there is nothing unprofessional about saying, "I can answer that when I learn some more and have time to consider how we might help you," in response to, "How much?" But once you say, 'We charge $1500 a day, plus expenses," you've had it. From that point your fee can only decline and yourmargins erode.
What I'm calling the formulaic method to establish fees is one I don't favor but that requires explanation, since it is so often advocated for individual consultants and principals of small firms. It's actually a strictly arithmetic approach that begins with your determining what level of income you require to support your desired lifestyle. (Note how delimiting this is from the outset. By establishing what you'll "need" you're already capping your potential.) For our purposes, let's say that Charles Consultant determines that $200,000 in after-tax money will support his lifestyle, pay tuition, provide for a vacation, and afford some savings, after the pretax (company) money pays for medical and retirement plans and assorted fringe benefits. So Charley calculates that a gross income from consulting of $280, 000 will provide -for company expense, personal expense, and personal taxes.
Now, sharpen your pencils. Charles calculates that there are 220 working days available to him during the year, once he subtracts weekends, holidays, and vacation time. Of these, he estimates that he will be booked 70 percent of the time, meaning he will allocate the remaining 30 percent to marketing, promotion, and other nonrevenue-generating activities. (If you have employees, these nonrevenue days multiply like libidinous rabbits, which is why the previous chapter discourages full-time employees.) That leaves 154 days available to generate revenue. If we divide Charley's $280,000 revenue needs by 154 billable days, we arrive at $1818 per day.
So, using this formula, Charley should establish a per them fee of $1800 per day. Therefore, when he formulates a proposal for a project, he knows that his time must be accounted for at the rate of $1800 per day. Or, if a client asks, "What will it cost for you to spend two days with us?", Charley knows that $3600 will cover it.
Candidly, this backward calculation of a daily rate is amateurish and, worse, severely self-limiting. But so many consultants inappropriately cite daily rates that I want to take the time to explain why they are such a bad idea before moving on to more fertile ground.
What happens if your lifestyle needs are $450,000 a year? Is that so ridiculous? A couple of kids going to good schools, a decent vacation or two, the luxury of a wonderful house to return to after all that time on the road, intelligent retirement planning, elderly parents who need support these are not uncommon events or desires. Moreover, if you are undertaking the major risks of being on your own, you should at least be in a position to enjoy commensurate rewards. How silly it is to take major risks when your return is less than it would have been staying in traditional organizational life. At $450,000, Charley's per them would have to be about $3000 a day. That's not all that uncommon for big names in the business, but it's stretching it for most people, no matter how talented and how endorsed. And what of a desire for $1 million? Well, that comes to $6500 a day, or $4500 if you worked every one of those 220 days and did nothing else. Daily rates are limited because they are based on a finite resource: time.
There are substantial risks in this profession, and substantial rewards. It is ridiculous to assume the former without capitalizing on the latter.
Why on earth would you want to work every potentially billable day? Wouldn't it make sense to spend increasing time on the other elements of growth we've discussed, including personal expertise and repute? And why not take four vacations a year or spend time to watch your kids play soccer to make up for the nights you weren't there to help with the homework? "Billable days" place emphasis on activity, not result. The measure of your success at year-end isn't the amount of days you've worked, but the amount of money you're able to keep. Period. Banks won't give you credit lines based on billable days worked, and no one will be impressed by the amount of time you spend on airplanes. A focus on per them rates, established by determining financial needs, will focus you on the wrong activities and waste your precious time and energy.
You want to encourage a collaborative relationship with the client, within which the client feels free to call you at any time. This includes people other than the buyer who signs the checks, so that a multitude of people can call you without incurring an expense, thereby making you more valuable to more people. When clients are on a daily rate system they hesitate to call for help when they may really need you because they are forced to constantly evaluate their request in terms of real-time, current expense. Consciously or unconsciously, they are calculating, "Is this problem worth $2500 for Charley to come over? What if we find he'll need three daysit's not worth $7500, is it? Even if it is, we're better able to afford it next quarter." These conversations occur all the time in these circumstances.
Let's face it, if days of your time are your fundamental device to make money, you are going to try to maximize the days of your time used. This is human nature and is often, basically, survival. Consequently, when you create a proposal or respond to a request for help on a particular problem, your tendency will be to maximize your involvement, when the consultant's real value-added is to improve the client's condition with minimum involvement. It is extremely difficult to establish the types of relationships we've been discussing when you are citing a daily rate to a client and then describing the number of days you will be "needed." It's that much more difficult for the client to commit to the keystone of the relationship allowing the consultant to determine whether he or she can improve the client's condition-when the qualitative benefit is viewed within the context of the quantitative measure of days required and costs per day.
If you are perceived as selling days, you will not be perceived as an equal partner in the relationship. And the converse of the client's hesitancy to call you is your hesitancy to suggest legitimate, additional investigations because such pursuits, no matter how justified by the project, mean you're suggesting more "days."
Finally, your scheduling and energies will be hampered by the need to minimize time use. It's grueling, for example, to conduct employee interviews or customer focus groups. I limit myself to a half-day of interviewing or two focus groups a day, for example. But if the client sees two half-days of interviewing, there will be a normal question about why the interviewing couldn't have been combined into one day, saving the client one day's per diem.
Sometimes, you can best schedule client work, or combinations of client work and your own marketing activities, in portions of days. As long as the client results are met within the deadlines agreed, the particular activities and timing you use shouldn't be the focus. But they inevitably will be if the client perceives that the way you spend your time is directly proportional to your fees.
If you want to make a million dollars or more in this profession, charging by time units isn't the route to get there. Not only are the amounts self limiting, but the opportunity for multidimensional growth can't be exploited if maximizing days at the client is the driving force of your business.
When prospects request a day of my time for which they'll pay a fee if our discussions don't lead to a project, I usually request only that my expenses be paid. This pleases the prospect, gives me an opening edge in building the relationship, and makes me very objective about the discussions that day. Personally, it's an essential component in my strategy to "think of the fourth sale" and not the immediate one. You have to invest money to make money. Have prospects "demanded" that I cite a per them rate? Of course. And I've always declined, stating that I work on a project basis only, and that our collaborative responsibility for results dictates that the client's people should never be hesitant to call me, and I don't ever want to be hesitant about spending additional time on site whenever I feel it's necessary to achieve our goals. If the prospect can't work that way, then I'm never going to establish the relationship I need, and I'm not interested in short-term income.
A final word on formulas that result in daily rates. Yes, I know that attorneys and kindred professionals scrupulously assess hourly fees. But most attorneys don't do as well as Charley Consultant's $280,000, much less $1 million. And attorneys don't establish relationships; as a rule, they provide a technical commodity-legal advice and representation. How many individuals or corporations view attorneys as collaborative partners, and how many as necessary evils? The attorneys who make the most money are those who take contingency fees. If you win, they win. If you lose, they lose. That's as close to collaboration as the legal profession gets.
Dick Butcher, a character in Henry VI, says, "The first thing we do, let's kill all the lawyers." I'm not certain, but I believe he was reacting to their billing system. Besides, doesn't it bother you that attorneys only "practice" law?...
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This book should be in any person's hands that is even remotely thinking of starting a consultant business. Alan Weiss is witty and thorough, and gets his point across in every arena with real life examples. It covers everything from how to get started to contract development, fees, and long-term relationships. It is a must!