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