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