Saturday, 29 May 2021

What to pay a consultant?

How do you know that a consulting project will deliver results? 

The short answer is that you don't just like you can not guarantee the successful outcome of most things in life. You don't know if your marriage will work - you believe it will; you have confidence that it will - but you cannot guarantee it. Chances are 99.99% that your next flight will land safely, but it is not 100% guaranteed. Again, you have confidence that all will be fine. 

There is no certainty anywhere in life, yet we pay for things despite this uncertainty because we are confident it will deliver. The same applies to paying a consultant.

Pay for value, not time

A consultant adds expertise to a project that will add outsized long-term returns to a business. The value of the consultant is the role they play in unlocking this long term value creation. 

In his book, Value-Based fees, Alan Weiss clarifies what the consultant brings to an engagement and, therefore, why you pay them. You pay them for the long-term value their involvement will unlock in your business. Take note that this value creation has nothing to do with the time the consultant spends on the project - it is purely based on the long-term impact they will have. 

Think about it: if a consultant spends 100 hours on a project at a fee of $1,000 / hour, they get $100,000 as a fee. But let's say the work they do help you, the client, grow revenue from $10 million to $20 million. What should they then charge? Still $100,000?

The primary value the consultant brings today is not their time today but the future impact of their expertise on your business. Suppose a project will have a significant positive effect on your business, and the consultant will have a considerable impact on the project's success. In that case, they should charge a substantial amount of money as a percentage of future values.

The elements of value

You should pay a consultant based on the scarcity of their skills and the potential impact on the future of your business. So let's look at each of these factors:
  • Scarcity - how unique is the consultant's skills? Are they a social media consultant, for example, of which many exist, or the only technical expert that understands a particular process in your business? Are what they know in short supply? The scarcer, the higher the fee.
  • Potential - how good is the consultant? Do they have a track record of working on similar projects before? The more experienced a consultant is, the more significant the potential impact of their involvement and the higher fee. 
  • Impact - the significance of the project that the consultant is working on. What will the effect of the project be if it all works out? Will you double your revenue or only save you a bit of effort? The more critical the project, the higher the consultant's fee should be.
Scarce skills x High potential impact x Significant project impact = High consultant's fee

Note that nowhere in this equation does time play a part. It is irrelevant.

Finding the good deal

Ultimately, both consultant and client need to get "a good deal", as Weiss talks about in his book. A good deal is when the consultant feels handsomely rewarded for their expertise - not their time - and the client feels richly rewarded for their investment - a substantial impact on the company's future success. Weiss uses a factor of at least 10 to estimate a good deal, meaning whatever the consultant makes; the client should feel they can earn at least ten times more in eventual benefits. 

However, getting to a good deal takes time - you don't arrive at it through a quick phone call followed by a proposal. No. The good deal is the culmination of a process where the consultant and client genuinely understand each other, the scope of the work, the desired outcomes, and agree on the approach to follow. This process of truly understanding each other takes time. In short, a relationship needs to develop between consultant and client before presenting a proposal. 

Any good deal ends with a proposal but doesn't start with it. Most proposals are generated far too soon and tend to reflect a bad deal, either for the consultant, who gets the work but ends up poorly remunerated, or the client, who works with the wrong person and does not see results. Without a thorough discussion and a deep mutual understanding of what needs to happen and the desired outcome, there can be no good joint deal.

It's all about confidence

So what if the project comes to nothing or ends up in a dismal failure? Should this not impact how you pay the consultant? Not at all.

It is for you as the client to decide if a project is worth taking and what you believe the likely outcome will be. Also, it is for you to determine if the outside expert is needed and how important their role will be. You must be confident in the impact of the project and that of the people you involve. 

Let's say I'm a tennis player, and I feel I could play at Wimbledon if I received the right coaching, then it is my job to find that coach and pay them "whatever it takes" to get me to Wimbledon. The commitment from both player and coach is to ignore time and effort and focus purely on the outcome - let's get to Wimbledon. 

But let's say I end up not getting to Wimbledon? Is that then the coach's fault? It might be - at least partially. Or maybe you're just not good enough. It is at this point that you decide whether to continue with the coach or not. But while they are involved, you aim for Wimbledon, pay for Wimbledon, and generally "do what it takes" - from both sides. 

Success is measured

Ultimately, the consultant's impact is during their involvement and their fee based on the eventual effect on the business. Throughout the project, it's a case of client and consultant working together to track success and continuously assess confidence. Do you, as the client, still feel confident that the consultant can deliver on your expectations? Is the consultant still convinced that they can work with you as the client and deliver on promises? No consultant can afford to work on a failure! It's a case of jointly keeping eyes on the stars and feet on the ground. 

Agreeing on how to measure progress during the engagement needs to happen before the project starts. The consultant and client should be on the same page regarding the eventual desired outcome, the consultant's approach and how to progress - only then should the engagement start. There are no surprises, and both parties work together to assess impact and outcome. Indeed, no one waits to the end to say, "it's not working". 

The bottom-line? Contrary to current practice, consultants should mostly bill for value and not for time, and clients should pay for outcomes, not input. In the lead-up to a project, the client and consultant should spend enough time to get a thorough understanding of each other, expectations and then arrive at a good deal. Neither party should walk away poorer from an engagement - both should feel handsomely rewarded.

The best consultants choose their assignments carefully and ensure their impact will be significant. They then charge accordingly. The best clients who benefit most from outside expertise can look beyond time and materials to see the real pot of gold at the end of the rainbow and then agree to a fair deal.