Saturday, 29 May 2021

Should you pay a consultant based on outcomes?

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

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

Is anything in life entirely sure? You may say "yes" - if you buy a red Ferrari, you know what you are getting. But why did you buy it? To feel a sense of satisfaction? Maybe a feeling of power, prestige or pleasure? You can't be sure that the car will deliver on these expectations, at least not exactly as hoped for. Nothing is 100% guaranteed.

There is no certainty anywhere, yet we pay for things despite this uncertainty. Immediately we can discount the argument that one should only pay a consultant for absolutely 100% guaranteed outcomes because this is not how the world works. You pay a consultant, despite the uncertainty. 

The value of a consultant

Fair enough - let's agree that you pay a consultant despite the uncertainty, ut how much should you pay them? The short answer is based on the value they bring. Note: value is not the same as an outcome! You pay a lot of money for a first-class ticket seat, based on it offering much more value than an economy class seat - but the successful completion of the flight does not feature in this price.

In his book, Value-Based fees, Alan Weiss clarifies what the consultant brings to an engagement and, therefore, why you pay them. For starters, you pay them for their current involvement, not the future outcome. But what do they bring today? Is it only the hours spent on the project? Is it only the "work" they do? No.

The primary value the consultant brings today is not their time but expertise. That is also the difference between a consultant and a contractor, whose direct input is time and materials. It is incorrect to pay a consultant based on their time because this is not where their value lies. You should pay them based on the knowledge and experience they bring to help you achieve the desired (note, not certain) outcome. 

How much should you pay a consultant?

You should pay a consultant based on the scarcity of their skills and the potential impact on the future of your business. 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 greater 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 important 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.

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 return on investment. 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 process to follow. This takes time. In short, a relationship needs to develop between consultant and client before a proposal is presented. 

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 poorly remunerated, or the client, who declines the proposal on cost. Without a thorough discussion and a deep mutual understanding of what needs to happen and the desired outcome, there can be no mutual good deal.

The risk is on you

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.

Firstly, as the client, you must decide whether to tackle a project and who to involve. You determine if it is worth taking the risk, given that there is never a hundred percentage surety. If you decide to expand your factory because you believe it will double your revenue- and you involve a consultant to help with the project - and you end up not doubling your revenue, this is on you.  Remember, there's no discount built into the price of a Ferrari because you (may) find that it does not give your ego the boost you expected.

Deciding whether to tackle a project or not is in the business owner's hands, and the odds of failure must not count against the consultant's fee. The consultant's price is based on the assumption that the project will succeed—scarcity x potential x impact. The same formula is what both consultant and client should use to determine price, hence the importance of achieving complete alignment before a proposal is presented. 

Success is measured

Ultimately, the impact of the consultant should be measured during their involvement - not afterwards. The relationship that had to develop beforehand to get to a mutual good deal, should continue into the engagement with regular catch-up discussions on how the project is progressing. There should be no surprises for either client or consultant. Both parties must be in perfect alignment as to what is being done, why it is being done, how it is being done and how it is going. 

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