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#654: Alternative Ways to Pay Consultants

Posted By Mark Haas CMC FIMC, Thursday, September 15, 2011
Updated: Thursday, September 15, 2011
Companies are being squeezed for cash like no other time in our lives. Even though, in theory, they really need consulting services more than ever, how are they, practically, going to pay for them? Can I be proactive to suggest alternative compensation strategies?

We are hearing from a lot of clients that are hitting the wall with all but essential expenditures. As much as we like to think of our consulting services as an investment rather than an expense, and an investment in efficiency and effectiveness, sometimes there is just no getting past the fact that your fees are a check that has to be written. Many clients will increasingly find it hard to pay your fees unless you can help make the case (usually in a new way) that your services are high priority.

Occasionally mentioned but never getting much traction in the past, pay for performance seems to be making a comeback. This is partly because clients want to make sure any investment (including you) is worth the cost, but also because clients are looking for more accountability from consultants. Satisfied with results of other pay for performance or gainsharing agreements for other professional services, executives are exercising their fiduciary responsibilities by asking consultants to assume some of the risk of investing in their intangible services.

What does this mean for you? Maybe nothing, or at least until your client asks you to discuss pay for performance instead of a daily rate or project fee. However, it makes sense to be prepared. Talk to your colleagues in IMC or in your industry about their recent experiences in structure of compensation.

Tip: Be prepared with data and an approach that works for you when the subject arises with a client or prospect. Work out in advance what kind of structure makes sense for you. Recognize that you should only be assuming risk for those portions of the project over which you have control. If you are making recommendations but have no control over implementation, how much risk should you assume? Conversely, this option for risk/reward trade off may be a powerful incentive for the client to involve you more deeply in implementation and management of your recommendations. If this is what you want, build that into your proposed compensation model.

© 2011 Institute of Management Consultants USA

Tags:  creativity  fees  innovation  proposals 

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Richard P. Morgan CMC FIMC says...
Posted Friday, September 16, 2011
Here are a few ways to make your fees more "affordable" for clients.

Spread your fee over an extended period of time: If your retainer is $6,000 per month for four months, allow payments of $3,000 per month for eight months.

Defer a portion of your engagement fee: Ask your client to pay a portion of your fee during the engagement and defer a final portion for an extended period, allowing time for your recommendations to create enhanced profitability and cash flow.

Charge a reduced fee, but add a significant "success payment" to your proposal: Reduce your usual fee, say by 33% or more, and add a success payment due after the engagement that ideally compensates you for the remaining 33% plus interest and a significant added kicker based on the projected improved results. The kicker might also be equity in the client in lieu of cash. Some consultants like the equity play, but I have never tried it.

I have found that clients readily accept fee arrangements with some level of "success payment" when they realize that you are willing to put some skin in the game and forego immediate cash for a greater reward after the client gains anticipated results. Even if you do not have to reduce or stretch your fee, it makes sense to request a reasonable success payment, as a bonus, based on your client's improved condition. Such payments help to keep you and your client focused on desired results!
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