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#159: Handling Pushback on Hourly Rates

Posted By Mark Haas CMC FIMC, Thursday, October 22, 2009
Updated: Thursday, October 22, 2009
Most clients in my industry insist on time and material billing rather than project based//value billing. Inevitably, someone on staff extrapolates this to an annual rate and raises a stink. Is there a way to defuse this?

This kind of pushback usually does not come from the executives or project sponsor, who is ultimately responsible for accepting your rate and managing how these rates (if disclosed) are dealt with by staff. Executives compare the value you provide to fees paid to lawyers or other experts for specific high-skilled services. So we are talking about someone who does not appreciate the value you bring and may well be comparing it to their own salary. If salaries are under pressure, for whatever reason, and management calls in an "outsider" to do what some staff feel they could do.

To complete the picture, many engagements involve consultants interviewing staff about company history and prospective interventions. The resulting perception is, "We are paying this consultant $400,000 a year and I have to tell them everything that's going on in this company." This can seriously affect your relationship with the staff on whose cooperation you depend. Resentment is not a good start to a trusting relationship.

Tip: Although your sponsor is ultimately responsible for justifying investments in consultants, you can contribute one logical argument that works well. Consider the 80/20 rule, where the first contribution is the most valuable. You should be compensated at a higher rate for your initial work, but the marginal value of this contribution goes down over time, negating the "$400,000 salary" argument. You are contributing dozens of years of expertise and your first 20% of time is worth 4 times the average of someone with comparable expertise over the long term. You might be able to save a company a million dollars with a few minutes of advice, but eventually the value of each additional piece of advice declines. This is when your engagement is over, and you can go to another organization, to which your advice is once again valuable at 4 or more times a comparable rate for salary.

P.S. The other obvious part of this argument is that your consulting rate includes overhead that a salary does not. You might want to do the math to calculate your equivalent salary, which might be, say 4 fold (for 80/20 value) times 2-3 fold (for overhead) equals 10 times salary.

© 2009 Institute of Management Consultants USA

Tags:  client relations  customer understanding  fees 

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