Every now and again I force myself to do something I normally wouldn’t. I attend a meeting I should decline, or have lunch with a colleague even though my schedule suggests that I shouldn’t. My logic is that I have often found unanticipated value in contrarian activities. Similarly, in the consulting world, by occasionally exploring a contrarian approach to our work, we may find unanticipated value for our practice and our clients. It is with this in mind, that I encourage you to explore the often dismissed practice of contingent fee consulting, where fees are paid based on performance gains instead of simple project completion. I begin with two recent conversations on the subject.
Conversation One: The CEO
Whenever I speak to executives of firms that hire consultants, I solicit their comments about the consulting industry. I am paraphrasing here but the responses are usually something like “consulting firms all offer some version of the same thing but a few of them really do have some unique and valuable expertise – and that gets my attention.”
A few days ago I was surprised by the perspective of one CEO. He told me that he gets dozens of calls, letters, invitations, and e-mails each year from consultants. Like most executives, he ignores those that can’t clearly communicate their relevance as well as those simply requesting a meeting. Occasionally he returns a call or an e-mail if there is an obvious fit with a need that his firm recognizes. That part of his response was fairly typical. It was the next part that surprised me as I queried further about the cost versus value of consultants to his organization.
“Cal I’m happy to make consultants rich if they can really deliver. And in fact I have done so in the past. But I have always done so on a contingent fee basis. I want a partner, not a dependant.”
I assumed he was referring to typical contingent assignments such as SRED credits, executive recruiting, or telecom auditing – but I was wrong. He was talking about mainstream performance improvement and strategy consulting.
Conversation Two: The Entrepreneur
I run into a lot of people starting small consulting practices that need sales help. And usually they are very cash starved and revenue desperate. The following scenario is typical of many I have seen over the years.
A new sole practitioner recognized their need for sales assistance, turned to an ad agency, and was soon loaded up with a website, brochures, business cards, print ads, stationary, etc. Their sales and marketing budget was gone and the phone was not ringing. A bad combo – and they wondered why.
The answer is that although they had sales tools, they had no sales process behind them. When you make the tools first and then try and create a process to fit the tools you invariably end up with the wrong tools and the wrong process. The ad agency and tools (promotion) are invaluable once the market position and sales strategy are well-defined, but usually not before.
In this case, the entrepreneur’s money was gone and they didn’t know what to do. When I looked at their expertise, pricing structure, competition, and the value they offered, I saw a firm with huge profit potential that was probably going to wither and die without a cash injection (unlikely), or some good advice (currently unaffordable).
The Contingent Fee As A Sales Tool
In the current economic climate, but also in prosperous times, a frequent barrier to a consulting engagement is lack of budget. Can the contingent fee approach be used to overcome this barrier while still bringing value to both client and advisor?
The above discussions illustrate two scenarios where a contingent fee arrangement could overcome the budget barrier and I am certain there are more scenarios as well – but the question remains – can your firm be profitable, while also appropriately risk-protected, with contingent engagements?
You need to evaluate your capacity for contingent consulting as well as the client’s. Use the criteria below as your guide to an honest situational assessment.
Culture – are your people project managers or strategic business advisors or just tactical implementors? Look beyond their title when doing this evaluation.
Cash flow – you need to be well-financed in order to engage in a contingent engagement. Is your firm sufficiently liquid ?
Fee structure – add 50% to the usual cost that you would charge for a fee based engagement. Is a contingent project worth the risk at that price? What premium does your firm require for a contingent assignment? Does that premium change with the assignment? Can the assignment be structured to include trailing fees far into the future?
Ethical, legal, or professional association issues – some types of assistance just can’t be done on a contingent basis. Are you prevented from doing so? Would a contingent assignment put you in a conflict of interest as advisor and partner?
Failure – does your advice really work in a way that can be objectively evaluated and confirmed? What happens if it doesn’t work? Are there incremental liability issues?
Exclusivity – a contingent agreement is not a contest so multiple firms working on the same challenge is not acceptable. Will your client offer exclusivity?
Internal resources – as well as a budget for external fees, consulting engagements often require the cost of significant employee involvement on the client end. Is that a deal-stopping constraint?
Lack of trust – contingent fees look great when clients aren’t paying them but at some point your client may decide that your firm has “earned enough” and stop paying you or try to renegotiate. Can you address this up front? What is the reputation of the client contact and their corporation in the greater business community?
Lack of advisor control – there needs to be agreement up front on how to manage the project in a manner acceptable to both parties. You need control – will they hand it over?
Client stability – are they asking for a contingent fee because they are teetering on the brink of bankruptcy? Disclosure and due diligence are important here.
Exit strategy – what happens if a new CEO or client contact takes over mid-project and changes strategy or terminates the project. Do you get partial payment or a kill fee based on progress to date?
Consulting vs. White Collar Labour
Within the professional services world are two sub-sets and it is important that we understand the differences. The first are true advisors, that sell their advice and expertise, and the second are skilled professionals that sell their time on a task (curiously, the two sub-sets often reside within the same practice or individual consultant – this explains the “sell narrow, deliver broad” strategy I advocate). Both are legitimate offerings but only expertise warrants consideration for a contingent fee approach.
Some scribes however, have argued that even a simple commodity project selling time on a task is a contingent assignment because full payment is not received until the project is complete. While this may seem a contingent approach, I argue it is just a financing approach for commodity services that adds the time-cost of money to the delivery expense for the vendor without any benefit beyond advantageous payment terms to the client.
A true contingent approach is designed to increase fees and margin to the expert advisor in exchange for risk-sharing with the client, as opposed to simple project financing for commodity projects.
An Honest Assessment of Your Value
One thing that contingent engagements certainly do is to force consulting firms into a more rigorous evaluation of the clients they work with, and a more objective assessment of the value they bring to their clients. Firms owe it to themselves to ask if they are rejecting contingent engagements because of the risks involved or if they are simply uncertain about demonstrating the actual value they can deliver?
Typical advice to consulting firms is that contingent fees are to be avoided by the “professional” consultant. My guess is that was written by an advocate of the generalist practice who also advises that specialization is a bad strategy. I suggest this because contingent fees are a realistic option only for recognized experts that can objectively demonstrate the value of their advice to the client based on similar prior engagements, and can also therefore realistically evaluate the likelihood of success and chance for incremental revenue from a successful engagement. While some writers argue that a contingent fee approach is not for expert consultants, I argue that the true expert is the only one capable of delivering a profitable contingent assignment.
Consulting is a profession that speaks incessantly about “partnering” as a prerequisite to a successful engagement. It would be fair to argue that the contingency fee approach is the partnering philosophy as applied to pricing and it’s certainly consistent with value based pricing – one of the paths to increased consulting profit margin. And based on the comments of the CEO, a much more attractive option for clients.
If you are confident that your firm delivers real value for clients, then the question becomes can you sufficiently manage the risks of a contingent fee approach, in order to increase your sales and profit?
There may be unanticipated value in considering something you normally would not.
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"This should be required reading for consultants AND their clients - especially the part about RFPs." - Blair Enns, Win Without Pitching