Value-Based Fees
An excerpt from Successful Independent Consulting by Johanna Rothman
Pioneered initially by Alan Weiss in Million Dollar Consulting: The Professional’s Guide to Growing a Practice, consultants create value-based fees when they decide on the value of the consulting to the client and quote a fee that’s a percentage of that client value.
I discussed tangible and intangible benefits in “Start with This Proposal Template.”
Weiss says there are three pieces of value-based fee calculation:
- Tangible value on an annual basis. To that, add
- Intangible value times the emotional impact. To that, add
- Peripheral value from the benefits that help the client avoid future problems, such as layoffs or renegotiating contracts. While these problems appear to be about money, they often involve morale.
All three of these benefits, added together, create value for the client.
Let’s imagine the difference between a project-based fee and a value-based fee for a workshop.
The client, Jim, explained they thought they missed at least three million dollars in potential revenue because of late projects. These late projects had at least two causes: how the projects worked and how senior leadership made decisions. In the discovery call, Jim admitted that he worried they also missed another million in recurring service revenue.
Jim estimated the tangible benefits on an annual basis: four million dollars.
Next, the intangible benefits.
On the discovery call, Jim worried that, as a leadership team, they would “never” figure out how to make better decisions. If they couldn’t learn what and how to do this work, this role was not worth his time. He didn’t want to leave, but he couldn’t stay.
That meant that the ineffectiveness of the six-person leadership team hurt the organization and tempted Jim to consider leaving. The entire leadership team was at risk. The value of intangible benefits includes the leadership team salaries plus the cost of hiring a new manager to replace Jim.
While you can search online for “typical” leadership salaries, consider using a conservative estimate. Here, I’m using an average annual salary of $200,000. The cost to replace a manager ranges from one to three times that manager’s salary. So a conservative estimate to replace an entire senior leadership team would be six (people) times the $200,000, $1.2 Million.
Finally, the peripheral benefits.
Jim realized that the organization’s “randomness” didn’t just cost them time and money as per the tangible benefits. The company was losing its most valuable technical people. The most recent three people who’d quit each said, “I can’t work in a place where management can’t decide which work is most important.”
We hope you enjoyed this excerpt from Successful Independent Consulting by Johanna Rothman. You can purchase the ebook directly from The Pragmatic Bookshelf:
