Companies Shoot Themselves in the Foot When Paying Consultants by the Hour
Public and private companies have to stop paying external IT consultants by the hour. They should instead jump into a collaborative model by paying fixed fees based on what the consultant will add in value. Read why — and see my six top recommendations for companies that strive to get the most value out of external consultants, freelancers, or agencies.
Both public and private companies focus on optimizing the use of their budgets and resources. Contrastingly, this doesn’t seem to apply when sourcing external IT consultants and freelancers. The formula seems to be doomed from the start.
External collaborations based on gut feeling
When Danish companies are looking for external IT consultants, they’ll usually draft a 5-10-line description of the job requirements, and an IT consulting agency will respond with a suitable CV, an hourly rate, and an available start date. If all three points tick the right boxes, the company will be ready to bring on the consultant.
Is that an easy solution? Yes — but there’s a better way.
In reality, it means that many projects and collaborations start without a common understanding of the value that the consultant is intended to create, and what the partnership should achieve. At the same time, it’s impossible to gauge if the work has been meaningful reflectively. There are simply no standard parameters with which to evaluate the consultant’s contribution.
In other words, these are collaborations based mostly on a gut feeling – and many companies gain no real understanding of whether their employment of external IT consultants, even at a high cost, has actually added value.
During the COVID-19 crisis, many consulting and freelance agencies encounter demands for “Corona discounts” of anything from 10-30 percent off of hourly rates that are typically accepted, which just helps to clarify my point. These hourly rates are arbitrary, and companies spend too little time on targeting the value creation that consultants must deliver.
Laissez-faire attitude
I can come up with several fundamental issues with hourly consultancy rates — the following are the most significant.
The hourly fee structure passively incentivizes external consultants to stretch out the arrangement for the most extended amount of time. I often come across consultants who have a “but the customer wants us to do things this way”-perspective, instead of working to build the most value for the partnership. In the same vein, hourly rates create an indifferent attitude within a company, because a consultant is viewed as someone who is at the company for a certain number of hours, instead of someone who is there to contribute a specific value as quickly as possible.
“The hourly fee structure passively incentivizes external consultants to stretch out the arrangement for the most extended amount of time.
Additionally, the hourly rate is a weak indicator for a consultant’s actual level of talent, even though it’s a common perception that a higher rate will bring a bigger superstar. I’m acquainted with many gifted, external IT consultants that work for 135 €/hr. and are still better than others on the market with a 240 € /hr. price tag.
Six recommendations for companies
Below, I compiled my six best tips for public organizations and private companies who would like to gain even more from working with external consulting agencies, consultants, and freelancers.
- Use fixed prices that are based on value creation to achieve a unique win-win collaboration. Important to note: If the fixed price is based on an estimate of hours with a 20% premium, you end up in a win-lose situation.
- Before contacting a potential consultant, it’s crucial to identify what value and goals the collaboration should attain – use this knowledge to choose the right consultant and to make sure that the value of the consultant’s contribution should significantly exceed their fee.
- Aim to employ professional consultants who can and will uphold the value creation and goal fulfillment together with you (for example, via a guarantee clause).
- In principle, do not accept limitations from consultants, if they are related to time or factors such as the number of workshops, meetings, or audits.
- If the fixed price (which is recommended!) seems too high, and it’s not due to too much value that may never be realized, get a second estimate from another consultant.
- Be aware that consultants cannot guarantee the actual realization of the value, as that often takes place after completion of the project. It is, therefore, important that the consultant’s fee is significantly less than the projected value for the company.
Do you have a seventh recommendation? Do you agree or disagree with me? If you’d like to share your perspective on how we can optimize collaboration between companies and external consultants, please don’t hesitate to add a comment or send me a line.
