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From hourly rates to value-creating, fixed fees – this is how to do it

Creating value together. That is the foundation of a good collaboration! And that is also the reason why I long ago dropped time estimates. I offer value-based fixed fees when selling my consulting services. And in this blog post, I lift the veil (if only partly) on how I enter into my value-based collaborations. What’s more, I hope to inspire you to make the transition with four companies’ experiences of value-based pricing.

A fortnight ago, I wrote a blog post with a strong call to action for companies, which was phrased something like this: Stop buying hourly paid IT consultants. Instead, go for value-based fixed fees. It creates a win-win collaboration because it commits both the consultant(s) and the company to producing the most value together, and to doing so as quickly as possible.

I have never before received so many good, reflective, constructive responses to one of my posts. The weeks since publication have proven to me how important it is that we have a much-needed debate about value-creating collaborations – and how to get there.

Several people have challenged me on how to approach value-based collaborations, and this is the subject I want to elaborate on in this post.

The greatest barrier is you!

Before we take a peek under the veil of how I design my value-based collaboration agreements, I want to make one thing clear: Progressing from hours to value requires a shift in mindset. And that is never easy!

The most important aspect of getting yourself out of the taximeter mindset is will. You have to fully want the value-based approach. And what does that mean? Well, it means that, as a consultant, you have an earnest desire to cease measuring all your work and all your profits in terms of time. And, of course, that you commit yourself to acting upon this desire.

This may seem a rather obvious statement but it is worth noting nonetheless: If you attempt the transition from hours to value-based collaborations yet still perform calculations in hours at any point in your process, you will not succeed!

I made the transition from hours to value several years ago, though with more forgiving external circumstances than usual. And even so, I still had to battle against my temporal mindset initially. But today I look back on the choice with pride.

The result was a better relationship with each of my clients, more enjoyable work days, and less time pressure. Striving to create value together in the most efficient way possible is more rewarding than attending endless, often pointless, meetings that serve only to add an hour to one’s income.

To phrase it differently, the shift from hours to value naturally eliminates unnecessary tasks. Keeping with the example of meetings, the value-based approach removes the incentive to attend meetings that do not contribute to the creation of value. And as we all know, not all meetings do.

VALUE-BASED PRICING – THIS IS HOW I APPROACH IT

If you want a value-based collaboration, it always starts with the sales work. It is during this process that you can focus on what you and your prospective client are going to do together and what value you hope to create together. Below I have shared an example of how I run the sales process for value-adding collaborations.

In broad terms, my process looks like this:

  1. Uncover the value your services are intended to create in a dialogue with the client. No matter the consulting fee, it is essential to know what drives the client’s pursuit of your services. Be aware that value is not always quantifiable. In some cases, it can involve abstract concepts where value is perceived value – not quantifiable value. It is often the consultant who will facilitate this talk, but it has to be the client who defines the value that you are to create together.
  2. Uncover the primary goals that lead to value creation. And if the project is a lengthy one, find out how to measure goal attainment/success along the way.
  3. Use the value that will be created to determine what the fee should be – for example, ten percent of the value created over three years.
  4. Define the process/approach/deliverables that realize the goals within the financial framework you have set. I think it professional to have several choices, where value and pricing vary.
  5. Draft an appropriate schedule. Although the fee is value-based, it does not mean that time is no longer a factor. The work still needs to be appropriately planned and deadlines agreed upon to ensure client involvement and availability.
  6. Establish joint responsibility in the collaboration; this is a prerequisite for successful completion of the process – the client’s participation and availability as per the schedule, for example, is an obligation they have to you.

A consultant can rarely guarantee the value creation itself. The benefits will often only be realized after the consulting engagement has been completed. Therefore, the consultant’s fee must be significantly less than the estimated value to be created for the client. And when the client’s business case is good, this has the added benefit of making it a no-brainer for the client to accept the proposal.

I usually guarantee the fulfillment of the goals that are set, and this is another cornerstone of value-based work: As consultants, we must take responsibility for achieving what we agree on. At IT ADVISORY, we have a guarantee clause in our contracts which obligates us to repay the full fee if we do not reach the agreed goals. It is tough – but it also shows a certain degree of professionalism. At the same time, we do not accept a lack of focus or impediments from the client.

“As consultants, we must take responsibility for achieving what we agree on

Kristian Sørensen, IT Advisory

A collaboration based on the above model is incredibly motivating to be a part of. Both the client and the consultant are focused on value creation, goals, and processes, and both parties want to achieve the goals – the client in order to start realizing the benefits, the consultant in order to collect the fee.

What’s more, both parties are incentivized to do whatever they can to remove impediments to the collaboration. If there is, for example, a need for X number of unanticipated meetings, the consultant can freely schedule them as the client does not have to approve any additional fees. This is a great advantage to any collaboration, and it ensures the momentum is maintained.

How to handle changes:

  • If the client wants to stop the collaboration: Negotiate a fair price for services already rendered – there is no magic recipe here.
  • If the value creation turns out to be less than initially anticipated: Change process and price to fit the anticipated value. Or stop the project and create a new one that fits the reality better.
  • If the client does not know how the project will translate into value: Do an analysis together and make a preliminary projection that covers the scope of the project. This service is easy to price and leaves the client in a strong position to make fact-based decisions regarding scope and value – and also to choose the right consultant for the project.
  • If the client asks for more: Find out if the extra work will create more value for the client. If so, use the above model to reach an agreement. If it does not add value, it is easy to reject.

For small tasks and extras:

  • Agree a fair price and get on with life.

Transport and accommodation:

  • Agree a fixed price per on-site meeting – or even better, include this in the project’s total cost.

Be brave and say no!

Many collaborations are not value-based but situations where the client requires the consultant to build a bridge, so to speak, and meet them halfway. With this type of client, value-based collaborations cannot be successful. You can sell hours to the client, and you may even be able to succeed (somehow) in creating value, but is it satisfying for you personally and professionally? Is it the right thing for the client?

Therefore, my advice is: Accept only collaborations with clients who need your help and who want to create real change. You must be confident that you can help them to succeed and create extraordinary value together. Otherwise, just say no.

FOUR INTERESTING COMPANIES THAT ARE WORKING ON A VALUE-CREATION BASIS

Fortunately, more and more companies are employing value-based pricing with great success. Below, I have selected four that I believe can inspire all of us.

Moores (Law firm)

The Australian law firm Moores is among the trailblazers when it comes to value-based fixed prices. The firm made an excellent video about what it calls the “Moores Agreed Pricing” model.

Moores also provides a guarantee, which it explicitly states as follows:

“Service Guarantee – we can’t guarantee outcomes but like price, the quality of our service is another thing we can guarantee up front. If you think the quality of our service didn’t match what was agreed, let us know and tell us how you think that should be reflected in the price you pay.”

For further info: https://www.moores.com.au/agreed-pricing

TWENTYFOUR (software development)

Another interesting company is the software developer TWENTYFOUR. It strives to avoid selling hours and has even dropped internal time registration altogether. This has improved client relations and streamlined internal processes, explains the company’s CEO, Bo Møller, whom I have interviewed.

To get rid of the hour-focused mindset, we have entirely removed hours from our everyday lives

– Bo Møller, TWENTYFOUR

TWENTYFOUR believes that processes must be simplified and made attractive, otherwise following them can be quite contrary to human nature. And time registration is so-called “meta-work” – “meta” from the Greek word meaning “beyond” or “after” – and there is nothing natural about work after work.

The concept at TWENTYFOUR can be summarized as follows:

  • TWENTYFOUR sells agreements, each of which includes a number of specific tasks to be performed for the client, and these tasks are priced individually in consultation with the client.
  • On a master checklist where each task corresponds to one item, the items are broken down into to-do lists. There are only two rules: a to-do may not take longer than one day to execute, and all developers must finish at least one to-do per day.
  • Once a week, internal follow-ups assess the number of finished to-dos, ensuring they correspond to the number of developers allocated, and progress is reported to the client.

What benefits have been created by this approach? Bo Møller emphasizes, among other things, the following:

  • Each developer always knows exactly what task he or she is responsible for because there is clear traceability in the breakdown of to-dos. Thus, the developers can continuously relate to the value that the task should create for the client.
  • With set tasks for every week, clients enjoy complete transparency in terms of progress.
  • Transparency (overview and status) has also increased significantly in the teams.
  • The simplicity has even meant that TWENTYFOUR has gone from five full-time project managers to one, working half-time.

Bo Møller explains TWENTYFOUR’s path to success as follows:

“We tried years ago to make value-based sales, but it was not a success, because everyone in our organization at that time, was hour-focused. To get rid of the hour-focused mindset, we have entirely removed hours from our everyday lives – primarily in terms of internal registration and secondly in our sales to clients. Our hour registration was the biggest obstacle to changing the mindset. It isn’t easy to make sales on a value basis if you constantly have to account for hours. As a project company, we have experienced a greater focus on the value both internally and externally.

Furthermore, we have experienced better conversations with the clients, where the dialogue is most now most often focused around solutions. Similarly, our reporting to clients always has a direct relation to value creation, as we are not talking about our input (hourly consumption), but our output (delivered tasks in the shape of TO-DOs). At the same time, it gives us a massive strength that we have one process to manage our entire delivery engine in the development projects”.

Algofy (Digital marketing)

Algofy is a so-called “born global” startup headquartered in Barcelona. It has an international team and the US as its primary market. And the company only makes value-based sales. I talked to one of the partners, Kristian Gosvig, about the company’s approach.

Algofy specializes in online ads (Facebook, Amazon, and Google). Traditionally, these services are sold either on an hourly basis or for a monthly fee for administration/maintenance. The company is proficient at analyzing data sets from ads and uses its expertise and client data to project the tremendous value it can create for clients with its optimizations. The value accrual becomes very concrete, which is why Algofy enters into performance-based agreements with clients.

Kristian Gosvig explains:

“When we charge for value and our fee is performance-driven, we have a great incentive to succeed. Our value-based clients create a win-win situation: When we succeed in creating great value for clients, both our clients and we make money at the same time.”

Thus, Algofy also experiences value-based contracts as a benefit in a competitive market, Kristian Gosvig explains further:

“We stand out because we stand for the value we create, and we never leave clients with a bill where the value is questionable. It strengthens our position in the market, and it is easier for us to get new clients once they see the numbers.”

TBK Consult (Management consulting)

TBK Consult is a global management consulting company specializing in the optimization of sales and marketing for business software. In this context, I had an interesting interview with the company’s managing partner, Hans Peter Bech, who spoke about TBK Consult’s experiences with fixed prices: :

“Clients think a lot about output when they contact us. It may be that they need help to develop a marketing strategy, get better at utilizing social media, or to explore the potential of a new market. Frequently, it is difficult for them to translate the effort into value. If I had to come up with one piece of good advice for clients before they contact a consultant, it would be to ask two questions: What do we want to achieve? What do we want to avoid?”

It has been many years since TBK Consult transitioned its business model to one based on fixed prices. One approach made possible by this new model, which has been very successful for the company, is the packaging of services. By combining selected services, clients can get started with the collaboration quickly and at an affordable price. If further services are needed, new packages can be created together. There are particular aspects of TBK Consult’s approach that I would like to highlight:

  • It is advantageous for both the client and TBK Consult that the initial work is packaged as a fixed service at an affordable price. This saves TBK Consult from having to undertake a comprehensive pre-sales job, and the client quickly gets a result.
  • The fixed packages are pure consulting services – operational implementation is the client’s responsibility.

About client relations Hans Peter Bech had this to say:

“Our clients are small and medium-sized companies that often do not have a tradition or experience of using consultants. They are insecure about paying for hours and are completely relieved when there is a fixed price. In turn, they have to get used to the fact that the operational implementation is in their hands. We help with the analysis, goals, and plan, whereafter they must implement it themselves. Often, only a few workshops are needed to get them on the right track. Then we can come back into the picture when evaluating the results and adjusting the direction.”

What experiences do you have with value-based pricing?

Whether you are a part of a consultant or a client, I hope the above was inspiring. I would love to hear about your experiences with specific collaboration models, initiatives and the like, which will create a win-win in the collaboration between consultants and clients. Click here to reach me.