Fourteen days ago, I wrote a blog post with a strong call for the companies, which sounded like this: Stop buying hourly-paid IT consultants, and instead go for value-based fixed fees. It creates a win-win situation in the collaboration because it commits both consultant(s) and the company to make the most value together – as quickly as possible.
I have never received so much good, reflected, and constructive responses to one of my posts. Therefore the recent weeks have proven me how important it is that we have a much-needed debate about value-creating collaborations – and the way 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 largest barrier is yourself!
Before I lift some of the veils on how I design my value-based collaboration agreements, I want to state one thing: Going from hours to value requires a shift in the mindset. And that is not easy!
The most important thing to get out of the time-taximeter mindset is that you fully want the value-based approach. And what does that mean? Well, this means that, as a consultant, you have an earnest desire to no longer measure all your work and all your profits in time. And not least that you commit yourself to act per this desire.
If you try to change from hours to value-based collaborations and still calculate into hours, you will not succeed!
I have performed the shift from hours to value myself some years ago (with less relapse of external circumstances, though). I look back on the choice with pride – even though I also had to work with my mindset for a start. The result was a better relationship with the clients, more enjoyable working days, and less time pressure. It is more fun to create value together than to being at endless, regular meetings that provide a “basic income”.
The shift from hours to value – when you go all in – naturally causes tasks to disappear. E.g., it becomes clear that you should not attend regular meetings unless they contribute to the value creation. And certainly, 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 here that you can focus on what we are going to do together and what value we will achieve together. Below I share an example of how I run the sales process for value-adding collaborations.
In broad terms, my process looks like this:
- Uncover the value in a dialogue with the client. No matter the consulting fee, it is essential to know what drives the client’s value creation. Be aware that value can be both quantifiable and softer subjects. It is often the consultant, who will facilitate this talk, but it has to be the client who defines which value creation to chase. And remember, value is perceived value – not quantifiable value.
- Uncover the primary goals that lead to value creation – and if the project lasts longer, how to measure goal attainment/success on the way.
- Use value creation as a benchmark for what the fee should be – for example 10% of the value creation over three years.
- Define the process/approach/deliverables that realize the goals within the financial framework you have set. I think it seems professional to have several choices, where value and pricing vary.
- Do not forget an appropriate schedule. Although the fee is value-based, it does not mean that time does not exist. The work still needs to be appropriately planned to ensure client involvement and availability and ensure that deadlines are agreed upon.
- Establish joint responsibility in the collaboration; this is a prerequisite for the completed process – cf. the client’s participation and availability.
A consultant can rarely guarantee the value creation itself. The benefits will often be realized after the consulting engagement is completed. Therefore, the consultant fee must be significantly less than the client’s value creation, which furthermore, makes it a no-brainer to accept a proposal, when the business case is so good.
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 the contracts, where we 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’s side.
“As consultants, we must take responsibility for achieving what we agree on
– Kristian Sørensen, IT Advisory
A collaboration based on the model above is incredibly motivating to be a part of. Both the client and the consultants are focused on value creation, goals, and processes, and both parties want to achieve the goals. The client wants to achieve goals to start realizing the benefits, and the consultants want to achieve goals to collect the fee.
Both parties are ready to do what they can to remove impediments or problems in the collaboration. If there is a need for extra iteration, x number of new meetings, and so on, the consultant can freely schedule this, as the client does not have to approve additional fees. This is a great strength, and it gives the momentum.
How to handle changes:
- If the client wants to stop the collaboration: Negotiate a fair price – there is not one recipe
- f the value creation turns out to be less than anticipated initially: Change process and price to fit anticipated value-creation. Or stop the project and create a new one that fits the reality better
- If the client does not know what will happen and therefore cannot relate to value: Make a preliminary project, an analysis, or similar that covers and scopes. This is easy to price and leaves the client in a strong position to make fact-based decisions regarding scope and value, – and has the insights choose the right consultant for the project
- If the client asks for more: Uncover if the extra work brings more value to the client. If so, use the model above to make an agreement. If it does not add value, it is easy to reject
For small tasks and small 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 and situations where the client requires “a bridge halfway across the river” to be built. With this type of client, value-based collaborations cannot be successful. You can sell hours to the client, and you may also be able to succeed somehow, but is it satisfying for you personally and professionally? Is it good for the client?
Therefore, my advice is: Accept only collaborations with clients who need your help and who want to create a real change. You must be confident that you can help them to succeed and create extraordinary value together. Otherwise, say no.
Four interesting companies – who are working on a value basis
Moores (Law company)
The law company Moores in Australia is among the first-movers when it comes to value-based fixed prices. They made an excellent video about their “Moore’s Agreed Pricing” model.
Moores also provides a guarantee, which they explicitly state 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
HTML24 (software development)
Another interesting company is the software development company HTML24. They do their best to avoid selling hours and have dropped internal time registration. This has improved client relations, and streamlined the 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, HTML24
In HTML24, they believe that processes must be limited and made attractive because otherwise, it is not natural to follow them. And time registration is “meta-work” that is not natural. The concept at HTML24 can be summarized as follows:
- HTML24 sell agreements, which include a number of specific tasks with the client, and these are priced individually together with the client.
- The tasks are transformed 1:1 into TO-DOs, which again break down into more TO-DOs. There are only two rules: A TO-DO must take a maximum of one day to execute, and all developers must finish at least one TO-DO per day.
- Once a week, internal follow-ups are done compared to the number of finished TO-DOs, and progress is reported to the clients.
Which benefits has it made? Bo Møller emphasizes, among other things, the following:
- All developers always know what task they are solving for the client 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.
- The clients have transparency with the tasks – there are no depreciations of remaining estimates – but specific closed tasks every week.
- The transparency (overview and status) has increased significantly both in the teams and in relation to the clients.
- The simplicity has even meant that HTML24 has gone from five full-time project managers to one half-time.
Bo Møller explains HTML24’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 “born global” startup headquartered in Barcelona. They have an in international team and the US as their primary market. And then the company only makes value-based sales. I talked to one of the partners, Kristian Gosvig, about their approach.
Algofy specializes in online ads (Facebook, Amazon, and Google). Traditionally, these services are sold either on an hourly basis or on a monthly fee for administration/maintenance. The company is proficient at analyzing data sets from ads and uses their expertise and client data to project the tremendous value they can create for clients with their optimizations. The value accrual becomes very concrete, which is why Algofy enters into performance-based agreements with the 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 optimizing sales and marketing of business software. In this context, I have had an interesting interview with Managing Partner, Hans Peter Bech, who talks about their experiences with fixed prices. Among other things, he says:
“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 should come up with one good advice to clients before they contact a consultant, ask two key questions: What do we want to achieve? What do we want to avoid?”
It has been many years since TBK Consultant transformed the business into fixed prices. One of the things that has been successful for them is that they have packed a number of their services. In that way, the clients can get started on the collaboration quickly and at an affordable price. If further cooperation is needed, new packages can be defined together. There are particular perspectives on TBK Consult’s approach, which 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 a comprehensive pre-sales job, and the client quickly gets a result.
- The fixed packages are pure consulting services – the operational implementation is the client’s responsibility.
About relations with the clients, Hans Peter Beck tells:
“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 get 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.