How value-based fees make the world a better place
This article is ultimately about ethics and conscience. But it’s not about moral absolutes. So don’t walk away thinking I’m judging you if you bill by the hour or use any other practice I’ve eschewed here for myself. I believe that morality is inexorably contextual, and we’re all doing the best we can with the resources we have to work with. That said, be forewarned: with new information comes new responsibility. If you charge by the hour and are happy doing it and don’t want to be challenged about it, then I suggest reading a different article!
First off, if you’re an independent practitioner of any kind (but especially a consultant), I may have good news for you! If you are currently trading your time for money (billing by the hour or the day), there’s another way which can be both more lucrative for you and more beneficial for your clients. It is this: charge based on the value you are providing, rather than by your cost in time. I won’t go into the mechanics of this (for that, see Alan Weiss’s books and articles, especially these ones). This may be the key (as it has been for me) to taking your business to the next level.
Exclusively using value-based fees has transformed my business, not just because I earn more per engagement than I would have otherwise, but because I’m providing way more value to my clients. When you structure the business arrangement around the value provided, your focus is in the right place. This has a positive impact on every stage of the project. In sales, you are focused relentlessly on identifying the ideal outcome the client wants to see. Often what a client thinks they want is not exactly what they need. This can become clear in that first conversation. But if you’re both thinking in terms of cost and inputs (how many hours this will take and “what are your rates?”), successful outcomes are hit-or-miss. You’re already pointed in the wrong direction—or at least flying blind.
Sometimes a prospective client comes to me and says things like “we’d like about 30 hours a week for the first month, 20 hours a week after that.” Really, all this tells me is their possible budget range. It doesn’t say anything about what results they want or what the value of those results would be to them. Not only that, but it’s completely irrelevant how many hours in a day it takes to achieve those results. What if I work more slowly than another consultant? What if I’m tired on some days, or if I need to spend extra time learning some technology? Are they paying me to learn? No! They’re paying me to create results. Conversely, if I’ve already done 10 projects using this technology and I know it inside and out, should they pay me less because it takes me less time to create those results? Of course not! If anything, I should be paid more. Getting the results more quickly may be worth a premium to them.
In the middle of a project, I am always evaluating my activities to ensure that they are contributing to the results the client wants to see. If not, I’m just wasting my time. In contrast, with a time-based business model, it actually pays to waste time. You might be thinking, “I would never do that!” Well, of course you wouldn’t do that intentionally, not if you value your integrity. But when your business model is inherently backward (get paid more to take longer), it is always working against you in subtle and non-obvious ways. No matter what your intentions are, your unconscious mind is always taking this into consideration. In contrast, when your business model is oriented exclusively around providing value, it’s like taking the shackles off. Your interests and your client’s interests are now fully aligned. Your brain is freed up to find the fastest and most effective path to the results they want. And you and your clients both get rewarded as you become better and better at what you do!
How does value-based fees make the world a better place? Think about all the waste in our world. “Well, at least we’re not talking about polluting the natural environment.” Are you sure about that? Would the environment be better or worse off if we started eliminating waste at the “knowledge work” level? Focusing on value is one way to make a small dent in the mass of wasteful work in our world—not to mention the emotional/psychological cost of meaningless work.
I’ll conclude by addressing a few possible objections.
“Time-based billing is easier.”
Of course it’s easier. It takes approximately zero thinking to get started. But just because something is easier doesn’t mean it’s better. The up-front communication and thinking required to precisely identify the results and the value of those results is well worth it. It helps ensure that you know why you’re doing what you’re doing and that the project itself is justified.
“Value-based fees would never work in my business.”
What would happen if they did? (They certainly won’t if you never try it.)
“What about unforeseen cost overruns?”
This is a problem, but it’s always a problem. You need to ensure that your fees enable you to absorb the necessary risk. Or you may just decide that a given project is not cost-effective. After all, what’s the alternative? With time-based billing, the client begrudgingly pays more than they anticipated, because you took longer to complete the project than you thought. And if the value of the project itself was never identified, they’re unhappy because all they see is the extra cost. This is the typical story in IT, so I would argue that that’s more of a reason, not less, to start focusing on value.
I want to leave the world a better place in every area of my life. In the context of consulting, using value-based fees is just one small way I can do that.