How Do You Consultants Come Up With Those Prices?

While there are some clients that ask this question out loud, it’s my sense that every client asks it even quietly when they get to the part of the proposal titled “Professional Fees.” Often, this section is approached with a sense of dread, as up until this point the prospective client has a feeling that I have something they are interested in buying, if only it fits the budget they have in mind. They have mentally mapped my proposed solution to the problem at hand and are hoping that they will not have to turn their company upside down to find a solution.

Therefore, from time to time in my career as a consultant, I am asked by a prospective or current client to engage in the awkward business of justifying my fees.

“Why is it so much? How did you come up with that figure? Why is it different/more than I thought it would be? Are you guys all a bunch a tief'?”

At first blush, my response is to give an off the cuff smart-aleck answer, like “it pays the rent” or “because that’s what it IS” – with a slight tone of contempt that is related to some vague feeling that they are questioning the value of my existence, and whether or not I deserve to be drawing breath upon this earth.

After I resolved the more basic question of my value to our race, I began to realize that they might be asking because…. they just don’t know, and they think that the knowledge might be useful to them. The truth is, that the setting of consulting fees is a mysterious business, even to the practitioners of the art. Obviously, we’re not selling something that is tangible or can even be compared to what any other person on the planet can provide. For example, part of what makes my work distinct is that I bring first world standards of thinking and tools gained from my years living in the U.S. to the Caribbean, and apply it with an understanding of our people in the region. (Whew) No-one else can do that in the same way, and I cannot do what they do in quite the same way.

But, how does one impute different dollar amounts to the different value? How about the local consultant who is known internationally? How about the foreign consultant who is married to a Caribbean person, but lives in Latin America? Aren’t they also valuable in their own way, and should be charging more, less or the same as I do?

These questions don’t have definitive answers, but as I played around with them, I thought that I should at least be honest about what drives my own pricing, so that I at least have something to say to myself other than “that’s my gut feeling,” when this awkward matter comes up.

So, to lift the fog on my own criteria, here are the rules of thumb I use when coming up with the cost of a project, and the price I charge clients.

1. The Value to the Client

Framework specializes in High-Stake Interventions, and not everything that a client needs or does is high-stakes enough to warrant my interest or attention. There are many more low-stakes opportunities for things like skills training, coaching, facilitation, job analyses, etc. than there are high-stakes opportunities, but we’ve made a conscious decision to stay away from them. In other words, we only get involved when there is a great deal of risk and/or reward involved, and we like both big problems and big bets. This commitment of ours keeps life interesting, which is the way we happen to like it.

The upside of this approach is that the projects we work on are of tremendous importance and therefore value to our clients.

As one might expect, the more critical the project, the higher the price we propose. Typically, on critical projects the costs of failure are prohibitive; people’s careers and futures in the company are dependent on successful outcomes. The same activity (e.g. coaching a CEO) that I will do for free for a friend starting his own business, will not be free to the CEO of the US$500m company, and will cost less than the coaching given to the US$5b company.

Why the difference? Doesn't a CD player sold to each of these CEO's cost the same to each one regardless of who is doing the purchasing?

Consulting services are very different, however. Experience tells me that high-stake projects are those that generate the most stress, require the most pre-planning, cause me to lose the most sleep, and are the ones I care about the most because they are so engaging. Also, coaching my friend has little or no downside to my reputation, but there is a greater risk in coaching the big company CEO because, presumably, his or her time is extremely valuable in economic terms, and the decisions and actions to be taken have far-reaching effects.

In other words, the same advice given to CEO's in different companies has different ramifications and effects, and the price of that advice varies accordingly.

For projects that are not important, routine or are too easy, our preference in Framework is to others, or turn them down flat.

The paradox is that I am in essence saying that I should be paid more to take on greater challenges… now that’s a win-win if I ever heard one, as I there's nothing I love more than an engaging and exciting challenge!

2. Delivery, Face and Contact Time
   

A modifier on the price of every project is the amount of time we need to spend face to face with the client, either in coaching conversations, planning or delivering a course. While there isn’t a tight correlation, it does play a part in our calculations.

For example, delivering a course in front of 50 people for two days is very different than sitting down to have one-on-one interviews, or observing an activity, or strategizing over Red Stripes while sitting at a bar in Ocho Rios. They are all valuable activities, but by far the most difficult activity to undertake, and the one that takes the most preparation and concentration is the 50-person course. That also is the one that is the most tiring, and must be done to the exclusion of any other activity.

Also, there are fewer consultants who can lead a 50-person course effectively, and any number who can (claim to) strategize over drinks. In other words, a consultant is more valuable to the client when they are undertaking unique and specialized activities that few others could do well.

3. Travel Time

Sometimes we include the time it takes to travel to and from the client, if that is a factor. I turned down a project in Europe recently because the one day that the project required was not worth the 2+ days of travel plus jet lag it would take to get to the site in Germany and then back home to Florida. I’ve never had a client that was willing to be charged for my travel time, unless I was travelling over 12 hours in one rare case.

4. Phone Coaching Time
   

If there is significant meeting time on the telephone, then that is factored in also.

5. Custom Preparation Time and Expertise

If there is something that we have developed that will fit the need exactly, then that is used to modify the price we propose. This is rarely the case, however, as the kind of interventions we do, don’t lend themselves to cookie-cutter solutions (but perhaps one day we’ll figure out how to do that!)

6. Client “Friction”

One of my prior clients was so difficult to work with, and so chaotic to do business with, that we’ve put a premium on doing work with them. This “tax” is to compensate for the missed meetings, long negotiations, last-minute cancellations, unreturned phone calls, unpaid invoices, etc. that continues to be part and parcel of working with them. By now, you might be wondering why I even worked with such a client – well, to date, they have refused to pay the increased fees caused by the “tax” so they are no longer a client.

7. Staffing and Training Costs

At times, projects require extra hands, which require additional management. At other times, I must bear the brunt of training someone to work on the project. In both cases, this impacts the cost of the project due to the extra head-ache of carrying another person on my payroll. The extra administrative time required to hire a single other person is just horrendous.

8. Opportunity Costs

Bluntly put, if I am busy I tend to charge more than when I’m looking for the next project to pay the bills!

Last Few Thoughts

What my more unreasonable prospective clients often don’t understand about business of consulting is that, unlike an employee, they are only paying me to work, and ONLY to work at my absolute best. They are not paying me to take vacation, get sick, get tired, pick up the kids / dogs / groceries / mother-in-law, take off early on Fridays or the days before holidays, do paperwork or anything administrative, pay my taxes, vote, do jury duty, travel to and from their locations…. or even take lunch, in the extreme cases.

They also don’t take kindly to my resisting doing weekend work, holiday work, late-night work or hurricane work.

They also don’t realize that while I’m negotiating with them and waiting for them to make up their minds, I am not getting paid. This gets expensive for me when I encounter prospects that have long decision-making processes, or just like to wait to see if the price that I quoted will come down.

None of these are a problem by themselves, as they are part of the service I’m offering as a consultant in the business of High-Stakes Interventions. The problem comes when a client does not see (or worse, cares not to see) the entire equation.

All in all, one thing I’ve learned over time is that the way a client negotiates says everything about what they will be like on the project once things get going, and that it’s important to define my firm’s boundaries early on in the process. I recall being on a closing call with another consultant and a client, who he later described as a “Taker.” In other words, the client was only interested in how much they could get for themselves and their company, with no regard for my firm’s welfare. “Takers” are trouble, and while I’m not good enough to spot them before every project starts, I am learning to know when to stop doing business with them.

“Takers” are the worst – most are much more sensitive – but I think the average client does want to know where the amount in the proposal is coming from, and do like to know that they are not just being fleeced by whimsical dreams of consumer goods bought with hefty consulting contracts. I think that the better clients would like to know that there is a hard business rational behind every dollar that gets quoted in a proposal, and that when I’m quoting a number for their consideration, I’m responding to the facts of my business, rather than just a need to buy a new car or take a fancy vacation.

As a new consultant, I did not appreciate this fact, and I committed what must be the mistake of every new consultant – that of charging too little.

A relevant analogy and story that illustrate the general point:

1. High-stakes professionals like surgeons and airline pilots tend to be paid more than others who are sitting right beside them, spending even more time than they are, and possibly working even harder than they are (in physical terms.)
   
   As a frequent flyer, and someone who had surgery once for adenoid removal, I have no problem paying my surgeon more than the orderlies who pushed me into the waiting room, or my pilot more than the cleaners who remove trash the from inside the aircraft.
   
   
2. I recall the story of the plumber who came in once to fix a complex system of pipes in a major factory. The problem had remained for months, and was starting to create severe problems with the company’s throughput of its main money earner. The plumber came in and after careful thought he reached down into the bowels of the plumbing and tightened a screw. The management was incredulous, but sure enough, that was the correct solution.
   
   A week later the plumber submitted his invoice for $5000. The plant manager went ballistic and refused to pay. The plumber quietly said he would resubmit the invoice, and he did so one day later with the following breakdown of charges:

Time used to tighten screw: $10

Knowing Which Screw to Tighten: $4990

Total $5000

P.S.

(Of course, I have absolutely no self-interest WHATSOEVER in bringing to mind either of these cases. ;0)