|
June 26, 2001
Q: We are a small consulting firm working closely with contractors and architects. My question has to do with how we get paid. Although our hourly fee is substantial, my feeling is that it in no way reflects the value of what we deliver. For less than an hour’s work, we sometimes save our clients hundreds of thousands of dollars. While I’m very happy at the outcome of our work, I sometimes feel cheated that we aren’t getting a better return for our knowledge. Any suggestions how to handle this?
A: Your issue is a common and very important one. Traditionally, professionals have been paid on a straight hourly basis. More recently, two changes in that approach have entered the picture. Each may be interesting to you.
The first variation to come on the scene a few years ago was what is called the “performance-based” fee schedule. In essence, you charge your regular hourly rate plus an agreed-upon percentage of whatever overall dollar improvement or savings your client receives. In other words, if you save your client $100,000, you receive $10,000 plus your hourly fee. The trick, of course, is ensuring you both agree how that performance will be measured so that you don’t get into a big hassle about how much you are owed.
The second variation isn’t a variation at all. It’s a flat-out big departure from the straight hourly billing process. And it’s a departure I think is long over-due. Simply put, it’s what a lot of people refer to as “value-pricing.” You determine what you think the value of your service to the client is and finalize it with your client. Of course, for this flat fee, you will identify what the client can expect you to do. With this approach, be wary of guarantees for outcomes overwhich you have no control. If you’re looking for a model for this approach, consider the surgeon who does brain surgery or takes out an appendix. The fee you see is a whopping flat one, not an hourly calculation.
I agree with you totally that straight hourly billing–regardless how high your hourly rate–is rarely fair nor accurate in reflecting your value. It’s a great time to be in business because of the options we now have. As you consider which direction(s) to go in restructuring your own fee schedule, keep in mind that above all, your clients must be clear what the rules are. Few issues cause more problems than mixed messages about fees. Be straightforward with what yours are and look forward to getting paid what you’re really worth.
Q: I’m a CPA currently working for a large accounting/consulting firm located in the city. One of my dreams has always been to go into business for myself, but I confess I am very nervous about being a one-man band. What do you think about my chances of successfully competing against the big guys like I’m currently working for?
A: Thanks for your question. It is one of the most frequently asked that come my way. First off, let me say that there is no way you can compete against the big guys and win. The good news is, you win by creating your own niche, by building on your existing strengths, and by capitalizing on the virtues of the small firm, which are many.
If you are raising your eyebrow or think I’m Pollyanna, consider the story of Reed Tinsley, a Houston CPA, who decided he was tired of having to know a little about a lot. For some time Reed sensed he wasn’t serving his clients as well as he knew he could, mainly because they came from myriad industries, including oil and gas, high tech, aerospace, etc. Instinctively, he knew that the best customer service happens when you have figuratively “moved in with your customer” –when you know the industry and the customer’s business so well, you can literally walk in and run the business yourself.
Realizing then, that he needed to focus on something, Reed looked at the range of service lines, eliminating those in industries he had no interest in or could not possibly take him where he wanted to go. Early on it was clear that health care was the front runner for his attention. All his own early tests showed skill in the sciences, plus he saw that there were people in the industry who needed help. Residents coming out of medical school who knew nothing about business were sure to need someone who did. Moreover, with health care just beginning to go through dramatic change, Reed speculated physicians would increasingly need significant support in running and managing their businesses.
Thus, he made the committment to health care and began a process that was without question the key to what has been his unparalled success as one of the foremost consultants in the industry. Reed went on a systematic campaign to learn everything he could about the health care industry. He spent his free time reading and talking–he worked for some clients for free, feeling he shouldn’t charge them for his learning curve–he did everything possible to learn about his wishlist client. As he put it, Reed basically “worked his tail off” to become the undisputed expert in his field. I say he moved in with his customer!
And that was step one in Reed Tinsley becoming indispensable to his client base. The fact is, he knows more about their business than most of his clients. His savvy evident, Reed reminded me “No one is going to call a generalist to solve a big problem.”
The second and equally critical step in his success was his relentless marketing. Even today when his reputation extends throughout the industry and he counts some of the most prestigious physician groups as clients, Reed Tinsley makes it a point to do some kind of marketing every day. “That’s what separates you from the rest.” In other words, he knows as you and I also know, that you can’t go to sleep at your niche.
So what does Reed Tinsley’s story have to do with your concern about surviving as a one-person operation? Simply put, with a combination of steely focus and non-stop marketing (even when you’re on top of the pinnacle), success is within easy reach. Have fun and good niche.
Previous columns:
