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paid in any case, but if the deal is concluded, a percentage fee is applied and the fee already paid on a per diem basis is deducted from the amount due.

It is easy to see that the fees earned by consultants, as indeed by other intermediaries who help to identify, prepare and negotiate important business deals, can be high. However, there is a risk of failure and a lot of time will be spent on deals that never materialize. Most importantly, bringing the deal to a successful closure and obtaining a good price is a skill for which even a seasoned business person is prepared to pay a high price.

Retainer (ongoing) fee

In retainer arrangements (see section 1.4), the consultant’s fee is calculated on the basis of a number of days of work in a period (say four days per month) and the consultant’s normal daily fee. A retainer provides a steady income to the consultant and saves marketing time. The consultant may therefore agree to a reduced daily rate. The retainer fee is charged and paid even if the client (at his or her discretion) makes use of the consultant for less time than foreseen by the contract.

This can be a delicate issue. The client may feel that the consultant should have taken the initiative to suggest what needs to be done. This is what good consultants do – in working under a retainer, they do not take a passive stance. Instead, they closely follow the client’s business and come up with their own suggestions on how they could be useful. This formula is convenient if the consultant and the client know each other well, if the relationship and the work content are quite straightforward and if there is a mutual understanding on how the consultant can be most useful.

30.5 Fair play in fee-setting and billing

None of the techniques discussed guarantees absolute precision and objectivity of remuneration for the work performed and results produced. There will always be an element of uncertainty, and of subjective judgement, which may or may not be correct and fair. Despite progress in measurement techniques, fee-setting and billing for professional consulting work continue to be matters of honesty and trust, in addition to being matters of measurement and control. Consultants and their associations are well aware of these two sides. Their concerns are expressed in the codes of conduct, which tend to pay considerable attention to billing techniques regarded as ethical, as well as to practices that are not recommended or are specifically banned by the profession.

Communicating fees to clients

Clients should be properly informed about fees and about the methods used to calculate them. They should have no reason to suspect that they are being

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charged an exorbitant fee and that the consultant wants to conceal an unjustifiable profit. Clients do not expect consultants to provide a high-quality service for a low price; indeed, many clients are wary of cheap consultants. Nevertheless, consulting is costly, and clients have the right to know why it is so and what they will be paying for. This is particularly important when the time actually spent with the client accounts for only a minor portion of the full cost of the knowledge provided through the assignment.

Up to a certain point, it is a matter of tactics and tact to decide when and how to communicate the fee to the client. Some clients will ask a direct question in their first meeting with the consultant (see section 7.1); they should get an equally direct answer. Others may make remarks that express their fears, or show ignorance about consulting fees and their justification. At a convenient moment the consultant should tell the client what the normal fee rate is and in what way he or she would charge for the work performed. If the client asks for more information, the consultant should explain the structure of the fee.

Such general information should be given at a relatively early stage in negotiating the assignment, to avoid disenchantment at a later date. Information on fees given in the written proposal to the client should not come as an unpleasant surprise. In particular, if the client believes that the consultant’s standard fees are too high, this should become clear before a preliminary diagnostic survey and work on a detailed proposal is started. On the other hand, it may be better tactics to demonstrate professional competence, genuine interest, willingness to share knowledge and a good understanding of the client’s business before starting to talk about fees.

Irrespective of the tactics chosen, there is a general rule: the client must be informed about the fees, or the basis of fees to be charged, before the work starts.

Overcharging

A universal rule concerns the appropriateness of the fee to the work actually done. As regards the time taken, the consultant may be the only person who knows how much time was really needed and spent to complete an assignment. Charging for time not worked, or spent inefficiently because of flaws within the consulting team or firm, is unprofessional, even if the client is wealthy. Charging an excessive fee for a simple job is equally unprofessional. As regards flat fees, they should not be used to blur information or to make sure that the client will pay more than if a per diem fee were used.

Double billing

Double billing must be avoided. A professional who works for two or three clients during the same trip should not charge the full travel time and cost to each client separately. A consultant who, in calculating the standard fee rates, has already made a provision for the administrative and communication charges of the firm should not charge separately for these expenses in billing individual clients.

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These are straightforward issues. More delicate questions arise in connection with research, fact-finding, development and systems design work, which can serve as a basis for two or more assignments, reducing the cost of the assignments. Is it fair to charge data collection or research work performed for one client (and fully paid for by that client) once more to another client at a full rate? If not, why should the second client benefit from work financed by the first client? Why should the consultant miss the opportunity to make an extra profit if no one knows about it? These and similar questions require judgement based on both business policy and ethical considerations.

Price of exceptional expertise

In contrast to the situations described above, there are cases where any fee level can be justified and regarded as fair if the client is aware of the reasoning behind it. This may be the case when an expert is able to help with a difficult strategic decision of far-reaching importance to the client’s business, to negotiate a major acquisition or to prevent a disaster. Usually such assignments will be short, and even an exceptionally high per diem or lump-sum fee will be a fair compensation for the consultant’s knowledge and only a fraction of the client’s possible losses or gains.

30.6 Towards value billing

The previous sections illustrate that in a professional service it is difficult, and at times impossible, to establish a clear, understandable and indisputable relationship between the cost of a service, the time required, and the results actually achieved. An ethical approach to assessing and recording time and costs, and establishing “fair” or “reasonable” fees, is essential, but it is not enough. In mature, demand-driven markets – and the consulting market in most countries is evolving in this direction – clients want to pay for value received, not for costs incurred in delivering a service. While they may be prepared to pay more than the costs if the value is high, they will resent paying a high price for a service of low value, irrespective of its real cost.

It is essential to understand the difference between cost and value. Value is not a mere reflection of costs. It is, above all, the client’s perception of what has been added to the business thanks to the consultant’s intervention. This perception can be very subjective. To one client, a retainer may have a high value since he can call on the consultant whenever he needs to. To another client, such easy availability has no value and she would not be prepared to pay for it.

Competition tends to ensure that a relationship between value and costs is maintained, and re-established when necessary. In a free and open market, professionals could not afford for long to sell a service of low value for a high price, claiming that this is justified by their costs. If the consultant believes that the price must be high because the cost is high, and the client fails to see a

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reasonable relationship between the value added to the business and the price paid, something is wrong.

These are the reasons behind the current efforts to apply what is now commonly called value billing, or value-added billing. In value billing, the price paid by the client is in proportion to the value added by the consultant. This approach does not preclude the use of any form of fee-setting and billing. A per diem fee may be perfectly correct and the daily rate may even be tripled if the issue at stake is important and the value to the client will be high. Yet in more and more cases other techniques of fee-setting are regarded as more appropriate forms of value billing.

The time when a consultant could say, “I am a professional and this is the price of my time” is gone. Increasingly, management and business consultants have to think of the value of the service rendered and of the degree of client satisfaction, aiming to judge them from the client’s perspective, and discuss them frankly with the client. This will help to reduce misunderstandings and conflicts over the relationship between value and price.

A consultant’s attitude to value billing was best expressed by Gerald Weinberg in his Sixth Law of Pricing: “If they don’t like your work, don’t take their money.”3 This view is shared by other leading professionals. Christopher Hart’s firm gives the following guarantee: “If the client is not completely satisfied with the services provided by the TQM Group, the TQM Group will, at the client’s option, either waive professional fees, or accept a portion of those fees that reflects the client’s level of satisfaction.”4 In supporting this approach, David Maister points out that “the professional firm market-place is cluttered with claims to excellence and assertions of quality, few of which are credible to the buyer... The reality of today’s market-place is that if your client is unsatisfied, you’re probably going to have to adjust the fee anyway.”5

30.7 Costing and pricing an assignment

Calculating time

The first step in costing an assignment is the calculation of the time needed to carry out the job. This calculation is based on an assignment plan (sections 7.4 and 31.1) and on estimates of the time required for each work operation. Reliable time estimates can be made only if the assignment plan is precise and detailed enough. For example, in planning the diagnostic phase of the assignment, the consultant can choose among several data-gathering techniques. The time requirements of the different techniques can vary greatly.

Considerable experience is required to assess correctly the time needed for all operations and phases of a consulting assignment. Such an assessment is normally made by senior members of the consulting firm, responsible for planning and supervising assignments. Some consultants have their own tables of indicative time data to which they can refer in assignment planning

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(e.g. number of interviews per working day). Such data must be applied with due regard to the specific conditions of every client and assignment.

There are cases where precise time assessment is difficult, if not impossible. Two kinds of situation are quite common.

First, either the individual who is assessing the time may be inexperienced in consulting, or the job to be carried out may be new even to an experienced practitioner. In such a case the consultant should try to obtain information on the time required in comparable situations, say from other consultants. Or, instead of making a commitment to completing the job in a fixed number of days, he or she should give only an estimate of the time and suggest a more flexible arrangement to the client.

The second case concerns assignments in which the initial phases can be planned with precision, while the subsequent phases can be estimated only roughly. Typically, the consultant may be able to make an accurate time assessment for the diagnostic phase, a rough assessment for action planning, and no more than a preliminary guess for the implementation phase. This is quite understandable owing to the number of factors likely to affect implementation. In these instances, it may be preferable to use a phased approach to assessing time and costing the assignment. Only orientation data would be given for the phases where duration and volume of work required are unclear at the beginning of the assignment. Clients who understand the nature of consulting will be receptive to such an arrangement.

Costing the consulting time

As mentioned in section 30.1, most consultants try to be as precise as possible in measuring the labour costs of an assignment. The cost of the time of operating consultants would be treated as a direct labour cost in any case. The cost of supervisory and control work, as well as various technical and administrative support operations, can be treated as either direct or indirect costs and the consulting firm will have to decide which is more appropriate.

If different categories of consultant are assigned to the project, it is customary to calculate and indicate the time and price for each category separately, so that the client knows how much he or she is to pay for the junior, intermediate, senior and very senior levels of direct services. As mentioned earlier, fee differentials can be significant and the cost of an assignment could rocket if a large part of the job is done by the most expensive tier of the consulting staff.

The total time required by an assignment, and the cost of this time, should be established even if a fee-setting method other than per-unit-of-time rate is applied. In such a case, the consultant will use it as internal management information in deciding the type and size of fee for which he or she would be able to work.

Other expenses

Expenses other than direct labour costs may be either included in the fee as overhead expenses or charged directly to the client. It is important to make this

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clear to the client, who should know precisely what kinds of expenses will have to be reimbursed.

Typical billable or reimbursable expenses are travel, board and lodging expenses of consultants on assignments, special services arranged by the consultant (e.g. testing, computing, printing, purchase of special equipment, drawings), long-distance communication and document delivery. In addition to listing these items it may be necessary to indicate the values, as for example, the expenses that the consultant expects to incur in travelling to and from the client’s premises, and how much the client is to pay for the consultant’s board and lodging, or for local transport during the assignment.

In international consulting these billable expenses may be quite high, reaching 25–30 per cent of the fees. There may even be a provision for family travel and accommodation if the consultant is to work on a long assignment abroad. Expenses defined as billable are not a part of the consultant’s fees, but a separate additional item in the total assignment budget and in bills submitted to the client.

Most consultants will ask the client to reimburse these expenses without paying any additional overhead or mark-up, but some consultants add a 10–20 per cent mark-up to cover their administrative costs.

Comparing costs and benefits

Irrespective of the fee-setting method used, the client is likely to compare the price proposed by the consultant with the value gained by the client’s business. The consultant, in pricing the assignment, should make his or her own calculation of this ratio, even if the client has not explicitly asked for it and has not even thought of it.

If the value to be generated cannot justify the price in the client’s eyes, the assignment design may need to be completely revised. Or the client should be encouraged to think of a different approach, for example, purchasing standard record-keeping and cost-control software rather than asking the consultant to design a customized system.

Discounts and contingencies

Under normal circumstances, if the cost of the assignment has been calculated correctly there is no reason to grant any discount on a consulting fee, and the consultant cannot usually afford to do so. Nevertheless, in certain situations a reduced fee may be justified and can be offered.

A client may claim a “quantity discount” if the volume of work contracted notably exceeds the average size of assignments. For example, a consultant working for public administration may be asked to do a similar job for several agencies. Either the assignment can keep the consultant occupied for a fairly long time, or the assignment team will be larger than usual. The consultant may save on marketing time, administrative support expenses, and even on technical

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backstopping and supervision. A discount can also be arranged if a consulting firm already has an assignment with a client, and is offered an additional one by the same client for the same period of time.

On the other hand, in costing assignments it is difficult to ignore changes in the cost of living and price levels. Aprovision for necessary cost increases can be made in various ways, depending on the client’s and the consultant’s convenience. For example, the contract can include an “escalation clause”, whereby the fees will be adjusted upwards in accordance with the officially recognized inflation rate. Or a contingency provision (say 5–10 per cent of the total cost) is made, to be used by common agreement of the consultant and the client for justified and inevitable cost increases, and for expenses that could not be foreseen before starting the job.

Schedule of payments

Both the client and the consultant are concerned not only about the amount of the fee to be paid, but also about the payment schedule. Many clients are interested in delaying payments. Consultants, in contrast, want to be paid as soon as possible after having completed the job or a part of it, and if they can get an advance payment before starting the job, they are certainly not opposed to it.

The most common arrangement is for the consultant to bill the client periodically (as a rule monthly or weekly) for work carried out in the previous period. The last bill is payable within an agreed number of days after the completion of the assignment. Payments are to be made within an agreed period of time – as a rule, 30 days after billing.

There are, then, various possible arrangements:

●In some situations (e.g. international consulting), consultants may prefer to receive an advance payment after the signature of the contract, but before starting the work; by agreeing to this, the client confirms his or her commitment to the assignment and confidence in the consultant.

●If other than per-unit-of-time fees are applied, there may still be some advance payment before the project is completed, or the consultant may propose waiting for payment until the job is finished and the projected results achieved. For example, the payment schedule may be: 30 per cent on signature, two payments of 20 per cent each during the assignment, and 30 per cent one month after the client has received the final report and bill.

●Occasionally a schedule of payments may be so important to the client that it is necessary to adjust the pace of the work to the client’s financial position. For example, the client may prefer to stretch the assignment over a longer period of time. Or the consultant may be able to accept a payment schedule that differs from the actual work schedule of the assignment, but makes the processing of payments easier for the client.

In fixing their fees, consultants should find out if the payment schedule matters to the client, and whether there are any particular constraints. However,

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