10 costly mistakes around fees
The ability to negotiate the highest possible fees without risking a client relationship or an instruction has become increasingly important to professional service firms and individual professionals in recent years. It is easy to make costly mistakes. The rising influence of procurement on the buying side is squeezing margins for many service providers. Those best able to withstand these pressures are usually those able to negotiate robustly on fees.
Clients often ask what makes someone a great fee negotiator, i.e. someone able to get clients to agree to pay as high a fee as possible without losing the work or the client. Many believe that great negotiators are born, not made. The truth is however, that great fee negotiators, in common with high performers in any other sphere of human activity, know how to maximise positive actions and minimise or avoid mistakes.
For fee negotiations positive actions include: preparing; setting appropriate vetoes and targets; trading concessions and looking for creative solutions. This is supported by the appropriate mind set, being flexible and practice, practice, practice.
A sign of intelligence is learning from one’s mistakes and a sign of true intelligence is to learn from the mistakes of others. Not surprisingly participants at our High Impact Fee Negotiation Programme find it helpful to review the most common mistakes and how to avoid them. Although not all of those listed below are negotiation mistakes they are relevant because avoiding them either avoids the need to negotiate or helps improve one’s negotiation position.
a surprisingly common mistake. The desire to trust blindly is all about a lack of self confidence and a desire to avoid engaging in fee negotiations. Trusting a client once may be appropriate, but there is no excuse to trust a client twice if the client turned out to be untrustworthy. The remedy is to get it in writing or to ask for significantly better terms so that you have some buffer. Remember – promises don’t pay bills.
Leaving it until after the work is done
professionals often kid themselves into deferring the negotiation until a job is done by claiming that they could not realistically assess the amount of work needed or that the client will be more inclined to pay the fee when he has seen what has been achieved. Given the amount of discussion around this theme it is clear that in over 90% of cases leaving it to the end only sets both sides up for disappointment, frustration or worse. The sad truth is that once a service has been rendered clients are no longer beholden to their service provider. They either forgot why so much work had to be done or they simply don’t care. The remedy is simple – don’t leave it to the end, get the difficult issues out of the way early. If the client doesn’t want to pay what it takes – why work for them?
Not agreeing terms
a variant of the two mistakes above. The “bill till they scream”, aka the de Sade approach is no longer acceptable (if it ever was). Some professionals still expect their fees to be paid, no questions asked. This is increasingly unlikely to be the case. If both sides choose not to agree terms before or during an assignment I always worry that one side will try to take advantage of this. Don’t let them even think that they can. There are times when starting the work first and then agreeing terms can be a clever way of avoiding competition and improving one’s negotiation position. This should not be left too late.
Doing pre-instruction work at heavily discounted prices and not recovering it in the bill
all too often professionals deliver significant pre-assignment work which delivers significant value. This is often considered paid marketing but not invoiced for. This problem is particularly acute in the case of time based fees. The remedy here is to be careful about “freebies”. Get clients to recognise the value of the work and to pay for it in some form.
Agreeing one sided risk share deals
If it’s too good to be true it is either not true or not that good. Attempts to resolve negotiation impasses through creative solutions such as risk sharing are well worth the effort, but only if the underlying problems, i.e. differences in the position of the two negotiating parties, can be resolved. Deferring the issue is not a solution. Remember that accepting risk has value (ask any banker). This value should be recognised and compensated for.
Agreeing terms that did not fairly reflect the underlying risks or costs
This is similar to the mistake above but much more insidious. This usually happens when the desire to be busy is greater than the desire to be profitable and happens far too frequently. There are many root causes for this but ultimately it boils down to professionals being unclear why they want to accept a piece of business. If the work does not contribute to a professional’s practice or career it would be better to say no to the work rather than to run the risk of not being available for better work or of ruining one’s position in the market. The best remedy is to be actively marketing for alternative work so that saying no is not a problem.
Not monitoring progress
a classic mistake that, although not a negotiation issue, soon becomes one, especially when the we hear phrases such as “…but nobody told me!” When combined with risk sharing fee structures not keeping an eye on where things stand and failing to intervene quickly will often create the costliest problems. The solution should be obvious – keep monitoring projects and address problems sooner rather than later. This may be as simple as holding regular review meetings, attending conference calls or monitoring time sheets.
Not keeping the client informed on progress
how often do we avoid giving bad news in the hope that things will work out on their own? This strategy is known as “double or quits” and has been responsible for some of the biggest losses in banking. Problems rarely go away on their own but delaying engaging with clients usually creates even bigger problems. Surprises are poison for relationships and big surprises are lethal. Engaging constructively with clients when things don’t go according to plan can actually strengthen a relationship.
Not billing regularly and promptly
empirical evidence demonstrates that the bigger the time lag between work done and invoicing, the higher the risk of write downs. Getting bills out early is a good way to avoid having to negotiate at the end, when clients have little to lose and often insist on a final concession. Don’t give them the opportunity. In cases where projects become more complex or costly than anticipated issue interim bills. This will get the client’s attention and start the dialogue early.
Making unconditional concessions
in an effort to please clients professionals are often tempted to accede to a client’s request such as a discount or other concession without asking for something in return. This can be dangerous as it teaches clients that if they ask they may get it. Furthermore they learn it does not cost them anything to ask. The solution is easy to apply. Whenever a client asks for something ask for something back. This can be done tactfully but the client has to learn that asking is not costless.
This is one of the most frequent and costly mistakes that one can make – in all aspects related to wining work, pricing, negotiation and value managing projects.It goes without saying that time spent preparing will yield major returns.
All of these issues and the techniques that any professional can master to raise their performance as a fee negotiators can be found in High Impact Fee Negotiation and Management for Professionals, 2nd Edition, published by Kogan Page.