Most professionals will admit to being relatively weak managing fees, i.e. setting the price for a piece of work, getting this agreed with the clients and keeping the profit margin implicitly agreed during the course of a project or instruction. Some professionals will even admit to an intense dislike having to spend time in this area. There are a multitude of reasons, such as the fear of damaging the client relationship, why practitioners feel this way – the outcome of these however is that PSF firms and professionals are exposing themselves to increasing financial risk, often unnecessarily. In extreme cases firms have imploded due to poor financial performance, at the root of which lies this diffidence to attend to the money. Relatively modest investments of time and effort in fee management can however significantly improve financial performance and, ironically, improve client relationships.
To provide an indication of the relative importance or difficulties associated with particular issues I have provided a subjective estimate, expressed as “odds” at the end of each section. These odds should be interpreted as an index of “perceived challenge” rather than a statistically robust number.
To understand this problem consider the life cycle of a typical instruction and the resulting fee. This includes:
- Find the work – “Find it”
- Win the work (sometimes through a competitive process) – “Win it”
- Set the appropriate fee and fee structure – “Set it”
- Agree the fee with the client – “Get it”
- Deliver the work – “Keep it”
- Invoice – “Bank it”
Professionals and their firms are historically ill prepared or badly set up for most of these stages, i.e. the odds are stacked against a front line partner overcoming these challenges successfully.
Professionals should be in a strong position to be profitably busy – after all they are by definition highly qualified to solve clients’ difficult problems. Clients typically know that they have a problem and are looking for the right provider of advice. Many professions require extensive qualification and continuous development and are usually protected by law. These circumstances limit supply, define minimum standards and set a high basis for fees as professionals will wish to recover their investment in time and efforts to become a practitioner. ODDS: 3:1 For
PSF practitioners however face the “producer – manager dilemma” because professionals have a strong preference to focus their attention on solving technical problems, i.e. produce, rather than manage their business. Few are motivated to do the business development work required. This problem is particularly noticeable within larger firms where, practitioners rise up through the ranks mainly on their abilities to “work”. In some particularly traditional firms this is deemed to be the responsibilities of partners only ODDS: 2:1 Against
Younger partners who have less of an established client base and less experience of successfully building one, are tempted to take on any kind of work to start generating income. By so doing, they typically fail to develop an understanding of how they can differentiate themselves. Such a shotgun approach may be successful it is ultimately counterproductive to build a sustainable, premium practice. In the long run they set themselves up to compete on price, i.e. being the cheapest. ODDS: 4:1 Against
Another driver to practitioners’ reluctance to “find” business is that effective origination requires time and effort. Few PSFs track this valuable time investment effectively. Instead firms focus on data relating to billable hours. This reinforces professionals’ prejudice for billable work instead of investment in clients and marketing. ODDS: 6:1
Closely related to the above are the issues relating to winning work at the “right” conditions. Professionals that do not actively market themselves rarely have many options. This has a dual effect on their ability to price work attractively. If professionals do not speak with clients at an early stage of a project, they are more likely to be asked to compete in a price driven selection process. A lack of options will cause practitioners to accept unattractive terms simply because they don’t look so unattractive in comparison – after all, some work at mediocre conditions is a lot better than no work at great conditions.
Those good at “winning” understand clients and their selection criteria and how to demonstrate value added. Few practitioners receive any training in this area and fewer still are given the training to do this well. ODDS: 10:1
There are three basic approaches to setting a price or structure for a particular piece of work. In descending order of preference one can price to value, price to market or price to cost.
Pricing to value is the most powerful route to premium pricing. Few professionals however truly understand the value of their work for their clients and are therefore ill equipped to conduct a values based negotiation.
Pricing in line with competitor pricing is suboptimal for professionals for three reasons. When services can easily be compared to those of competitors we have, by definition a commodities market.
When services cannot easily be compared professionals have to articulate the differences between their offering and those of their competitors. As most don’t spend much time understanding these they are tricked into thinking that it is down to offering the lowest price.
The third reason why market pricing tends to work against professionals’ interests is that many clients will use the threat of competition to drive prices down. Professionals will almost always choose to belief their clients’ threats and are intimidated into giving (bigger) discounts. ODDS: 14:1
An absence of reliable historic pricing data and inevitable over optimism regarding the time and resources needed to handle all but the most regular types of work further undermines good pricing. Some clients deliberately ask for quotes on the basis of incomplete information at short notice. Many professionals in a misguided effort to protect a relationship that is all one sided, fall for this classic procurement ruse. ODDS: 16:1
This is classic negotiation territory. Few professionals are comfortable negotiating with their clients and even fewer are any good at it. The single most powerful driver at work here is the fear of losing the work and even the client. Many clients take full advantage of this to exert maximum pressure on their professional service providers.
Outstanding negotiators are made not born. Good negotiation skills, such as planing, concession trading and creative approaches can be learned and have to be practiced. They do not come naturally. Whereas a typical professional will spend something in the region of 30,000 hours honing their craft, they may have spend less than 100 hours acquiring and practicing commercial skills such as handling clients or negotiation. Compare this to the time and effort invested by a typical procurement manager. They attend regular training and negotiate on a weekly if not on a daily basis. No surprise then that even a relatively junior procurement professional in their late 20s or early 30s has a considerable edge on a veteran practitioner in their late 40s or 50s. ODDS 20:1
Most assume that once instructed fees are no longer a problem and that they can focus on doing the work. Unfortunately this is not the case. Quite a number of firms that the Møller PSF Group works with lose more profit during the delivery of work than they when pitching to win an assignment.
The problem is that many professionals, fail to manage projects appropriately. Scope changes are a major source of margin leakage. Many professionals undervalue the importance of a clearly defined scope of work. Few professionals have the discipline and competence to address scope changes during a project. This both causes big write-offs as clients refuse to pay for the overrun and fails to take advantage of a precious source of negotiation advantage. ODDS 25:1.
Most professionals do not much care for administration. Some professionals run into problems when chasing outstanding invoices when clients seek to delay payment or extract another final discount prior to paying. Some professionals would rather grant the extra discount – for feat that collecting on the debt will endanger the relationship. ODDS 27:1
What can professionals and Professional Service Firms do to redress the balance and beat the odds?
The biggest common factor for the challenges listed above is the fear that efforts to improve profitability will risk losing an instruction or a client.
Paradoxically one of the best ways to overcome the fear of losing a client or work is to be prepared to do so. If practitioners never encounter price resistance they are underpricing. If they encounter price resistance it will not always be possible to reach agreement. Some firms have gone over to articulating clear new business acceptance criteria to help partners understand when to say no.
Practitioners need appropriate information to price. Firms we work with are building databases of past instructions. They are also investing in tools to help provide a more rigorous basis for pricing decisions.
Many firms are building the negotiation competencies of their fee earners. These have to be learned. Key negotiation skills include setting ambitious and realistic targets, managing the flow of concessions and how to apply creativity.
Regular progress monitoring of projects is essential for profitability. Although many professionals have long established processes in place, many of these have to be reviewed critically in the context of new technologies and changing client requirements.
Firms are also redefining roles and responsibilities in relation to fees. Partners have become more accountable for their financial performance and that of their teams. In addition, some firms have started to hire pricing and negotiation experts to provide support to help partners beat the odds.
If appropriately incentivized and supported partners will find that paying attention to financial issues will not only improve financial performance but also that their client relationships and the quality of instructions will improve. With this in mind it will only be a question of time when partners will be able to beat the odds.
A longer and more detailed version of this blog can be found here