If you want to value bill – you need to start much earlier than you think
I am often asked by clients how they can raise the share of value billing in their firm. There are usually two reasons for these questions:
- Value billing is seen as the holy grail for billing by many firms and professionals – on the assumption that value billing will always yield more profitable fees, and
- Professionals find value billing to be extremely difficult as they either don’t know how to value bill and/ or because clients resist a move towards value billing, often threatening to withdraw business if the provider persists with a value based approach.
Before dealing with the question further let me first resolve a potential misunderstanding regarding the usage of the term “value billing”. Many professionals (usually but not exclusively those based in North America) refer to value billing in connection with any fee structure or billing approach that results in a lower fee compared to one based on an hourly or other time based rate. The explanation for this being that the resultant discount generates additional value to the client.
On the other hand, professionals usually (but again not exclusively) based in Europe would associate a value based fee with one in which the fee is set in relation to the value of a transaction or service. A typical example of the former might be a discounted or blended rate arrangement and of the latter a percentage of value based arrangement. Although many of the points about to be raised can be applied to both I will focus on the latter interpretation, i.e. how to agree fees with clients that are driven wholly or in part by the overall value of a transaction or service.
The reason why value billing has become a more prominent challenge is that many professionals face limitation on their basic unit of production (time) whilst clients have started to become more sophisticated in their approaches to buying professional services. Using procurement and other methods clients are increasingly looking for efficiencies, synergies and other cost savings.
Before addressing the “how” of value billing it is important that anyone looking at this issue should double check that the “improved profitability” assumption holds.
There may well be circumstances where an input based approach to invoicing (that is what time based approaches are) may be preferable. These include instances where the volume of work cannot truly be estimated up-front and where there may be completion risk, i.e. where the project may never reach its intended goal. Another example of where value based billing may not work is where the individual value of a project or service may not be very high to a client, but where a service provider, through the application of processes or IT might be able to execute a large volume of repeatable work highly efficiently. In such a situation a fixed price approach may very well be worth considering, as any initial R&D or development costs will not be recoverable in the first instruction or two but over a large number. By fixing the price at a point that is less than break even for the first instruction a provider may well be able to generate such large volumes as to make the initial investment highly profitable.
Once however it has been confirmed that a value approach does indeed make economic sense for the service provider the question remains how best to agree this with a client.
A number of challenges present themselves:
– Does the service provider actually understand the value of the service or transaction to the client?
– Can the service provider calculate or estimate the value added delivered?
– Can the service provider articulate the value delivered?
– Does the client understand and agree with these views on value add?
These are actually very tough challenges for the best fee negotiators and often require extensive and detailed preparation. There are three key actions that need to be taken:
- quantify the value,
- share and agree this view on value with the client, and
- negotiate an acceptable fee and fee structure based on the value agreed.
To quantify the value you need to see the service or transaction in terms of the client’s world. No matter what you think the value of a service is, it is the client’s view (the true one – not necessarily the one that they will pretend to have) that matters. Ask yourself questions such as:
– How much more profit or revenue will be generated or costs saved as a result of this?
– Will this work materially improve the quality of the client’s business or reduce risk?
– What other benefits can/ will the service or transaction deliver the client
– How would the client go about quantifying any such benefits?
– How much of these benefits will arise from the provision of the services in question?
– How does the way in which the services are delivered by the specific PSF firm or professional impact on the value delivered, i.e. what extra benefits do we deliver as opposed any other firm
You need to confirm that these views are shared by the client. It is my strong view that his cannot happen early enough. One of the biggest challenges that many professionals have is to hold commercial discussions about what the provision of a service actually means for a client. What are the implications if the service were delivered poorly or not at all, or if the transaction or project did not happen for some reason? How does the client talk about this project internally or with external stakeholders? Having a strong view on value or co-developing a view on value with a client in the early stages of the business development process can be a major competitive advantage as clients will see how well the service provider understands their needs and is looking to deliver the desired benefits.
Value billing discussions often fail because these “value discussions” did not take place early enough. The client consequently failed to develop a view on value and to build an internal consensus around this. Under such circumstance it is no wonder that clients will push back on a value approach, preferring to go with the tried and tested alternatives such as time based or fixed fees. In the case where clients or budget holders do not have a view on value it often becomes a critical step in the run up to a successful pitch or fee negotiation to educate the client so that they can actually articulate their views on value.
Finally, assuming that you and your client have a common view on value, it remains a major challenge to negotiate a fee acceptable to both, particularly as the amounts in question can often significantly exceed a comparable, conventionally derived fee. This then becomes a classical fee negotiation issue as discussed in detail in High Impact Fee Negotiation and Management for Professionals. Some of the key issues to look out for here include the nature of the client relationship, i.e. is the client a dolphin who values your contribution and the relationship or is the client more of a shark – just looking for a cheap deal. Other issues also include the existence of precedents to guide expectations and discussions around what is a “fair and equitable” share of the value that should be paid as a fee.
Negotiating value based fees is a major challenge. The successful outcomes of such efforts however are much more critically dependent on the preparatory work that precedes the negotiations than just about all other forms of fee negotiations. Where value based fees make sense, investing the time and effort to position these with clients are well worth the effort and will generate very high return on investment.