One of the best kept secrets of PSF economics is that the vast majority of PSFs lose more profit when working on an assignment than when having to pitch for one. No matter how well or how badly a mandate was priced and fees agreed – chances are that the biggest drains on profits will occur after the deal has been won when there is no more competition to drive down fees. Why?
The basic truth is that most professionals are so focused on doing the work that they forget about the economics of work. In the good old days that may have worked – the more a professional worked, the more he or she could invoice. As most clients paid the bill without asking too many questions things were fine.
Times have changed. Nowadays clients expect, for all but the most unpredictable projects, to be able to ask for and to receive reliable budgets at the start of a project. These may then be subject to “robust” negotiation. Once agreed, clients no longer accept invoices above and beyond these budgets, unless changes were agreed.
PSF projects however do take on a life of their own for a multitude of reasons. These can include changes to the project time-table due to unpredicted external events, changes in client requirements or simple issues such as being wrongly informed by the client as to the extend and nature of the work required or information available.
The only way that such changes can be managed transparently and fairly is to establish a clear scope of work at the start of the project. In fact – no fee quote makes sense unless it is accompanied by a clearly defined scope. Just ask yourself – is a 75,000 fee expensive or cheap? The only sensible answer of course is: “it depends” on what the fee covers. This cannot be answered without a scope.
Once a scope has been defined (and agreed) it is possible to discuss changes to the scope during the course of a project and the implications for fees. There is an old, established commercial principle that states that: “there is a price for a job and a job for a price. Change the job – change the price”.
Unfortunately many professionals we work with have still not fully understood the full implications of this. Although most PSFs now require clients to sign off on some form of engagement letter at the start of an assignment (if for no other reason other than pressure from professional indemnity insurers), the full power of scope is still little understood and poorly implemented, often to the disadvantage of both service provider and client.
Even when a scope is in place many professionals still resist monitoring the progress of a project against the scope, fail to informing the client of work that is out of scope and then miss out on the opportunity of having a sensible discussion regarding changes to the budget/ fees.
These failures are especially troublesome for two reasons. A failure to notify clients of changes in scope – is a failure to manage the client’s understanding of the progress of a project with all the risks associated. Small wonder that this is one of the most common criticisms raised against PSFs.
The other reason is that clients have reduced leverage to negotiate fees in the middle of a project. Often changes in scope are due to client requests. It is also highly unlikely that an alternative adviser will be able to replace the incumbent for a lower fee (known as switching cost). Professionals are therefore in an excellent position to ensure that the extra work is remunerated reasonably well.
Changes in scope can be a powerful opportunity for a professional to both build trust and a relationship as well as improve margins. All too often professionals fall short of their own professional standards in failing to recognise and apply this.