My New Book

Order your copy today!

David Maister - Professional Business, Professional Life
David’s ResourcesAbout David
NEW! Browse my materials by topic of interest:StrategyManagingClient RelationsCareersGeneral

Passion, People and Principles

| return to blog index |

Advice on Negotiating a Deal

post # 214 — October 14, 2006 — a Client Relations post

David Kirk added this comment and question to the post on value pricing. I decided to move it to a new post to see if the community has reactions to his questions. Here’s what he had to say:

The timing of this post is almost perfect for me. Unfortunately, almost in this case is three days too late!

Over the last year, I’ve been working on-and-off with a trade association to do some work to solve a problem (entailing calculating a price index in a particular way based on historical data). This has all been in the “proposal stage” where we were all deciding whether what I could offer could work. (Not that my solution is particularly exceptional, but it is the best solution to their specific problem in this case and I know of very few others in South Africa who can provide all the aspects of this work – you’re gonna have to trust me on this part!). When they agree they want the work I done, I prepare a quote based on hourly billings for the team to be involved on the project. I don’t include any amount for the time already spent (amounting to about 40% again on top of the quote) because I felt that was part of the process leading up to getting the work. It was during this proposal phase where I did signficant research, both about their problem/situation and about the best solution for them.

If the results are positive (they will be based on historical data, so neither party can know this yet), the impact on the regulation of this industry is likely to mean that the member companies of the trade association will see a return on their investment in the project of several thousand percent (based on retaining pricing power and thus profitability from several large, listed businesses.

In a meeting this week that basically demanded a massive discount. Their argument for why the cost is too high? “The trade association is a non-profit company with limited funds.”

Also, based on the work done to date and the documents I prepared for them, it is possible that someone could “reverse engineer” the required calcs and do a decent job at performing the work (although if they messed up they probably wouldn’t even know it, let alone what to do about it) at a lower cost because their billing rate doesn’t reflect the expertise required to understand what calcs and formulae were needed in the first place.

So, my questions:

  1. What to do about the trade association claiming no money when the real beneficiaries have plenty, and how does this tie into value pricing?
  2. How do I get around the problem of having given away so much “free consulting”?
  3. How should I have approached this situation from the start, since it’s clear my actual strategy failed miserably?
  4. Does this sound like the sort of client that we should all avoid like the plague?

10 Comments

Lora Adrianse said:

This is a lesson I also learned the hard way. And interestingly enough, with non-profits. I’m proud to say, I no longer work for free for “potential” clients.

Today, I would have considered this as a feasibility study, or the exploratory phase of the project. I would have estimated and allocated myself a certain amount of hours to complete this phase of the project, priced it accordingly and required the (non refundable) fee prior to starting work. Depending on the situation, I may have broken the billing down to a hefty deposit with installments.

Another lesson that I took away from my experiences…non-profits do not fit the profile of my niches or target markets. I typically refer them to other consultants who specialize in working with them. My background is in business, and non-profits operate very differently from business.

I look forward to seeing what Tom “Bald Dog” has to say when he weighs in on this issue :)

David, if you would like to email me personally, I’d be happy to be more specific.

posted on October 14, 2006

David Jacobson said:

Trade associations can be quite rewarding clients provided you understand their politics: they are funded by members and therefore need to provide services that benefit all the members at the same time as understanding that members are of different sizes. There is also the possibility that you could get work for the individual members. Tip 1 : identify and understand the stakeholders.

Therefore stage 1 is preparing a proposal and costing for the research for member feedback and approval of project specifications and funding. Tip 2: communicate the benefits to the stakeholders.

Stage 2 is doing the research and preparing a discussion paper for further feedback which may result in Stage 3. Tip 3: don’t tell them how you are going to do the work, just the goals.

Stage 3 is doing the further work identified in Stage 2. Tip 4: this may involve leaving them with do-it-yourself tools (“intellectual property”) for the future but if you’ve developed relationships you may be requested to do further work.

It may well be that at that stage the association indicates to its members that because of their different interests they should talk to you individually if they want you to apply your skills to the individual member organisation. But it may also be possible individual members then get their own advisers to do the next steps based on your work.

At that stage you might publish articles or give talks to cement your expertise in the industry.

posted on October 14, 2006

Tom "Bald Dog" Varjan said:

Great point, Lora, about non-profits.

Most of them are pretty good at crying how poor they are. A friend of mine has recently had a discussion with the CEO of a non-profit. He said he couldn’t pay for the work because there was only $14 in the kitty. Yet, being the CEO of that non-profit allowed him to live in a $2 million home and drive a Porsche. Hm. I guess he has been faithfully pilfering the society’s kitty. Hence the $14.

I believe business is a value exchange: I help you to achieve ABC results, which will have a recurring annual financial improvement of DEF on your business. Calculating with a conservative 5% annual improvement after my disengagement, the 10-year value of my help is roughly 12.5 * DEF. What investment can you mobilise to garner this return?

And this is the bee’s knees. Many prospects want you to guarantee results which you can’t, unless you’re the ultimate decision-maker. For this investment you help clients to help themselves to solve a problem and keep it solved after you’re gone. You improve both short-term performance (catch a fish) and long-term performance capability (teach how to catch a fish).

So, it’s important that we don’t price the tasks that lead to the projected improvement, but present our fee as a fraction of the improvement we create in the client’s condition.

So, in the initial client interview you can ask about quantitative (higher sales, lower absenteeism, etc.), qualitative (better reputation, teamwork, etc.) and personal improvement for the buyer (more time with kids and family, less stress to manage business, etc.). We are all ego-driven creatures, and before we buy benefits for our companies, we buy personal benefits.

So, we don’t discuss time and deliverables, but only value. And the funny thing is that what we dismiss as “everyone knows that” is probably the biggest value we can offer to clients. Every now and then I review proposals for some local colleagues. I charge a flat $1,000 for it and it takes about 30 minutes. Yet, in 30 minutes we can discover several points of improvement in the proposal. A few months ago an IT consultant was about to submit a proposal for $7,800. We massaged it a bit, clarified the value he brings to the table and submitted the proposal with three options. The lowest option was $21,000. The client went for the $27,400 option. A tiny bit more time to render the service, but significantly more value in the client’s perception. And that counts.

I learnt this value pricing stuff a good few years ago from Alan Weiss, and it took me a bit of time to wrap my brain around it. I grew up under communism, and I was taught that value of a service was the amount of manual labour invested to create it.

Ron Baker’s stuff is brilliant. I’m about to order all of his books. It think this value-pricing stuff is really the wasp’s nipples (the real breakthrough) for professional practitioners. This is the only way to end the trading time for money loop.

And as a McKinsey study of manufacturing companies has found that increasing fees by only 1% can cause a 12% profit increase. For this sweet reward, I think it’s worth investing the time to learn value-pricing.

That’s it for now. Dinner ‘s ready, so I’d better go.

posted on October 14, 2006

Warren Miller said:

Thank you for a great post, David. This is a battle we have fought (and usually lost) on occasion.

I don’t know about what South Africa requires in the way of public disclosures by non-profits. I do know that, in the U.S., Form 990 (the 1040 equivalent for NFPs) is available for free via http://www.guidestar.org. In my experience, most U.S. trade ass’ns have BUCKETS of money ratholed in marketable securities. They just whine about being non-profit because that’s what they’ve gotten away with for years.

I like Lora’s comments about a feasibility study. Too bad I wasn’t lucky enough to hear them about 60 days ago. :-) And I very much agree w/her about NFPs not being in our target market. We learned that one the hard way.

I think David J.’s ideas and suggestions are very sensible. And I agree wholeheartedly w/Tom “Mad Dog’s” focus on value.

But, at the end of the day, NFPs are not part of our target market, and I’d bet a bundle that they’re not part of yours, either, David. The politics are ferocious, they don’t understand value, they’re culturally different from for-profits, and they go into sticker shock at your rates (and ours). Even if they reverse-engineer what you did (doubtful – they’re probably not that energetic, plus they just don’t think in those terms), I think this is one you will probably have to chalk up to experience.

But thank you again for a great post. It’s come a little late (this time) for me (and for you, too, I’ll bet), but it’ll be something that will be a huge help to us in the future.

posted on October 15, 2006

David Kirk said:

Thanks, David M, for giving me the airtime and to everyone else for the insights.

Lora, your comments have started me considering very seriously whether non-profits can be part of a target market alongside commercial businesses. Several of the comments above have highlighted that the differences are not trivial. As a matter of interest, how do clients react to your suggestion of non-refundable “exploratory phase”? I’ve heard this suggested before, but was always a little sceptical of the results I could expect while I am still in the early stages of being a brand.

David J – I found myself nodding vigorously as I read your comments. These are the lessons I learnt along the way, but succinctly and clearly worded. Thanks for providing the framework for my thinking. As a secondary point, how useful have you (and any others) found publishing articles in developing business and a brand for both non-profit and more traditional clients? Are non-profit companies more “impressed” by quasi-academic credentials?

Tom “Bald Dog” made many great points on value pricing, including this which I would like to qualify slighlty:

So, it’s important that we don’t price the tasks that lead to the projected improvement, but present our fee as a fraction of the improvement we create in the client’s condition.

While I agree to the general idea, I also agree with comments on David’s previous post about value pricing that the relative scarcity of the services being provided also comes into play. If you’re providing massive value to a client, but they could equally get the value from ten other providers, one would presumably have to at least consider the impact of competitive pricing.

And Warren, chalking mistakes up to experience does smart though, doesn’t it?

So, should I bend and try to get the work at a deep discount to improve my experience and possibly win the gratitude of a client of dubious long-term value, or do I stand firm and reiterate the value proposition of the project and highlight the long path we’ve gone down and my investment in understanding the problem, people and being ready to implement the solution?

posted on October 15, 2006

Francine McKenna said:

Dear David and David,

I’ll try to comment on each question.

  • What to do about the trade association claiming no money when the real beneficiaries have plenty, and how does this tie into value pricing? One of the most important things a consultant needs to do before proposing on an engagement is to qualify the client. Trade associations are a different kind of non-profit. As has been said, their funding comes from their members and is often very extensive. Part of qualifying the client (and a particular engagement) is to determine who and how they would pay for such a study and verify this, before doing any “free consulting.” Has the project been budgeted? For how much? Do they understand the level of effort necessary to get a good result? Have others had a problem getting this client to pay their bills? Do they have a reputation as an honorable client or are they they the type to “nickel and dime” you and renege after the work is done and your costs incurred?
  • How do I get around the problem of having given away so much “free consulting”? A proposal effort and the discussions involved as well as travel and other costs are an investment, in most cases. As with any investment, a consultant must make a calculation (and then a bet) of the likelihood of a payoff. If a client will pay for a feasibility study, that’s great. But most savvy clients, and definitely most not-for-profits, wil try to squeeze as much as possible out of you before the meter starts running. At the firms I worked we called them “brain suckers.” Sometimes they are soliciting proposals just so they can gather the most useful and current information from each and then do the project inside. It happens. They like to call themselves cost-conscious and careful. Determining the balance is where your judgement as a consultant serves you best in your role as a business person.
  • How should I have approached this situation from the start, since it’s clear my actual strategy failed miserably? You didn’t fail. You just weren’t ready to walk away when your terms weren’t met. That’s the key to any successful negotiation.
  • Does this sound like the sort of client that we should all avoid like the plague? Don’t avoid – Qualify.

posted on October 15, 2006

Tim Burrows said:

Some thoughts in relation to this:

1. Being “unique” doesn’t mean that you must find a niche that results in you being the only person in the universe that can provide the service (although this would be nice). There may be 10 other consultants that can deliver the service, but if there is enough work to keep them fully utilized, then as far as the client is concerned, you are it. That is, supply needs to be considered in the context of demand. Conversely, if there is insufficient demand to soak up the available supply, price cutting is a likely outcome. Are you sure that there are others out there that are actually available to do the work?

2. Pricing as a fraction of value doesn’t mean that you necessarily take 50% of the project’s NPV, but it may mean that you can justify a fee that is somewhat higher than your normal hourly rate. However, if you were pitching against competitors that were working on a cost plus technique then you would need to be offering something different.

Anyone have any real-world thoughts about this?

posted on October 15, 2006

michael webster said:

If the return on the pricing tool is so significant for the member companies, then charge them nothing for the work but insist on a very lucrative licensing deal.

If the member companies don’t really believe that the pricing tool will be value add, then they should happily give you a large percentage of the upside.

posted on October 16, 2006

David (Maister) said:

For what it’s worth, my experience with trade associations is that they pay very little but that they can be a fabulous base to market to their members. However, this does not come from dabbling – you have to make a real commitment and investment to build the relationship.

As an example, it can be a great positioning to be the person who conducts and publishes the associations regular surveys. You then get to be the person who understands the industry (or at least has more facts) better than anyone else.

However, it is hard to get paid full fees for this work.

I would NOT do it for free – I would not want the association organizers to get too comfortable with my availabil;ity. I have learned that if you let them exploit you, they will.

Another one of my rules is that its OK to ask for a discount up front, but if you change the rules midstream, that’s cheating – and I don’t work with cheats, under any circumstances.

posted on October 16, 2006

Matt Mason said:

I’ll also say thanks, David, for posting the topic – it’s one of my favorites.

While others have covered most of the points – I wanted to add one point about the selling process.

The exploratory process can be an important part of the larger “qualification” process that Francine mentioned above. For those of us who work primarily on fixed-price contracts, there is a not-insignificant amount of risk. We frequently use the selling of an exploratory process to get a sense of whether the client is truly qualified or not (or if we’re actually selling to the correct person in the organization).

We tend to keep the exploration relatively small – perhaps 5% to 10% of what we envision the size of the project to be. If the client is not willing to invest 5-10% of the projected cost to understand the feasibility, as well as to understand if this is something that would cost $25,000 or $100,000 – then we would not consider them “well qualified”. Which is not to say we don’t move forward – but we certainly think twice.

It’s still a challenge to do properly – you have to do a strong job of portraying the potential value of the opportunity to the person who can appreciate it.

-Matt

Brookline, MA

posted on October 16, 2006