When I first started my business, a colleague suggested to me that I bill my clients based on the results I created for them. It was an appealing idea at the time – after all, who wouldn’t take me up on that offer, and so long as I performed, I’d get paid. Sounds too good to be true? It probably is. Here’s an article that discusses charging models and why being paid on results, popular as this is becoming, may not be your best option.
I’m currently reading Alan Weiss’s book - “Million Dollar Consulting”, in which he has a section dedicated to payment models. (Highly recommended book, by the way, although I don’t agree with everything he says).
This is my interpretation of what he says:
The ways to get paid are on a spectrum from 100% up front, paid before beginning work at the extreme left hand side to contingency fees based on performance at the extreme right hand side i.e. you only get paid on results and over a timeframe beyond the end of the project. In between are situations like 50% deposit, then scheduled payments all due before completion of the project, and 100% payable on completion etc.
He points out that your cashflow situation deteriorates as you move from left to right. In the worst case scenario, you may not see any return on your investment in the project until many months after it has been completed. If you incurred expenses or hired subcontractors, then not only would you not have any personal income, but you’d be out of pocket as well. Most small businesses don’t have the cash reserves to fund someone else’s project, and if they have to borrow, then obviously their profit margins are eroded by interest payments. In the case of a “one-man-band” this might be OK, if you have other income to live on in the meantime and do not incur any costs other than your time. However, in the UK, the major reason small businesses go under is cashflow problems, so for most of us, positive cashflow is a necessity.
What I would add (and I don’t think Alan explicitly stated this) is that the level of risk increases as you move from left to right. For example, if there is any kind of disagreement during or after the project, and you haven’t been paid, or have only received partial payment, then you risk losing some or all of your fee.
If you work on a performance/results basis then you also risk:
- the client dragging their heels and not creating a situation where you can get started
- disagreements or ambiguity over what constitutes results or performance
- the client being unethical or downright dishonest and not providing full disclosure of results
- the client not using your work in the way it was intended thus diminishing the probability of success
- the client not being fully committed to the project or not valuing what you do because they’re not committed to paying anything yet
- creating an image of yourself or your company as being “desperate” for work
On the flip side of this is the risk to the client. Clearly, paying nothing until tangible results are delivered is the client’s lowest risk (and probably most desirable) position, and paying the full fee up front is their highest risk position. If the client perceives a high degree of risk in employing you for their project, then they may take their business elsewhere or just abandon the project. Therefore many marketers advocate reducing the client’s risk in order to win business by working on contingency fees i.e. paid on results. In this scenario, the consultant or independent professional should negotiate so that the rewards outweigh the risks – so that they will be paid in excess of their standard fee by the cumulative payments based on results.
Therefore the maxim for the consultant/professionals is to negotiate as much upfront fee as possible, in order to minimise the risk and prevent cashflow problems. But you need to be able to do this in a way that also reduces or eliminates the client’s perceived risk (or else you make yourself vulnerable to another risk – that of not winning the business). Other ways of reducing the client’s perceived risk include having a good reputation, building credibility and being known as the expert, plus adding satisfaction or money back guarantees.
You should only engage in results-based fees if:
- the reward outweighs the risks and hit to your cashflow
- contingency based fees are normal in your industry
- you have spare capacity and something is better than nothing
- you need the project to help build your credibility and reputation
- you have agreed metrics upon which your performance can be measured and the client is legally obligated to provide the corresponding information
Other than that, try to stay over to the left-hand side of the spectrum as much as possible if you want positive cashflow and to stay in business for some time to come!