Million Dollar Consulting¹ was originally published in 1992, and my position that consultants should only charge by value and never by a time unit or numbers of people involved was a major disruption to the profession. Hence, this book in its original version soon followed to explain the approach in more detail.

Historically, consultants had billed for their services on the basis of time units, usually hourly rates or per diem assessments. There is no logical reason for doing so, but the underlying reasons seem to have included the following:

• Other professionals had set a precedent, most notably lawyers and accountants, both of whom preceded consultants on the business stage.² (Architects, designers, and other professionals also charge in this manner.) Recently, some New York attorneys made headlines by moving rates to $1,000 per hour, which they readily conceded they didn't expect anyone to pay. Lawyers still actually bill in six-minute increments and will charge 55 cents if they mail a letter for you.
• Most of the conventional working trades—plumbers, electricians, carpenters, and the like—have placed a premium on their time.
• Time is the universal objective, in that the client and the consultant can agree on the length of an hour or a day. (Of course, how much of that duration is spent on qualitative work is another matter entirely.)
• Consultants have had a ready-made lever for increasing their business by merely increasing their time investment.
• One's consulting worth was usually perceived as the same as one's physical presence, thereby attaching worth to “showing up.” It was easy to attach a fee to that presumed worth: “If I'm here, I must be helping, so I ought to be paid.”
• The uncertainty of the work required that the consultant “protect” future time by charging for all time spent, since there was no firm way of predicting how much time would be required, what new and unforeseen developments might affect the project, or what increasing demands the client might come up with. The belief was that time spent on one client was irretrievably lost and was therefore denied another client (and another client's potential fee).

Finally, there seems to be a widespread belief, unaccountably held to most dearly by the larger consulting firms, that the only consulting items of value are either time or materials (deliverables) and that clients wouldn't pay for anything as ephemeral as pure advice. Of course, stated that way, this proposition is true. The point, however, is that clients will pay a great deal for the outcomes, results, and long-term value of that advice.

And that value has nothing whatsoever to do with time. If I solve your problem and create an innovation in one day that you can immediately begin realizing the value of, isn't that worth far more than my taking three months and denying you a quarter year of improvement? That's why charging by a time unit is unethical, pure and simple.

SUPPLY-AND-DEMAND ILLOGIC

One of the worst pieces of advice I ever heard was from a professional speaker who pontificated to the audience that speakers should “raise fees when demand exceeds supply.” That might work for soybeans or cement, but it's simply goofy when applied to professional services.

Demand never exceeds supply. Not only do I know of no consultants who are booked every day of the year, but I can't imagine any who would want to be, since real wealth is discretionary time. The idea, I always thought, was to work a minimal amount of time while earning a maximum amount of money. (My ideal client is one who pays me $5 million to work for 20 minutes a year. My wife points out that if I can work for 20 minutes, I can certainly manage 40 minutes.)

Moreover, supply and demand rest on the trembling foundation that a single client at a single time usurps all attention. It is possible to do something for multiple clients at any given time: research, joint meetings, newsletters, focus groups, interviews, and a plethora of other activities can benefit numerous clients in unique ways. (The lawyers achieve this by billing different clients for an aggregate of hours that only slightly exceeds by a factor of four the total number in any one solar day.)

My personal record is 38 active clients at one time.

There are actually formulas that advise that consultants take the following steps:

1. Determine the amount of money they need to support their total lifestyle.
2. Calculate the total number of hours available to consult during a year, eliminating holidays, personal needs, and so on.
3. Determine an approximate usage rate for the remaining time (for example, what percentage of time will the consultant probably be booked, given the marketplace and focus?).
4. Divide the result of the usage rate applied to the net available hours by the lifestyle needs total. This gives the hourly rate needed to meet financial goals within the given time constraints.

Now, there are only about 70 or 80 things wrong with this, but I'll concentrate only on the relative few needed to thoroughly debunk this point of view.

First, it's absolutely nuts to use your current lifestyle (or even an intended lifestyle) as the basis for income needs. What about unanticipated expenses (illnesses, extended family needs, unexpected opportunities to invest, and so on)? Especially for younger consultants (or for anyone without fully funded, totally comfortable retirement savings), why delimit yourself during your highest potential earning years?

Second, how do you intelligently arrive at a number of hours you think are available? The number will always go down from that estimate, never up, meaning that your hourly rates will be inadequate and you'll either have to raise them or take more hours from “private time.” Time is always usurped by the unforeseen, which, by definition one would think, can't be forecast. (This is the currently fashionable “black swan” phenomenon.)

Third, approximations of usage rates are absurd because high rates aren't necessarily good. It's simply not smart to be booked 80 percent or more of the time, because your flexibility is eliminated (just as any good medical consultant will tell a medical practice not to book all available hours every week but to set aside time for emergencies and other exigencies). Wouldn't we all rather work less for fascinating clients who pay us well rather than more for dull clients who pay us poorly?

Fourth and finally, the resultant hourly rate in the equation has no bearing on the market, the client need, the unique conditions, or the value of the help delivered. It reduces the consultant to an arbitrary commodity, to be compared to other hourly rates and other commodities, like fish or movie tickets. When you deliberately remove market uniqueness and differentiation, you also remove the basis for high fees.

So the very basis for a “supply and demand” dynamic is fallacious. We do not have a limited supply of expertise, nor do we seek higher and higher demand (not if we want to maintain a life). What we should want to accomplish is an ideal relationship of interesting, growth-oriented work and fees based on our contribution to the clients' results.

The “Big Four” (or whatever it is at this reading, having come down from the “Big Eight,” perhaps the “Big 1.5”) consultancies are the stepchildren of accounting and audit firms. Consequently, they have been fixated on billing rates that are based on hours, fit nicely into boxes on a spreadsheet, and can be conveyed in a no-thinking-required fee schedule. These are, after all, descendants of the primeval bean counter. Their dilemma, facing the tremendous overhead of multiple offices, advertising, and huge recruiting costs, has been addressed by creating an army of inexpensive technicians who descend on the client with an hourly billing rate that is somehow digestible but significant enough to generate profit when multiplied by the legion of consultants assigned to the account. This model has been adopted by smaller firms and independent practitioners who, frankly, should know better.

Supply and demand tends to get way out of whack when the consulting firm can produce a prodigal supply of low-level people, irrespective of the actual client demand. And this tactic has, understandably, driven clients to ask: “Can you do this with fewer people?” “Can you do this in fewer days?” “Can you do this with cheaper people?”

These are not the questions we want a client to be asking. I'd rather hear a client ask: “How can we maximize the results?” “Will you work with me on this as a partner for as long as it takes?” “Will you assure me access to you personally?”

These latter questions represent the value of a long-term relationship, not an attempt to get me out before I run up too much of a bill.

Leave supply and demand to the economists or the people raising ostriches. It has nothing to do with good consulting, and it should never be used as a basis for fees.

ETHICAL CONFLICTS OF INTEREST AND OTHER MINOR MATTERS

Whenever a consultant accepts work on the basis of being paid for time spent on the project, an immediate conflict of interest arises. There is no way around this, the problem is always present, and it is caused by the following.

LIMITING PROFITS, OR WHY NOT JUST FORGET DOMANI?

The very worst aspect of billing based on time is the limitation it places on profitability. I've never believed in business plans, for myself or for my clients, because the danger with a plan is that you might achieve it.⁴

Consultants—and this applies particularly aptly to solo practitioners—take extraordinary business risks. Why shouldn't they reap the commensurate rewards? The only intelligent business proposition is to attempt to maximize profitability. Note that I'm not saying “maximize business,” because that might lead to harder work, longer hours, and an infringement on one's life balance. But I am saying “maximize profits” because we wouldn't be very good businesspeople or consultants if we didn't.

Therefore, why create a straw man of an artificial business plan that delimits growth? (Have you ever really seen managers in October still managing against a plan created the prior June?) The mantra-like focus on “increasing business by 20 percent” or “gaining five new coaching clients” or “gaining 5 percent in the Canadian marketplace” is rather pointless if, in fact, the conditions were such that you should have increased by 40 percent, gained 12 new coaching clients, or become one of the major players in the Canadian market.

An hourly fee is a similar delimiting factor. You will always be at the mercy of the “cap” in your marketplace. (The best New York attorneys, senior partners, working for the best clients, are hard-pressed, realistically, to go much above $650 an hour—despite the $1,000-per-hour ego trips—and they represent a small fraction of all attorneys, whose average income is about $165,000 in the United States in 2020.⁵) And the larger firms with junior help will always be able to undercut you with junior rates.

If I estimate that I can work 40 weeks a year and that I'll be “billable” an astonishing 80 percent of the time, that provides me with 1,280 hours (80 percent times 40 equals 32 times 40 hours in a workweek). At a New York lawyer's healthy fee of $500 an hour, that comes to $640,000—not a bad year's work (although not anywhere close to the best solo practitioner consultants). However, a more reasonable rate is probably half that, resulting in $320,000, and a more reasonable billing percentage might be 60 percent, not 80 percent, resulting in $240,000. Now that's still not exactly shabby, but is that the number that will support your lifestyle through marriage, children, tuition, retirement, care for elderly parents, vacations, investments, unexpected emergencies, and the pure joie de vivre of it all?

I think not. I tell my mentorees all the time that $100,000 ain't what it used to be. Refer back to the actual 2020 average stated above.

Architects are famous for their hourly billing, and they are probably the only profession that had a decrease in net income over the boom years of the recent past.⁶ They were done in by a number of factors, all within their own means to control, but particularly these:

• Hourly billing, which declined as hours declined due to competition from general contractors, engineers, and others who freely “poached” on architects' turf
• Fierce competition and resultant pressure on prices caused by a plethora of architects, not unlike today's burgeoning number of consultants (In Duluth, Minnesota, no less, a focus group told me, “Stop any three people on the street, and two of them are architects.” I immediately termed this the “Duluth architect syndrome.”)
• An absence of negotiation skills with educated buyers, meaning that the only variable the architects would manipulate was their own hourly fees, and the direction was always downward
• Blindness to the real profit margins caused by love of the profession (Every architect wants to build a cathedral and keeps waiting for that contract, even though architects are overwhelmingly engaged in house extensions and garage additions. Consequently, they are always too willing to take on unprofitable projects to keep them busy “until the real thing comes along,” and they tell you that they'll make up the shortfall “on volume.”)⁷

Consultants have been little better. The focus on “billable time” has driven both independents and large consulting operations to focus on work, use, and task, on the assumption that something is better than nothing—we can't let all those billable hours be spent sitting here at a desk, after all. This mentality severely limits profits because, as happened with the architects, it forces one to do work that shouldn't be undertaken at rates that can't be countenanced. Something is not better than nothing. Some things are worse than nothing because they cost you money.

Billable hours, and the formulas on which the more methodical base them, are pernicious and insidious dampeners of profit. Moreover, the need to be competitive on such a commodity ultimately forces downward pressure on all time unit rates. So in the tactical application—fees based on time for the project—the consultant will suffer from continuing downward pressure when played off on others offering the same commodity pricing, and in the strategic sense—using time units to create a year's living expenses—there will never be enough hours or a high enough rate to dramatically improve income.

Aside from their tactical and strategic failures, time-based fees are great!

WHY LAWYERS AND CPAS DO SO POORLY

The problem with professions that use time-and-materials charges is that the practitioners have no real appreciation for their own value and hence cannot adequately (or dramatically) convey their value to the client. Let's look at some cases in point.

EDUCATING THE BUYER INCORRECTLY

An inherent problem in the lunacy of time-and-materials billing is that we educate the client incorrectly from the first meeting. Buyers are willing to believe that we operate in certain ways—just as the client does—and that those methods of operating will somehow have to be accommodated.

Yet we often show up as supplicants and fawners, obsequious in our determination to get the business. We position ourselves as vendors and “salespeople” from the outset, not as credible peers of the buyer with our own valuable trove of expertise.

Hear this: In true client-consultant partnerships, neither party wants to put the other at a disadvantage. Partners simply don't do that to each other. But in superior-subordinate relationships, the superior usually doesn't care, either out of callousness, noblesse oblige, or indifference.

Our job is to educate prospects from the outset about how we operate. That means that certain steps are important to take and others important to avoid. Use the following as a checklist to assess your own effectiveness in educating buyers.

Prospect Education Checklist

1. Never quote a fee before project objectives and their value to the client are stipulated (we'll discuss this in a bit).
2. Don't quote any time unit basis at all.
3. Explain to the client, if pressed, that single, value-based fees are in the client's best interests.
4. Resist comparison to other consultants by pointing out that your potential client probably also operates differently in many respects from his or her own competitors.
5. Never commit to arbitrary amounts of time for the accomplishment of objectives.
6. Focus on results, not tasks.
7. Never accept a prospect's conclusion—stated or implied—that you will constantly be onsite or that you're available “on call.”
8. Emphasize results, not deliverables; in fact, minimize deliverables.
9. Don't accept contingency fees or “pay for performance”; you're not a seal. Variables are often outside your control, and besides, you're being paid for your best advice. It's up to the client to implement it effectively.
10. Provide value immediately. Shift the focus to how much value you provide, not how much work there is to be done.

I've found that in most cases, consultants create their own quicksand by undermining any possibility of establishing value-based fees at initial meetings by ignoring or acting contrary to the rules just stated.

Two parties are concerned about maximizing results—you and the buyer. But only one of you is concerned about maximizing your fees. If you emphasize the former, the latter will occur. But if you treat these as two separate considerations with the buyer, that person will try to maximize the former and minimize the latter every time.

Wouldn't you?

THE MERCEDES-BENZ SYNDROME

People believe they get what they pay for. Moreover, emotion makes them act, while logic only makes them think. Put those two immutable theorems together, and you have what I've termed the Mercedes-Benz syndrome (MBS).

When people enter an auto showroom today, no matter at what economic stratum, the salespeople don't launch into intricate pitches about the electronic fuel injection or the wonders of rack-and-pinion steering. They encourage the potential buyer to sit in the car and then mention, with a straight face, “You really look cool in that car!” Yes, and the more expensive the model, the cooler we tend to look.

No one needs a Mercedes-Benz for transportation. Not at that price level, they don't. But a car purchase is, after all, a lifestyle statement, and a Mercedes can begin to look quite reasonable in that light. When women try on a new frock, the sales help always say, “That was made for you; it brings out your eyes!” Despite the fact that I've never understood why a woman wants her eyes brought out, this ploy is always effective, even though it's repeated 26,000 times every day in the same department. When a man orders wine at dinner, the captain always says in response, “Excellent choice!” as the guy preens in that complimentary glow. (Never mind that he ordered Wild Coyote Road Kill or that May wasn't such a good month.)

Fees are based on perceived value. That perceived value is in the eyes and the cerebellum of the buyer. Consequently, the buyer's perception of value is the first point of attack for a consultant who wishes to maximize income.

Consultants are almost always remiss when it comes to obtaining some agreement from the buyer on the value of the results of the project. Sometimes the consultant is too anxious to attempt to close the sale; sometimes the relationship isn't yet strong enough to do it; many times the consultant feels inferior and not enough of a peer to suggest it; sometimes the skills are missing; and often it's plain sloth.

Here are some basic questions to use to help the buyer arrive at some measure of value for any given project. You don't need to ask these interrogation-style, but it is a good idea to have them written somewhere and work them conversationally into the discussion until you're comfortable that you've obtained a clear expression of value.

Thirteen Questions for Establishing Value with the Buyer

1. What will be the difference in your organization at the conclusion of this project?
2. What if you did nothing?
3. What if this project failed (or have these attempts failed in the past)?
4. What will you be able to do that you can't do now?
5. What will be the effect on revenues (sales, profits, market share, and so on)?
6. What will be the difference for your reputation (image, standing, stature, and so on)?
7. What are the three greatest impacts of the result of this project's success? (People love to think in threes.)
8. What will your boss's reaction be to this success? (Even economic buyers have a boss; sometimes it's the board.)
9. What will this mean to you personally?
10. What peripheral and secondary value do you see accruing to this project?
11. What will you be proudest of at the conclusion of the project?
12. What will be the legacy of this project?
13. What will it mean to be on the leading edge, the thought leader in the field?

You can create another bunch of questions if you like. My point is that you have to be prepared to discuss value with the buyer very early, prior to discussing methodology, options, timing, or, heaven forfend, fees.

Another fascinating aspect of MBS is that buyers have egos, which can greatly affect the buying process if you allow them to (and you want to allow them to, believe me). No buyer in my experience has ever said, “Okay, we've managed to secure the cheapest consultant we can find for our sales development. He was sitting at home with nothing to do, waiting to go to his normal day job, but I've persuaded him to work with us for $250 a day. We can afford that much, so let's use him as best we can.”

Buyers are much more apt to say this to the troops: “Listen up. I've hired the finest consultant in the country on sales development. She graciously agreed to postpone a vacation to be with us. She's very expensive but worth every cent if we use her right. Now pay close attention, and plan to work with her closely.”

When a CEO is in trouble, that person will call either someone who has clearly helped in the past or, if no one comes to mind, a “name” or a “brand” such as McKinsey or Andersen. No CEO wants to appear before the board and introduce a consulting firm without a track record or without a recognizable name. The executive ego will not permit it (“This person is taking advice from someone I've never heard of?”). The same holds true for every buyer. People believe they get what they pay for—and with their careers and businesses, they want the best.

Consequently, does your image fit the MBS? Do your materials bespeak a successful consultant? Are you proud of your web site? Is your appearance professional and that of a peer to the buyer's? Intellectually, are you able to interact and even “push back” to demonstrate value in the earliest meetings? Are you building a brand and cementing your position as an expert? You can't start this too early, and you can never stop doing it.

Finally, the MBS creates rising expectations, which means that the buyer is prone to improve his or her condition through perceived high-value assistance. Why purchase a less expensive model when the (perceived) better one is only a few hundred dollars more per month on the lease payment? Why take a basic consulting approach when a more sophisticated one is available?

That presupposes that a more sophisticated one is available, meaning that higher fees will always depend on the buyer's seeing a set of options. The ultimate consultant always provides options for the client's review so that the buyer can determine just how much value is available in terms of differing investments.

Offering options—a choices of yeses—moves the buyer psychologically from “Should I do this?” to “How should I do this?” You've just increased your odds of a high-fee sale by at least 50 percent.

A consultant once asked me, “Aren't we ethically compelled to provide every possible assistance to meet the client's objectives?” Unequivocally no. We must meet the client's objectives. But if the client's objective is, say, “increasing sales closing rates,” then conducting industry-wide benchmarking studies or longitudinal analyses for two years or 360-degree feedback on four levels of management represents value above and beyond merely meeting the objective of “increasing sales closing rates,” for example.

Offer a client various “value packages” that help the buyer ascend the MBS ladder. Over the course of my career, buyers have chosen my least expensive option less than 10 percent of the time and my most expensive option over 35 percent of the time.

How much money are you leaving on the table? If it's $50,000 a year, in 10 years that's half a million dollars that can never be recovered. If it's $100,000 annually, just $10,000 on 10 projects a year, you are going to lose millions.

CHAPTER ROI

• Supply and demand is for commodities, not consultants. Your supply will always exceed demand, and that tells you something about the inherent stupidity of this bromide.
• There are legitimate and obvious ethical reasons not to use time units for billing bases.
• Profitability should not be arbitrarily delimited by finite measures of time, materials, deliverables, or costs.
• Other professions do it incorrectly. Why would you want to emulate them?
• The buyer is educable, and you are the teacher. Don't abdicate that huge responsibility.

The average attorney's income is barely above $100,000 annually. Successful people drive cars that cost more than that. What model are you using as your income paradigm, and what model car are you driving?