Why all project-based work should be fixed-fee

by

I was having lunch with a friend the other day who runs vendor management for a large IT organization, an organization that makes heavy use of consultants, contractors and outsourcing companies. He’s now been in the role for a couple years and has clearly developed some opinions on how (and how not to) manage vendors well.

The conversation started when I told him I like to fix fee most everything we do. His eyes lit up. He expressed frustration that leaders in his organization are usually so desperate to get an individual or company working immediately that they do not want to take the time to work through the project details. Instead, they agree to hourly rates without fully defining what the project will entail.

Before I go on, let me explain what I mean by a “fixed fee” engagement in contrast to “hourly” work. This means that the consulting firm and client agree to a flat rate to deliver a project with defined deliverables. The rate may or may not include expenses; I usually leave that up to the company’s preference. I do not consider fixed fee to include projects that have some sort of daily or monthly hourly cap; those to me are just daily or monthly (versus hourly) rates and arguably have more issues than a straight hourly rate, usually in neither parties’ favor.

I see so many organizations waste money on consultants for the very reason my friend expressed. I do think there can be good reasons to pay someone on an hourly (or daily or monthly) rate and I’ll cite some of those reasons later, but I firmly believe the buying company’s default preference should be to fix fee all consulting work. Here’s why:

  1. It forces the client and the consultant to think through exactly what they want to get out of the project – deliverables, milestones, outcomes, etc. – versus vague approaches. This means fewer misunderstandings and missed expectations on either side, and better outcomes since objectives were agreed to up front.
  2. Generally, consultants who are willing to fix fee work and are still in business are more knowledgeable and experienced in the type of work they are proposing, since without that knowledge and experience it is very hard to make fixed fee engagements profitable.
  3. It forces the buyer to quantify the value of the project, up front. They must ask themselves “is it worth $50,000 to have this consulting firm create all the processes and templates for our PMO?”
  4. Throughout the project, both parties are focused more on the desired outcomes versus the number of hours being worked. With good consultants, the buyer may even get more hours or more of the right hours because of this. A woman who does contract work for us who is extremely good at what she does and also very conscientious about her costs prefers to be paid on a fixed basis so she doesn’t feel “guilty” when she sometimes wants to spend extra time on something that she doesn’t think we’ll want to pay for! I am the same way with my clients.

So if I have you convinced, you may be wondering why you would veer from the fixed fee preference? I have at least a few exceptions:

  1. If the client really wants a contractor, someone who is filling a full-time (or part-time) role within the organization, and wants to pay this person in a temporary versus employee manner. I don’t even consider this consulting work; this is contract work.
  2. If the client has a very large and complicated project that will take a long time to define in a fixed fee structure, it may make sense to do a short “paid proposal” or planning phase up front. I like to fix these too, when possible, but sometimes hourly is more practical.
  3. If the client truly has an urgent need that is not fully defined and needs a consultant to come in and figure out the situation, in a maximum of a couple of weeks. I had a CIO call me on a Friday afternoon and say she needed to run a quick re-organization and needed me there Monday morning for two weeks. We verbally agreed to an hourly rate and I showed up, but that was only after years of working together on a fixed fee basis that we both thought this exception was warranted.
  4. If the consulting firm is truly only providing advisory services without a specific desired outcome or deliverable. Sometimes the client needs to have a consultant on retainer for advice, like they might for an accountant or attorney.

For project-based work, fixed fee is the way to go. Clients who don’t push for it either don’t have all the facts or are avoiding the tough thinking. Consultants who don’t push for it may be inexperienced or focused on the wrong things. Consider it. Now if that doesn’t rile a few people up, I’m not sure what will. I look forward to your comments…

READ MORE

Shifting Perspectives: 3 Learnings From a 3-Day Training

Shifting Perspectives: 3 Learnings From a 3-Day Training

About a week ago, I completed the second live (virtual) training in the process of becoming a Certified Professional Coach through iPEC. Once again, my mind was blown! It reinforced for me that virtual workshops can, and do, work, and, in a lot of ways, I prefer them...

read more
Finding My Work-Life Balance

Finding My Work-Life Balance

In my previous post, I told the story of how I got back into consulting after becoming a mom. All of the diverse experiences I had during that journey have helped me to find my work-life balance by… Defining Boundaries “Go home,” my first boss said 12 years back —...

read more
How I Got Back to Work After Being a Full-Time Mom

How I Got Back to Work After Being a Full-Time Mom

I Landed My Dream Job Throwback to 2014, I had completed my MBA, landed my dream job as a consultant, and was hoping that my new consulting career would exponentially ramp up my career growth for the next 5 years. This would position me to take on critical decision...

read more
Self-Awareness is Key to Belonging

Self-Awareness is Key to Belonging

In August of this year, as part of our annual company meeting, our team at Thought Ensemble participated in the foundational session of Diversity, Equity, and Inclusion (DEI) training led by Dr. Nika White, IOM, CDE (she/her/hers). One of the most meaningful moments...

read more
Finding Your Organization’s Magic Pixie Dust

Finding Your Organization’s Magic Pixie Dust

It is often said that organizational culture is like a fog — it is all around us; it impacts our ability to see, to move quickly, and to deliver; but we cannot quite put our finger on it. Indeed, some organizations see their culture as a byproduct of operations,...

read more
We’ve Refreshed Our Brand!

We’ve Refreshed Our Brand!

Why have we refreshed our brand, you ask? Well, as we have grown and matured as an organization, we felt that our previous brand elements no longer represented us as well as they could. You see, we founded Thought Ensemble back in 2008 to help companies better compete...

read more
Thought Ensemble’s Purpose — Inspired in 2020

Thought Ensemble’s Purpose — Inspired in 2020

I recently wrote about how company purpose is being tested and inspired by all the events of 2020. This topic is very real for us at Thought Ensemble. We’ve been thinking a lot about what really matters as we’ve navigated the...

read more
How 2020 Is Testing and Inspiring Corporate Purpose

How 2020 Is Testing and Inspiring Corporate Purpose

In August 2019, the Business Roundtable rewrote their statement of corporate purpose. I followed this with significant interest being that I have never forgotten the debates about corporate purpose in business school almost two decades ago. We were taught that the...

read more
Why Purpose-Driven Organizations May Struggle With Change

Why Purpose-Driven Organizations May Struggle With Change

I love working with companies who really want to make a difference, beyond just making money for their shareholders. I mean, making money is fun and all, but it is even more rewarding to join in on a just cause. Plus, as this HBR article explains, companies who have...

read more