Exploding the “Conflict of Interest” Myth of Consulting

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In an article published on CNBC.com on September 30, 2011, titled, “Consultants Thriving as Businesses Struggle to Survive,” industry analyst, Patrick Schwerdtfeger, says, “Most consulting relationships have an inherent conflict of interest. On one hand, consultants strive to solve their clients’ problems. On the other, they hope to extend the relationship as long as possible, so they come up with solutions just fast enough to keep the client happy, but no faster.”

What Schwerdtfeger says may be true for some consultants and the arrangements they have with their clients, but that is 180 degrees opposite of the way TopLine Consultants operate their businesses.

The Big Guys Want To Be Paid For Results (So Do The Little Guys)

In an article titled, “Skin In The Game” (Forbes.com, February 16, 2004), Daniel Lyons wrote, “Some big corporate clients–resentful, skeptical and embittered by expensive projects that flopped–now reject slick-talking consultant-speak and put it this bluntly: If you’re so good, let’s tie your pay to how well you deliver on your promises. Consultants increasingly are willing to go along. Smaller players have offered variations of this — under names like “contingency pricing “or “variable fees”– in recent years, usually as a way to win business from bigger blue-chip firms. Now even titans like Accenture and IBM consent to tie their fees to their results.

“One way consultants put skin in the game is to tie part of their fees to such benchmarks as cost savings or productivity increases. Why doesn’t everybody do this? Jess Scheer, executive editor at Kennedy Information, a company that tracks the consulting profession, reckons only 5% of consulting engagements involve contingency pricing, though he expects that figure to increase in the next few years. Many consultants are reluctant to put skin in the game, and some refuse outright. Sometimes it’s the customer who balks, after learning that consultants usually demand a “sweetener” clause that says, in effect: Sure, if we fall short, you can withhold some of our pay, but if we exceed expectations, we get a bonus.

“Bain & Co. sometimes gets paid part of its fees in equity. The move ensures that Bain’s consultants have the client’s best interests at heart, but it also has allowed Bain to earn up to nine times what it would have earned in traditional fees.”

“Skin In The Game”… the real key to running a successful consulting practice.

Consultants often ask me what is the best way to charge for their services, and if they should offer a guarantee. My response is that there is no “right way” to charge, there are several effective ways, depending on the situation; and they already have a guarantee… in fact, a two-way guarantee. One guarantee that protects the client, and one that protects them as a consultant.

If you charge based on a modest monthly retainer fee plus a percentage of the revenue increase you create for your client, for instance, your guarantee for your client works this way. The retainer covers the cost of the research that you do on your client’s business, their competitors’ businesses, their customers, their staff and employees, and what’s going on in the marketplace, so you can know the best, most efficient, and most cost-effective ways to generate both immediate profits and long-term profits for them.

Don’t make the mistake that so many do of of thinking that this is all about marketing. It isn’t. Marketing is a part of what you do, but so is helping your client find ways to run their business more effectively and more profitably… and your retainer fee includes work in those areas, too. The lion’s share of your income, then, is based on the results (in terms of revenue, not profits) that you produce for them over and above a pre-determined baseline.

That’s your skin in the game. If you don’t produce results for your client, your income is limited by the monthly retainer that you charge. So it puts the responsibility of creating results (profits) for your clients directly on your shoulders… where it should be.

But what if you come up with a bunch of great ideas and strategies that you know can help build your client’s business, but they don’t take any action to implement them? Well, that’s where the second guarantee comes in… the one that protects you.

If you charge for your services on a monthly retainer plus contingency (or commission) based on results, you’re guaranteed the monthly amount only. The contingency only pays on a percentage of the amount of revenue you generate over a pre-established baseline. So if you don’t produce, you only earn the retainer… which becomes a cost or expense to the business, and is only recoverable if your client implements the strategies that you develop and revenues are generated as a result.

What About That “Conflict of Interest?”

So what about what Schwerdtfeger, says, that “Most consulting relationships have an inherent conflict of interest,” and why that thinking doesn’t affect TopLine consultants? The reason is that most TopLine consultants don’t work by, or get paid for project work, nor do they bill by the hour. Those are certainly options, and some “mainstream” consultants charge in those ways. But once a project is completed, the consultant is unemployed, and in once again looking for another project, either within the same company or with a completely new client. And if you bill by the hour, there are only a certain number of hours you can realistically work. So in both instances, your income is limited.

On the other hand, charging a modest monthly retainer (for a set period of time; months, years, etc.) to cover your research and expenses, and then basing the major part of your income on the results you produce, opens up and broadens your opportunities and makes your income pretty much unlimited. As long as you’re producing results for your clients and getting paid a percentage of what you generate – and your client is getting a bigger percentage (of what they wouldn’t have if you weren’t involved) – there’s no logical reason for your client to want to end the relationship, so the “conflict of interest” problem is non-existent.

Knowing how to effectively charge your clients for the services you perform for them doesn’t have to be complicated. But knowing how to charge is one part of the equation. You also have to know how to present your offer so that it becomes a no-brainer for your prospect to immediately recognize and to jump at. In our TopLine training we cover these areas in detail, showing you a number of ways that are working for other consultants.

I agree with the title of the CNN article, “Consultants Thriving as Businesses Struggle to Survive.” It’s true. This economy is absolutely golden for people who can provide value to struggling businesses… and the income opportunities are unlimited for those who know how to present their services and charge appropriately.

If you want more information about how these systems work and some easy ways to generate more income very quickly, please let me know. As usual, I’m very interested in your success.

Martin Howey, CEO
TopLine Business Solutions

2 Comments for this entry

  • Charles Cox says:

    Great article as always Mr. Howey, I completely agree with charging a modest upfront fee followed by a percentage of revenues generated by your recommended strategies as a consultant. Upfront fees should be designed to cover the costs associated with bringing on a new client such as research, analysis, collaboration etc., and not as a profit stream. By having “skin in the game” and setting up performance based ongoing revenues, it establishes a win-win relationship with the client, adds credibility to your business and has the potential to significantly increase your revenues over the long term. Thank you for your article.

    • Martin Howey says:

      You’re 100 percent right, Charles. I couldn’t have said it any better. Basing the lion’s share of your income on generated results not only provides you the opportunity to earn more for yourself, but comforts the client by removing a big part of his or her risk. Thanks for sharing your comments!

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