COSTS AND FEES

A consulting firm needs to generate adequate remuneration for the services provided and to have healthy financial relations with clients. The client should feel that the fee is commensurate with the real value contributed to the client’s business by the consultant’s intervention. Clients do not expect to get an excellent professional service for a low price, but they do not want to be overcharged. Consultants seek remuneration that fairly reflects the time spent and the impact achieved in working for a particular client, as well as other costs and expenses of the consultancy – the acquisition and development of the consultant’s intellectual capital, service marketing, practice management and administration, etc.

However, “fair remuneration” and “value to client” in professional services are complex and intricate concepts, which are easier to discuss than to apply to a wide range of different clients and assignments. Traditionally, consultants and other professionals dealt with these issues by applying time-based fees, and using higher fee rates and various other arrangements to reflect the higher knowledge content and special contributions made in some assignments. This practice has been repeatedly challenged for various reasons. For example, Karl-Erik Sveiby asks: “What is the value of an idea that comes in the flash of a second but is based on a life of experience? It is hardly the time spent on it. Basing the value of knowledge on time spent can never be correct, still it is the most common. What other ways are there to charge for knowledge?”1

In this chapter, we will first review the basic considerations involved in costing the consultant’s time and establishing time-based fees. We will then discuss other fee formulas and policies that aim to relate the fees charged to the particular knowledge and value imparted to the client.

30.1 Income-generating activities

A precise definition of services for which clients can be charged is essential to the costing and pricing of consulting services. If only chargeable services

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generate income, every other service and activity of the consulting firm will have to be financed out of this income.

Chargeable services

Generally speaking, a chargeable service is one performed directly for a particular client on a contract basis. It does not have to be carried out at the client’s premises: the consultant can travel and negotiate on behalf of the client, search for information in a documentation centre, or work in his or her own office on a business plan. It should be clearly established, however, that these activities are part of a given assignment, and their results will be made available only to the client who commissioned them and who will be charged for them.

Certain activities may or may not be treated as chargeable. Travel is an example. Most consultants charge a full rate for the time spent travelling to and from the client’s location and any other travel time required by the assignment. Some consultants charge at a reduced rate, while others do not charge anything (e.g. if they work for local clients and travel time is negligible).

Supervision, technical guidance and assignment control may also be charged for in various ways. Here again, some consultants prefer to give their clients precise information on the amount of supervision and similar work required by the assignment and charge a corresponding fee for it. Others consider this to be an unnecessary complication of accounting and billing procedures, for example if a senior consultant supervises several assignments during the same period of time and the cost of his or her time would have to be apportioned to these assignments.

In summary, in time-based fees the prevailing practice is to charge clients directly for all services provided to them under a specific client contract, with the exception of services for which it is impossible or impractical to charge directly.

Services that are not directly chargeable

General management and administration of a consulting firm, and marketing and promotional activities, as well as research, product development and staff training, are activities that are not directly related to a particular client assignment. The same applies to annual leave, time lost through sickness and various other time losses, including those due to a shortage of clients or to poor management of the firm.

The cost of the time spent on activities that are not directly chargeable will be spread over all clients through overhead charges. The cost of the time lost will also be spread over all clients, or it may be necessary to treat it as a loss, reducing the consultant’s income.

Free client services

Strictly speaking, in a self-supporting professional practice there is no place for “free” client services: the consultant can work for free only if, for some reason,

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he has decided to do the work in his leisure time, if he accepts a reduction in income, or if the service is subsidized. A service that is given free to one client will normally have to be paid for by other clients. Someone will be charged for every free lunch offered to a potential client!

As regards the cost of preliminary diagnostic surveys and assignment proposals, it was mentioned in Chapter 7 that short surveys required for preparing an assignment proposal are done free of charge by some consultants and billed only if the proposal is accepted and the assignment executed. Other free services may include management seminars or information provided through the Web page; these are not charged for because they are used for general information support and marketing to existing or potential clients.

Fee-earning days

Services to clients are costed and, in many cases, charged on the basis of consultant-days (or hours or weeks). It is essential to plan for and attain the required number, which may be determined as shown in table 30.1 (assuming a five-day working week).

Table 30.1 Chargeable time

The 190 chargeable days per consultant represent the expectation of a consulting firm for the planned period. This is a 73 per cent utilization of the total time, as determined by the ratio:

This is only a hypothetical example, and is not a standard figure. Every consulting firm has to establish its own time budget based on local conditions, and the firm’s experience and strategy.

An alternative way of calculating this ratio is to compare chargeable time with days available:

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