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Meet
the MasterMinds: Harry Mills on Pricing Consulting Services
 Harry
Mills is the CEO of The
Mills Group, an international consulting firm, and
an expert on marketing and selling professional services.
He's a regular keynote speaker and the author of twenty-three
books on sales, negotiation and influence, including
Artful
Persuasion and The
Rainmaker's Toolkit: Power Strategies for Finding, Keeping,
and Growing Profitable Clients.
MCNews talked to Mills about the always-controversial
subject of pricing consulting services.
MCNews: What do you think is the client's view on
the pricing of consulting services?
Mills: Well, it's obviously a very self-interested
view. The typical client's thought is probably, "how
do I get the best bang for the buck I'm paying?"
Clients also tend to simplify things. They don't
know how to determine what the price should be, so they
look for a benchmark or an anchor.
I call it the Eiffel Tower effect. If you're lost in
Paris, you use the Eiffel Tower as your reference point,
right? Clients want a similar reference point, or anchor,
when it comes to price. That's why hourly pricing is
so attractive to clients because it's an easy way of
anchoring. But to answer your question, I don't think
clients understand pricing very well because they don't
understand the value consultants offer. So they
look for a way to simplify the matter.
MCNews: Does the variety of pricing models--whether
it's hourly, contingency, value-based or fixed fee pricing--confuse
clients?
Mills: Yes, it does. So I think you've got to
keep price out of the equation for quite a long time.
First you've got to create value in the client's thinking;
you don't want the price or the pricing model to come
up too early. Otherwise you'll get the anchoring effect.
You've got to communicate how you will create value
before you put a price on it.
MCNews: Many clients want to get to the price before
talking about value. How do you manage that pressure?
Mills: Clients do tend to want an indicator of what
you're going to charge and may say, "just give
me an idea what it will cost." If it's a simple
project--just a few hours or a few days long--it's much
easier to do that. But for most large jobs, I recommend
a three-part value creation process.
First, establish what I call the Initial Value Proposition
(IVP). Now obviously when you meet with a client for
the first time, you don't know all the facts about the
business or the project. Establish credibility by presenting
a compelling story--a case study based on a previous
client. And through that story, show the specific value
you were able to create for that client. So that's the
IVP. From there, you explain to clients that once you
have a thorough understanding of the problem, you will
quantify the value for them.
And value is what clients don't understand. They start
out with an understanding of the problem or the pain.
Even if they have a notion of the solution, they don't
necessarily know the potential value of the solution.
If you're a highly skilled consultant, you should
have a more sophisticated understanding of the solution
and its potential impact than the client does. The last
thing you want to do is talk about price or fee before
you've established what you can do. In other words,
you've got to sell the value before you start talking
about price.
The IVP gives them an idea of what you can do. Then
you gather a whole lot of information about the client
and the project as you go through the rainmaking, or
sales, process.
MCNews: At this stage, are you identifying the potential
range of value you can provide given the project objective?
Mills: Yes. For example, you might be working
on a project that could potentially provide benefits
to the client that are worth twenty times your fees,
but only if the client is prepared to make significant
changes. If the client is only prepared to make limited
changes, then the benefits might only be worth five
or six times your fees. You get your super profits when
you add super value. But you have to realistically analyze
the client's environment and ability to change to quantify
the value you can actually provide.
MCNews: If you take a client through that process
and there's a quantifiable value they can understand
and agree with, what happens if you're competing against
a consultant who is pricing by the hour?
Mills: You have to make the case to the client why
it's not a good idea to be too simplistic by bringing
it down to an hourly rate. You've got to say, look,
this is a complex project and there are things that
could go wrong. In part you're paying for insurance
because something might happen no one can foresee. What's
that worth to you? So that's part of the response.
But the most important point you have to make is that
your approach is so different that it can't be brought
down to an hourly comparison. If you're going to
use value pricing, you've got to differentiate yourself
in a fundamental way from the competition.
You've got to establish the value of your approach,
its intellectual underpinnings and the track record
behind it. You have to explain why you're different
from the hourly players out there who are simply selling
time. That's what you're really saying--the competition
is just giving you time; I'm offering you an entire
approach, which I define as value.
MCNews: Are clients migrating from the hourly rate
mindset to value? Do you see this taking hold?
Mills: Well, the trouble is that pricing labels
get blurred. For example, the downside of hourly rates
for clients is lack of control over the end cost. So
many clients try to turn hourly rates into a fixed fee.
The client will ask for your hourly rate and an estimate
of how long you think the project will take, and then
say, I'm not going to pay anymore than whatever that
total works out to be. What they've really got is a
capped hourly rate.
But what's happening is that a whole lot of people
are saying, if we're doing it for a fixed fee, that's
value pricing. So the two are getting confused. When
you ask people what they mean by value pricing, it turns
out to be just an hourly rate in drag.
MCNews: You're not likely to go back and measure
whether you achieved a particular value for a client
in a fixed fee contract, are you?
Mills: Some professionals agree on a fixed fee
in advance and call that value pricing. Well, I have
a broader and a deeper definition of what value is.
I think you create value in conjunction with the client.
You work out together what the solution is worth.
I tend to use a 5:1 ratio. If I quantify a million
dollars worth of value or benefit to the client, I think
I can easily justify a $200,000 fee. Now there's a bit
of arbitrariness in using a 5:1 ratio. But I know there's
a huge amount of skepticism on clients' mind. Even if
the benefit is twice your fee, you will run into resistance
from clients. If you can't confidently establish at
least a 5:1 ratio between benefits and fees you're going
have problems using value pricing.
MCNews: How do consultants verify that the value
was achieved? What are some techniques to prove that
the client actually achieved that million in cost savings
and that the savings were attributable to the consulting
intervention?
Mills: Tax accountants have an easy job proving
value. So we need to be more like them. We've got to
quantify benefits with the client in areas that are
not as concrete as tax, where there are numerous external
variables that drive value.
The first rule for consultants is to use value pricing
only in areas where there are definite opportunities
for value creation. You won't get very far, for
instance, if you tell an auto dealership that you can
save it $25 per car sold. That would be just pitiful.
Next, block out the areas that are quantifiable. For
example, let's say you have a measure for your client's
sales productivity. We would show the client that for
every percent we can improve that measure of sales productivity,
we can increase revenues by about half a percent. We
can't guarantee absolutely, but based on our work in
similar industries, we conservatively estimate that
we can raise productivity substantially through the
use of our services. Once that is quantified, we move
onto the other value areas we have diagnosed.
MCNews: Do you think the offer of a guarantee--not
necessarily of an outcome but of client satisfaction
with consultants' work--is emerging as a trend?
Mills: I don't see guarantees emerging as a trend,
but they are a great value add-on. The firms that
have been bold enough to offer a guarantee as a differentiator
have been enormously successful. We've offered a
money-back guarantee on all of our training for twenty
years and we've had only one problem.
The reason I don't see guarantees as a trend is because
a lot of my work is with the big accounting firms. And
they are incredibly risk-averse by nature. They live
with professional liability, and are having the pants
sued off of them in all sorts of environments. So the
notion of a guarantee just gives them the willies. I
do tell consultants they should consider guarantees,
and they say yeah, it's a good idea, but someone else
can do that.
A guarantee puts huge pressure on consultants to deliver
consistent performance and at the right times. Most
consultants wow the client in the initial phase, win
a big contract but then don't keep managing the wow
experiences like a performance. A performer who is being
judged every day knows that the final show has to be
as good if not better than the first. The best consulting
firms not only impress the client at the beginning,
they wow them at the end.
MCNews: If they don't want to offer a guarantee,
what else can consultants do?
Mills: Don't say to the client, we're going
to do this big project and you'll pay us a huge fee.
Instead, segment the project into defined value chunks.
Make them explicit with deliberate sign-offs for each
chunk, and set it up so the client can walk away at
the end of each segment. That way, the client doesn't
have to buy the whole project at once but can buy it
in smaller pieces. What you're establishing is a series
of value checkpoints.
Clearly define the way you go about your work and
be explicit in the way you create value, how you price
it and how you collect the money as well. Most consultants
want their money in small or regular chunks for obvious
reasons, so that's a much better way of doing it for
consultants as well as clients.
MCNews: Do you think the hourly rate approach to
pricing will ever go away?
Mills: No, I don't, because it's very, very
convenient. An American legal group recently did a review
of the history of it. Funny enough, it has a recent
history. I never realized that. You might think it's
always been around, but lawyers have only been charging
an hourly rate extensively since about the Second World
War.
The hourly rate simplifies the process and I think it's
useful for clients who want to make quick decisions
and price quickly. It's also advantageous for consultants
when there's high risk and low value in projects.
MCNews: What's your opinion on the effectiveness
of services marketing?
Mills: In general, marketing for services doesn't
work very well. I did a speech on entrepreneurial markets
for an MIT forum. I made the point that the reason entrepreneurs
struggle with marketing, particularly for services,
is that the model doesn't make sense to them. But just
about every Western manager has been through Marketing
101, and they learn their Four Ps. I can't believe academics
are still flogging the Four Ps but they continue to
do so because they've hung all their work on that model.
Professionals' mindset about marketing has changed quite
dramatically over the years. They really want to understand
how they can create, communicate and capture value for
their clients. But there haven't been any marketing
models that explain how that all hangs together.
We have found that as soon as we introduce the 8
Rs framework for marketing services, professionals
get quite invigorated. All the pieces come together
and they say, that's what I've always done, but I haven't
really understood the whole picture before.
And as a professional you're never just out there rainmaking,
are you? You're never just doing one specific marketing
task. While you're out there working on a project, you
might also be talking to someone with the intention
of creating a referral. You're always doing some other
part of it and you need to understand the whole when
you're doing the part.
I have found that you can change the mindset of
the professionals, but our biggest resistance comes
from marketers.
MCNews: Because they're wedded to the old model?
Mills: Much of what firms spend their marketing
money on is of dubious value. There are huge teams of
people spending a lot of time creating newsletters and
marketing collateral and a lot of other things. But
if you actually have a look at it, they're spending
money on advertising campaigns that have no demonstrable
return on investment at all.
MCNews: Last question--what's on your reading list
these days?
Mills: I'm very interested in how people change
minds, so I'm reading the biographies of famous people
who have been brilliant at changing minds in different
situations. Churchill for example, at the right time
and the right place, was able to move nations and people
with a vision.
I like reading about quirky characters, and I like
Churchill particularly because he was not slick. He
was pudgy and funny looking--much closer to the average
consultant. We don't normally look like presenters on
television. So Churchill leaves us with hope.
MCNews: Thanks for all of your time.
Visit http://www.millsonline.com
to find out more about Harry Mills, his books and services.
Was this useful? Send a quick e-mail
with your thoughts.
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Predicting
On-Time Flights
With summer vacations just around the
corner, parents flying children to prospective colleges
and, of course, client travel, it's handy to know how
well your favorite airline is sticking to its schedule.
The U.S. Department of Transportation's
(DOT) Bureau of Transportation Statistics tracks the
performance of domestic flights operated by many air
carriers. Summary information on the number of on-time,
delayed, canceled and diverted flights appears in DOT's
monthly Air Travel Consumer Report, published about
thirty days after the month's end. So, if you want to
see the odds of your flight leaving the gate on time,
click
here
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How
to Prevent Unpaid Consulting, by Jeff Thull
If you're in consulting, you've probably encountered
this scenario. You're trying to convince a potential
client that your services will solve a pressing problem.
To prove the point, you explain precisely how your solution
will work. The client listens carefully, asks many questions
and takes copious notes. You leave convinced that the
client will hire you for the project.
But when you call to close the sale, the client is
nowhere to be found. Later, you hear that the project
was awarded to your top--less creative and less expensive--competitor.
Frustrated, you ask yourself, "Where did I go wrong?
Why didn't I see it coming?" You may have fallen
prey to an all-too-common trap: unpaid consulting.
Read
the Article
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What
Clients Think of Consultants
Capgemini,
the management, technology and outsourcing consultancy
released the results of a survey it conducted titled
"The Voice of the Customer," which examines
the perceptions of consulting clients.
Clients pointed to five key areas where they believe
the consulting industry needs to change:
Talent. Below the senior level, clients perceive
a drop-off in the talent of consultants.
Communication. From the client perspective,
consultants are more often in "tell" rather
than "listen" mode, resulting in a tendency
for consultants to introduce pre-ordained solutions.
Objectivity. Clients value a consultant's ability
to offer an objective perspective, but think that consultants
often identify too closely with the client's culture
and lose their objectivity.
Reality. Consultants' recommendations are often
too optimistic or complex; clients are looking for solutions
that are achievable.
Goals. Clients want value, consultants want
profit.
Clients want relationships with consultants that are
responsive to the needs of both parties, where the definition
of success is agreed to upfront and measured to ensure
mutual success, advice is honest, and respect for what
both parties bring to the table is a given. In short,
clients want consultants that work in a collaborative
manner.
When defining the criteria for selecting consultants,
almost all clients mentioned the importance of track
record, technical and industry knowledge and value for
fees. No surprises there.
But clients are now looking more closely at consulting
teams' ability to collaborate with client teams,
their reputation for delivering solutions, and a real
understanding of the client's business.
Almost all executives highlighted some kind of delivery
failure as their biggest concern in hiring external
consultants. Loss of key personnel, recovery from error
and budget overruns also featured in their concerns.
Draw your own conclusions from their comments, but
consulting clients seem to be telling us to get back
to the fundamentals, including working closely with
them and delivering what we promise in an objective
and professional way.
If you want to look at the Capgemini press release,
click
here.
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What
Can We Learn From Business Leaders?
Could Bill Gates recreate Microsoft if
he tried again? Could Sam Walton run another company
as successfully as Wal-Mart?
The Harvard Business School's Leadership Initiative
is attempting to answer these and other intriguing questions
about the nature of leadership through its Great
American Business Leaders database. The project
identified and analyzed the accomplishments of some
860 top executives in the twentieth century, and results
are now emerging. A portion of the database is free
and accessible to the public.
Follow the link above to an interview
with Tony Mayo, executive director of the Harvard Business
School Leadership Initiative. You'll also find out how
you can access the database. You must submit an application
to access many of the details of the database but, for
consultants, this information is solid gold. Don't miss
it.
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Understanding What Your
Clients Need
If you want to sharpen your consulting
service offerings and your practice management skills,
you should have a look at the work done by consultant
Patrick McKenna. He combines two decades of extensive
work with international professional service firms with
acknowledged expertise in strategy, practice group management
and world-class marketing skills.
McKenna has written a sixteen-page white paper called
Understanding Your Key Client's Needs.
The paper is aimed at law firms, but the insights apply
equally to all consultants. Download
this paper, put it in your briefcase and then read
it as soon as you can.
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This Month in History
On May 13, 1958, the Velcro
trademark was registered. The fabric hook and loop fastener
was based on the work of Swiss inventor George de Mestral.
On May 13, 1637, Cardinal Richelieu created
the table knife in France. Before that, daggers were
used to cut meat, as well as to pick one's teeth. Apparently
offended by that practice, Richelieu ordered that the
points be rounded off all knives to be used at his table.
On May 21, 1853, the world's first public aquarium,
the Aquatic Vivarium, was opened in Regent's Park, London.
It was the inspiration of self-taught naturalist, Philip
Henry Gosse, who wrote popular illustrated books on
nature, especially marine biology.
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Coming
Attractions
With the news headlines littered with stories of corporate
fat cats cooking the company books and sticking shareholders
and employees with the bill, we thought we'd take a
step back and ask if there was a way for businesses
to be socially responsible and profitable. After all,
when there's so much bad news for businesses, it's also
bad news for consultants.
So we asked Jeffrey Hollender, CEO of Seventh Generation
and co-author of What
Matters Most: How a Small Group of Pioneers Is Teaching
Social Responsibility to Big Business, and Why Big Business
Is Listening to discuss the business case
for responsible corporate behavior and how some of the
best run companies are making social responsibility
a centerpiece of their corporate strategy.
Look for the next issue of MCNews on June 1, 2004.
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The
End Page
"Now this is not the end. It is not even the beginning
of the end. But it is, perhaps, the end of the beginning."
- Winston
Churchill
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