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Should You Use the Same Fee Structure for These Two Consulting Engagements?

Consulting engagements come in many flavors. Your consulting firm’s work for a client could range from answering questions in real time based on your knowledge and experience, to developing research-based recommendations, to constructing and implementing complex solutions.

Where does advisory work fit in, and should you construct contracts for advisory work differently?

Let’s say Mabel Maybell, CEO of the famous Home o’ Phonics literacy company (a.k.a. HoP), asks you for help. Your consulting firm recently completed a project for HoP in which you researched a broad range of possible expansion opportunities. Ultimately, you recommended they enter the digital shirts arena.

Mabel’s senior staff think your recommendation is a good fit, and now Mabel wants to shoulder into the new jersey market.

Mabel’s concerned there are holes in the plan her personnel have patched together, though, which is why she wants your consulting firm’s support.

As her group rolls out their small, medium and large initiatives, Mabel wants her staff to be able to tap into your consulting team’s experience.

Mabel isn’t expecting your consulting firm to stir up any concrete deliverables in this new phase of your work together. She merely wants you to be available to offer expert advice, when asked.

Should the fee structure you propose for this new engagement be similar to the structure you used in your first engagement? Do you consider the same factors?

No.

Your clients harbor different expectations from consulting projects than from advisory engagements.

While the lines can blur a bit between projects and advisory relationships, your consulting firm will fare better (and reduce the risk of unhappy clients) separating the two types of work and structuring your consulting contracts differently.

While working on a project, you can offer advice. And you should absolutely strive to play the role of trusted advisor.

However, if your client consistently asks for business insights that are outside of the scope of your project, you may feel the client is taking advantage of your consulting firm.

Conversely, during your advisory engagement with Mabel, your consulting firm can occasionally offer a bit of hands-on assistance; however, once you start promising large deliverables, you’re headed for trouble.

That’s because different fee structures are best suited for these two different types of consulting contracts:

  • Propose project fees for tightly bounded groups of tasks (i.e., projects).
  • Propose stipends/periodic fees for ongoing advice.

An hourly or daily rate can also be used for both types of consulting, but isn’t the best fee structure for either.

Mixing project work and advisory engagements creates trouble in the long run because your client’s expectations become muddied and confused.

They start asking questions like “How much work are we getting?” and “What time are we entitled to?” At that point, tensions arise and they start focusing on the cost of your activity rather than the value your consulting firm provides.

Your original proposal for Mabel could have suggested a fixed fee for a deliverables phase (identify the market) followed by an advisory phase (12 months of advice during implementation). That structure isn’t terrible. In practice, though, you’ll find those types of projects often lead to uncertainty and scope creep between the phases.

Final question: if you’re going to turn to a stipend fee structure when you have an advisory engagement opportunity like the one Mabel is offering, then what factors should you consider to determine the fee?

Good question. The next article covers nine factors to consider when determining advisory engagement fees.

In the meantime, I’m curious about whether your work is mostly project work, mostly advisory work or a mix. Please let me know below.


14 Comments
  1. Ian Tidswell
    January 6, 2021 at 6:23 am Reply

    My work was almost all projects and now is becoming more balanced with advisory…a progression I like.

    Having just looked at my performance in 2020, I find that fixed price projects (a model clients like) tends to end up with lower hourly rates than advisory services (where I’ve gone with a T&M basis). In practice I find it difficult to not get squeezed on deliverables and scope with fixed price projects (and yes I do know the theory – I focus on pricing!)

    This may be a “do as I say, not as I do” situation 🙂

    • David A. Fields
      January 6, 2021 at 7:31 am Reply

      Ian, your case study is very instructional. Pricing is hard! It’s the trickiest part to get right in consulting and it’s definitely possible to end up on the losing end on a project or two if: 1) you estimate a fixed-fee project incorrectly; 2) you don’t manage your client or scope creep well.

      Kudos to you for doing the analysis. I’d gently encourage you to move your business away from T&M for your advisory services and to pick up some practices and habits that will help you make the advisory work more profitable. A big downside to variable pricing on advisory work is it discourages clients from calling on you, and when they call on you… yet, when they call on you is your opportunity to demonstrate your enormous value.

      I appreciate your candor and contribution to the discussion, Ian!

  2. Corinna Z
    January 6, 2021 at 8:50 am Reply

    I find it especially tricky when thinking about the “advising part” that precedes my consulting engagements. Hooking the client, showing expertise and value are all free to close them. But if the client doesn’t sign and keeps asking questions, it’s difficult for me to say “ok, this is advisory work and should be paid independently”.

    • David A. Fields
      January 6, 2021 at 9:01 am Reply

      You’ve brought up an crucial point that challenges many consultants, Corinna. You may want to set a guideline for yourself. Something along the lines of, “I’m willing to give 30 minutes of advice for free and, of course, offer information that I’ve previously published; however, after that 30 minutes, a paid relationship needs to be in place.”

      Thanks for sharing your current reality. What do you think of trying something like that?

  3. Dan Balcauski
    January 6, 2021 at 9:49 am Reply

    The difference between project and advisory engagements was a big aha for me. If you don’t set this frame with clients, expectations can get messy very fast. I recently offered a prospect the option between advisory and project work for the same company objective. It was a nice option for them to choose based on their budget and how much they wanted their team to own (e.g. know-how vs. do it for them) over the long term.
    Personally, I’d like mix of both for me in the long term, as the project work helps the consistent learning and growth that makes the advisory more valuable.

    • David A. Fields
      January 6, 2021 at 10:57 am Reply

      Terrific case study, Dan! I’m impressed that you distinguished between the advisory and project paths to solve your client’s problem and presented them a clear choice. That avoids confusion down the line. Well done!

      Your example is going to give a lot of readers big ideas, Dan. Thanks for contributing it.

  4. Stephanie
    January 6, 2021 at 11:39 am Reply

    Another fantastic article, David. My head was nodding like a bobblehead doll. I may have whiplash! We’ve been trying to price the client first, then price the scope. And, we typically use a paid diagnostic to get to know the client and refine/define the problem. We haven’t tried an advisory approach yet with a new client. We’ve typically used that model with a client toward the end of a multi-year engagement. What are your thoughts on staff augmentation for a small consultancy? Do you think it a viable offering or too distracting from core services?

    • David A. Fields
      January 6, 2021 at 12:30 pm Reply

      New, consulting priority: protect yourself from whiplash! You’re being very smart by understanding the client’s fee tolerance at the start. (That’s why the Heart Attack Question is such a valuable part of the discovery process.) Also, transitioning from project work to advisory as a long tail is a great way to create a sustained, profitable relationship with a client.

      Re staff aug, I have mixed feelings. Three of our current clients offer staff aug. One as a primary solution, one as an adjunct to the primary solution and one as a completely side business. It can be very lucrative, and if you can sequester that business somewhat so that it’s not an ongoing distraction, then it’s worth considering. On the other hand, it’s a major investment to start it up correctly and the business tends to be binary, which can be gut-wrenching if it turns off and you have to let go all the folks you brought on to staff a project/client. Net: it’s worth a deeper discussion!

      Great questions and perspective, Stephanie!

  5. PETER KORYTKO
    January 6, 2021 at 1:25 pm Reply

    We do almost 100% as project-based work. The early introductory phase is difficult because it involves a 1-hour introductory meeting to prove to them that we know how to help them, plus a 1-hour meeting to learn what they have already done. From there, I invest several hours developing their program plan. From that plan, we develop a proposal for exactly what they need on a project basis.
    The trick here is that we give away the strategy when we write the proposal. When they see the fixed fee proposal with all of the components included, that is their strategy. We also build their external budget for the program. They have the option to walk away with the strategy in hand plus the budget. I guess they could just implement it themselves if they had the know-how. With that said, if we invest this much into a prospect, they become a client 85% of the time. I call this phase business development even though we are laying out the strategy for free. Many times, they use our program plan to raise more funds from investors or to justify program to management. That is fine with me.
    To reduce the up-front free work developing their strategy and proposals, we use an extensive set of templates to make proposal writing really fast. With that, the development of strategies and proposals is only 2 to 3% of our time. Since this free part is small, the small size keeps the pain low.
    I also view our early free efforts as a way to build trust, a precious commodity. Even if they do not use us after our free work, there are options for future referrals.
    In our fixed-fee projects, each part of the project is priced slightly differently. The early 20% of work is priced at cost for our time. The later work is priced to drive a profit. This helps us get the program moving when the client most reluctant to proceed. Once we start, we never stop. So, the differential pricing does not negatively impact us in the long run. The fixed-fee project includes advisory discussions to support any reasonable topic with client as long as it fits into our biweekly meeting time (built into the fixed fees).
    We always add contract language for hourly work. We only use this if the client does something (or fails to do something) that disrupts the program. We then bill hourly to clean up the mess. We use this rarely, probably 3 to 5% of billing is hourly. I do not like hourly work because of the time tracking and paperwork is a time black hole when we could be performing more valuable work.
    When clients start to pump us for advisory information, I give it to them for free provided it is close to the scope of our current work or relates to future project work. For most clients, we do free advisory work if it is related to the current or future projects. If I suspect that clients are intentionally pumping us for free advice, we decline to answer advisory questions that are outside of our expertise because clients then expect us to become their free advisors on everything.
    In general, I avoid projects for advisory work only, as it is too small and does not fit well in our calendar or systems. Advisory work is also a bit too unpredictable resulting in waves of too much work followed by too little work.

    • David A. Fields
      January 6, 2021 at 4:08 pm Reply

      Peter, thank you for the thorough explanation of how your firm approaches the work. It sounds like you’ve found that sharing some big ideas up front helps you win your consulting projects, and that’s very consistent with what we’ve seen for consulting firms in general. It’s why consultants should never be shy about sharing their ideas and IP.

      Adding an hourly fee onto a fixed fee contract to “clean up the mess” is unusual, and while it’s a creative solution, I wonder whether it could put you in the world of hourly fees.

      Advisory contracts aren’t for everyone. As you point out, the workload can be difficult to predict and can challenge your systems. On the other hand, that type of work can also be extremely high margin and keep your consulting firm’s thumb on the pulse of client needs.

      Again, Peter, I very much appreciate the time you put into your comment and the ideas you raised!

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