How Do Consultants Charge for Their Services?
Bringing a financial consultant on board can be exciting for your company. It can lead to major payoffs, from acquisitions to new funding sources to increased efficiency to smoother financial processes – all of which can fuel growth. But it’s crucial that you are equally aware of the costs. Don’t be caught off guard when the bill arrives; before hiring a consultant, know how—and how much—they charge for their services.
The first step: analysis
A good consultant bills you based on your company’s needs, rather than on a generic formula. The consultant should start by fully understanding the issues you need solved. Frequently this includes an examination of your books followed by a more rigorous vetting of your Accounting, Finance and Treasury departments. This is known as an AFT assessment.
Unpleasant surprises can happen when consultants don’t take the time to understand your issues and frame them properly for your current situation. Bills run higher than expected and the results don’t meet expectations.
Creating a Roadmap
After getting to know your burning financial issues, a consultant will draw you a roadmap for a successful outcome. It should give you confidence your issues will be resolved. At the same time you should be evaluating whether the consultant is the one who can solve it for you.
Pricing Model: Flat rate vs. Per hour fee vs. Value billing
Once you agree on a game plan, consultants generally bill one of three ways: a flat fee per project, by the hour or a % of value created. In start-ups or where a significant time commitment is expected it is not unusual for the consultant to receive a fourth type payment, an equity or equity like stake in the company.
A flat fee ensures both you and the consultant agree at the outset about what the work is worth. This pricing method is good because your consultant has an incentive to complete what was promised on time and you won’t pay more if the work takes longer than expected.
According to the Institute of Management Consultants, the flat fee can be influenced by a number of factors, including the client’s need for special knowledge and experience; the consultant’s reputation; and, if known, the dollar benefits of a successful outcome.
Some consultants, according to the Institute, may charge a portion of the total fee when the project begins and throughout the project until the work is done.
Sometimes the consulting arrangement will involve a not-to-exceed figure or a figure that, when reached, triggers a joint evaluation of results-to-date and an estimate of the time needed to reach a satisfactory conclusion, an institute guidebook says.
An hourly fee, on the other hand, means you’re paying for your consultant’s time, not the completion of a specific objective. The major flaw in hourly billing is it isn’t outcome based. However, it can be useful if the preferred outcome to a specific problem is unclear. It is also a good way to pay for a consultant to come in a few hours a month to do ad hoc projects and activities that aren’t repetitive.
To calculate their hourly rate, many consultants work out their desired annual salary, adding yearly expenses such as office rental and equipment. Then they divide that figure by the number of billable hours they work in a year to determine an hourly rate.
For instance, if consultants pay themselves $200,000 annually and calculate their yearly operating costs at $100,000 over 200 billable days, the hourly rate will be $188.
Value creation is a great method for aligning the goals of the client and the consultant. It is also the most difficult to set up. It requires the ability to measure in financial terms the specific outcome from the consultants work. The company and consultant share the outcome at a split agreed to prior to the engagement.
Your bill also depends on the consulting firm. Larger firms may have more staff and additional expert niches but they also have higher overheads and less flexibility in the services they provide. A boutique-sized firm, on the other hand, may have fewer hands on deck but could tailor its services to your company’s needs and save you more money.
An outside consultant can be just what your company needs—but only if the work is worth what you’re paying. Understand how your bill is put together and be clear on what you want—and what you want to pay—to head off any unwanted surprises.
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