COCO COntact » Buy, provide professional services fairly

02/14/11

Buy, provide professional services fairly

Ugly misunderstandings over money damage business relationships.

How to resolve billing disputes before they begin

Common sense controls costs Until a perfect solution is found, here are some ways hourly billing costs can be contained.

Assign one knowledgeable and trustworthy person as the interface. This avoids, for example, having five employees calling a lawyer with duplicate, conflicting or frivolous assignments.
Think through the goals and needs before making a request.
Make sure your team’s needs are considered before making final decisions. It is less expensive to send the vendor one set of comments than to respond with dozens as input is received.
Provide clear and complete information.
Consider the ramifications of refusing advice.
Read, track and save e-mails and other communications. If you see volumes of correspondence, chances are bills will be higher.
Reduce change orders. Avoid over-analyzing or second guessing every action the vendor takes. After all, you brought them in because of their expertise.
Assume every e-mail or telephone call is billable. They may not be, but why take it for granted?

Vendors, on the other hand, might consider:

Assigning one person as the interface and requiring clients to talk only to this person. This helps avoid misunderstandings and conflicting assignments.
Mailing invoices daily or weekly rather than monthly. This ensures neither you nor the customer will forget important details. This may also help cash flow since many clients pay anywhere from 15 to 60 days after you issue an invoice, even if you incurred expenses up to 30 days before the invoice was ever issued.
Requiring advance deposits to ensure costs are covered. Otherwise you risk making interest-free loans to clients and customers.
Ensuring the client contact is knowledgeable, credentialed in the field and has the authority to complete the project. Otherwise, raise the issue with the contact’s supervisors before problems occur.
Screening prospective clients by whether their spending personal funds or company money. Those spending personal funds are more apt to betray their own company goals if it comes down to a choice of a company need or the car payment on the Mercedes or BMW.
Calling other vendors who do business with prospective clients. This not only helps to determine creditworthiness, but also whether the client is disorganized or difficult to work with.

Chances are your organization buys hourly professional services — legal work, IT consulting, advertising, accounting, auditing, etc. Perhaps, your firm also sells professional services in this manner. No matter which situations apply, chances are you, your vendor or your customer occasionally builds as much steam as an old-fashioned pressure cooker.

A sense of fairplay, good communication and understanding go a long way toward reducing the steam buildup.

By the time the bill is generated, memories are hazy and it is seemingly too late to ward off any disputes. Questions arise. Could services have been performed faster or more efficiently? Was the end result worth the expenditure? Could the customer or client have better managed his or her contribution? Were goals clearly defined?

“After all, if you’re going to audit my books, and so is she, then why shouldn’t I simply find the cheapest hourly rate? When things are reduced to a commodity, we lose sight that all service providers aren’t equal,” says Dr. Alan Weiss, author of “Million Dollar Consulting.” He advocates a “value-based” approach. That is, if a client’s project can be completed in a day rather than a week — a real advantage to the client — why shouldn’t the client pay the vendor more than the competitor that needs a full week?

Billable hour vs. project-based fees

The concept of the billable hour came into vogue because it was considered fair to both parties. If a small job takes only a few hours, the client shouldn’t be expected to pay an exorbitant flat cost. On the other hand, the vendor should not be driven out of business by the fixed-fee client that expands the project scope, misses deadlines or drags out its length.

Project-based fees work when there is a clear understanding of the work to be performed. It doesn’t take into account, however, what happens when elements are not clear. Take, for example, an order to connect a cable or pipe from point A to point B. What happens if the contractor discovers an unforeseen or undisclosed obstruction between the two points that requires more time or additional equipment? If the price is not adjusted, the customer could end up with an ugly line simply strung — clothesline like — across the office because that is the easier and faster than overcoming the obstruction.

Similarly, a fixed price may be unfair to the vendor if a client believes he or she has unlimited license to expand or change the scope of the project. It may be unfair to the client if it encourages the vendor to cut corners or complete a project in haste to guarantee profit.

What happens if a client agrees to a fixed price with a vendor to reconcile last year’s statements, but one month’s records were misplaced? Is it fair for the vendor to absorb the unanticipated extra cost of reconstructing the missing month? Is it fair to the client if the vendor acts quickly, but turns in a handwritten reconciliation — requiring the client to manually re-enter the data into a spreadsheet? This goes back to Dr. Weiss’ observation that “all service providers aren’t equal.”

Buying professional services is not akin to buying a gadget at Wal-Mart. If one cannot afford the item, it is a good idea not to place it in the shopping cart. The cashier also cannot be expected to refuse to ring up the sale or offer a steep discount because the buyer cannot afford it.

When selling services, it is important to understand customer expectations, correct misperceptions early and determine a refund policy. Should a investment client unrealistically expecting a 50 percent return on investment, receive a refund if the market goes south?

Value-based pricing

Over the years, many ideas have been advanced about how to relieve the tension. Dr. Weiss writes in his blog, “If a client is best served by a problem being remediated quickly, or an innovation being implemented rapidly, or an improvement being installed momentarily, then why isn’t the consultant charging for the velocity of the work rather than for the duration?”

Writing in TechRepublic, IT consultant Chip Camden counters with a more frequently encountered reality. “Rather than drawing a line between value-based and hourly billing, let’s draw a distinction between types of value. Some engagements (but very few in my experience) follow the model of providing a specific, discrete service that has a well-defined result. Many more engagements fit the concept of the consultant as advisor or as an ongoing participant in the growth of the client. The results provided in the second category are numerous and sometimes difficult to pin down.”

Further, consultants note that it is difficult to guarantee results when clients water down projects, set unrealistic goals or fail to take advice or control vital components. An example of the latter is a client who insists he or she be the outside contact person, but then fails to return calls to customers or the media. If the client does not return the call, should the vendor still guarantee results? For other examples, see COCO+CO. COntact, Issue 5, “The marketing/operations disconnect.”

Avoid the inevitable pressure cooker explosion by addressing misperceptions or misunderstandings in advance.

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