A cross between bingo and voodoo was how a university professor recently described the approach of most service providers to fee negotiation! This got me thinking about professional firms.
With clients looking for more cost certainty and alternative billing structures available, firms are finding fee negotiations with clients more complicated and are struggling to maintain fee rate levels. The response of firms is puzzling. Efforts are rightly being made to become more efficient and reduce costs, but little is being done to address improvements in the top line.
For a start, firms will benefit from reviewing what’s causing fee rates to slide. Where are the priorities? Is it primarily:
- Scope creep on projects?
- Procurement pressure from clients?
- Clients cutting budgets?
- Pressure to provide fixed fees or reduce hourly rates?
To assess where your firm is, ask yourself the question: ‘What would you say if a client said
“Your fees are 15% higher than other firms”.
“Drop your fees by 15% or we’ll put the work out to a pitch!”
What are the best responses to these situations and how can firms improve their approach?
There are lots of things firms can do to improve their approach to fee negotiating. Here are 17 tips:
- Make sure key people understand the relationship between price and profit – a study by McKinsey in 27 industries (most of them with lower margins than professional firms) showed that, on average, a 1% increase in price leads to a 10% increase in profits. Even if your margins are 20%, you’ll make an extra 5% profit if you can bill just 1% more. The extra fees drop straight down to the bottom line as profit. Conversely, writing off fees has a dramatic negative effect on profits.
- Analyse your business in terms of client profitability. Many firms have a group of clients that could be called profit vampires. They challenge you on fees all the time. They might be trophy clients, but be a pain to work for. You might have discounted to win them in the first place and have planned to find ways of increasing your rates, but be finding it impossible to do so. These clients need to be shifted up or out! Let them drain your rival’s profitability, not yours!
- Get the relationship right. Avoid those relationships where you could describe them as ‘master – slave’. Try to develop ‘peer–to-peer’ relationships based on mutual trust. This may take time, but will be worth it, both for the client and for you as the service provider.
- Prepare for conversations on fee negotiation. The worst people at winging it appear to be senior, who seem to be saying to themselves “I’ve been doing this for 20 years – I know what I’m doing and don’t need to prepare!” Back of the taxi preparation is risky given the implications of getting this right or wrong.
- Put yourself in the client’s position. Imagine what might be important to them and what they might value. It’s likely that they will want to get good value, but ask yourself how they are likely to define value. Most service providers underestimate the importance of taking away hassle, helping the clients be less stressed, helping them hit their targets and generally look good to their peers and directors.
- Have a structure for fee negotiating, such as:
- Open with a proposition
When bargaining, be clear about your ‘must haves’ and your ‘like to haves’. Give away your ‘like to haves’ if you have to, not your ‘must haves’.
7. With your most profitable clients, be careful that your key contact remains influential in the negotiating. Budget decisions are moving to more senior positions, particularly in this current economic climate. Your contact may be becoming a less important ‘gatekeeper’. Also, what are you doing to ensure complacency isn’t creeping into the relationship? From your side or the client side?
8. Be bold and negotiate with your mind, body and voice as well as your words. If your posture doesn’t match your words you risk the other side seeing you as posturing. But be realistic and fair at the same time.
9. Become more skilled at developing alternative pricing strategies. Should you be selling value or time? Inputs or outputs? I have a table of different options, with the pros and cons for clients and service providors. Get in touch if you’d like a copy. If in doubt be flexible and offer your clients choices.
10. When reducing your fees, ask for something in return from the client. Don’t think that clients believe you’re being generous if you reduce your price. They’re more likely to think you were trying to rip them off in the first place! Plus, they’ll probably continue to ask for discounts, knowing that you’ve said yes in the past. Maybe you could suggest that, for a reduced fee, the client does some of the work?
11. Train some of your better negotiators to be pricing champions. Let’s face it, not everybody can be a star fee negotiator. But if you had one or two champions, you could strengthen your negotiations and improve margins substantially. Plus, what about capturing their approach as ‘knowhow’ and train others to replicate their approach.
12. Consider ways of measuring, incentivising and rewarding people who negotiate well on fees. This approach usually gets any issue more attention and improves performance!
13. Avoid negotiating in the mindset of either friend or adversary – see it as joint problem solving.
14. Avoid focusing on their stated positions – find out their underlying need and focus on that. The situation in which two people are arguing over having the last orange can be avoided if they each realise one wants the juice to drink and the other wants the peel to make a cake.
15. Ask more questions, such as ‘tell me what’s important to you?’ and ‘’tell me why that’s important?’ These should help you understand their underlying needs. Then really listen to what they are saying. And watch to see what their body language is saying as well.
16. Avoid digging in with too strong a position too early on – explain your underlying needs and explore the options, perhaps by jointly brainstorming, for a win-win first.
17. Acknowledge any emotions on their side – if there’s been an ‘incident’ or misunderstanding and the client is feeling annoyed, allow them to let off any steam and avoid over-reacting on your side. Return to the negotiating process when everyone is in a calm place.
Negotiating about fees is not a comfortable process for most of us. It will take practice and a mindset of learning from your experience.
If you ask procurement specialists how they do it, they’d say…..
1. Be clear about what you want
2. Ask for it
3. Give nothing away
4. Don’t leave until you get it!
Given this strong stance adopted by many clients, firms need to respond robustly. In a way, the challenge on fee negotiating can be phrased as ‘how to disagree without being disagreeable’!
For details about improving the profitability of your practice group see: