Founder in Eleven

One of the last posts presented ways to negotiate with clients and avoid fixed-bid arrangements.   The alternative to fixed-bid arrangements are time-and-materials arrangements.  All time-and-materials arrangements include billing rates for resources and Clients, particularly those associated with purchasing, will seek ways to reduce costs and can pressure service organizations to lower billing rates.  This post will describe how and why it is important to embrace standard billing rates that are never reduced, and include a clever hack Technology Services Group (TSG) discovered to avoid billing rate discussions.

Establishing Standard Hourly Billing Rates

In time-and-materials arrangements, billing rates establish the value of the services delivered by a consultant for an engagement.  Establishing standard hourly billing rates allow both the services firm and the customer to understand the cost of the services engagement.  Rather than negotiating rates with every client, standard billing rates are applied to all clients consistently.  Some best practices discovered during our time at TSG include:

• Hourly rates versus daily/weekly rates: Hourly rates are typically standard with all professional services, whether that be IT consultants or lawyers.  Daily or Weekly rates typically represent the hourly rates being multiplied by 8 (daily) or 40 (weekly).  Hourly rates provide client flexibility for tasks that don’t neatly fit into eight hour days (support) or take more than a week ( go into overtime).
• Standard rates set by the market: Billing rates are typically set by the market based on what customers are willing to pay for a service. 
• Rates vary based on experience: Billing rates vary by resource skill and market demand.  A best practice is to vary the rate based on experience level, lining up billing rate with the cost of the resource (example—the more the resource costs, the higher the billing rate).  When done correctly, rates will help place resources where clients are incentivized to use lesser cost/inexperienced resources for activities that don’t need to be done by senior resources.

Why Never to Reduce Rates

Service firms that reduce rates between clients run the risk of the following consequences:

• Customer perceptions: When rates are reduced, customers can perceive the service firm as pushing higher rates on them when compared to other customers.  They can also feel as if they have to negotiate rates every year or for every project.
• Employee perceptions: Employees, wanting to make the customer happy and avoid conflict, can bring up rate reduction as a way to reduce the cost of the project based on experience negotiating discounts on other projects.
• Long-term discounts: Rate discounts last forever, affecting the project at hand as well as follow-up projects where the rate negotiation starts at the previous discounted rate.

Successful long-term client relationships rely on mutual trust between both parties.  Challenging rate discussions can severely impact trust.  Setting standard rates that are market-based and never reduced removes rate negotiations.

Investing in Client Activities rather than Rate Discounts

One way to offset the perception that “consultants are always billing” is by offering to invest in the client as the project begins.  A typical investment includes offering to develop free proof-of-concept work or make an investment in the client with a number of hours of work that will not be billed (i.e. 40, 80).  When compared to rate reductions, investing in the client provides the following:

• Client work can commence immediately as the investment work does not require an approved contract, master services agreement, or other client-signed documents.
• Proof-of-concept work typically can help the client show off the potential benefits of the system to get funding approved.
• Proof-of-concept work remains the property of the consultant as it was not developed under a client agreement and can be used at other clients without restriction.
• Proof-of-concept work can be done by any resource chosen by the services firm since it does not require client approval.  In this manner, junior resources or unbillable resources can be used to get experience and exposure to the client prior to the engagement.
• Proof-of-concept or investment work ends after the number of hours is used and does not factor into follow-up negotiations like rate reductions.

Investment work helps breaks the perception that the consultant is always billing and shows an early commitment to building a client commitment without the long-term ramifications of rate reductions.

TSG Rate Hack

TSG had a client early in our history that pushed for the following language to be included in the Master Services Agreement between TSG and Client X (name removed for confidentiality):

Most Favored Customer,

Consultant warrants and represents that all terms, including prices, charges, benefits and warranties, in this Agreement are at least as or more favorable than any terms that Consultant has offered to any other person or entity, including any affiliates, for the types of services covered by this Agreement.  If at any time during this Agreement Consultant shall offer any other person or entity, including any affiliates, terms more favorable, Consultant shall promptly notify Client X of such more favorable terms, and if such more favorable terms were offered by Consultant to another person or entity other than any affiliate of Client X or Consultant fails to notify Client X in any event, Client X and every affiliate of it shall immediately receive the benefit of the more favorable terms for the remainder of this Agreement, including any renewals thereof, as well as retroactively to the effective date such more favorable terms were offered by Consultant.  Upon Client X’s request, Consultant shall advise Client X in writing, executed by an officer of Consultant, that this section has not been contradicted by Seller since the later of (i) the Effective Date of this Agreement or (ii) the date of the most recent notice provided by Consultant pursuant to this section.

As the opportunity for Client X was a large company, TSG had to accept the language in the Master Services Agreement.  One unexpected benefit of signing this agreement was it pushed us to only offer standard billing rates to all clients.  When a client would demand “We need to reduce billing rates” any employee could reply with “We have a Most Favored Client Arrangement that doesn’t allow us to reduce rates for any client.”  For some clients, TSG would proactively include similar language in their Master Service Agreements with exceptions for non-for-profit customers.  The standard billing rates and most favored client had the following benefits:

• Employees do not have to engage in rate negations
• Customers, particularly purchasing, could be confident that they were not being overcharged compared to other customers and didn’t push to negotiate rates

Summary

Rather than rate reductions, service firms can develop standard billing rates and apply them to all customers, reducing the stress of rate negotiations for customers and employees.  TSG offered clients investments as well as “Most Favored Customer” clauses in contracts to support standard billing rates and give customers the confidence that rate negotiations were never needed.