Value-Based Consulting Is Risky As All Anything

Hello and welcome to the third issue of The Business of Analytics newsletter.

This time around, I want to talk a little bit about Value-Based fees in consulting.

This is often held up as a super-groovy way of increasing your revenue without increasing your actual working hours, so in that sense it’s no wonder that recommending the blanket adoption of Value-Based fees has become something you hear all the time, from basically everywhere, and all at once.

The professional services equivalent of Happy by Pharrell Williams, if you see what I mean.

It carries, however, a sting in the tail: it introduces risk, and depending on the makeup of the rest of your consulting business, that may or may not be a good thing.

What follows is as coherent an expression of my feelings on Value-Based as I’m able to articulate. Value-Based was always something I’d try my best to avoid when I was building my agency, largely for the reasons I outline below, but I accept that many other approaches and attitudes to it will work well and pay off. If your experience of Value-Based is different, I’d love to hear about how you made it work.

Anyway.

To business!

Value-Based fees can propel you into a higher revenue orbit… but what if it all comes crashing back to earth? Photo by Mara F on Unsplash.

Value-Based consulting is often held up as a Really Good Thing by authors, speakers, podcasty people, and advisors. They like it because it gives you freedom from hourly billing, aka Time & Materials, aka the way that everyone does it and has done it since the first neanderthal sent the first project estimate to another neanderthal.

The logic runs like this:

Let’s say you charge yourself out at [$100] per hour (a crappy rate, yes, but bear with me as it keeps the maths easy.)

You know that a campaign setup, monitoring and reporting job would normally take 30 hours, but you can deliver it in 20 hours because you’ve got some internal IP (standard operating procedures, software, or a combination of the two) that will allow you to complete the work faster.

Instead of charging [20 x $100 = $2,000] for the work you actually perform, you charge [30 x $100 = $3,000] as the prevalent market rate for the delivery of that particular type of work.

I paid lots of attention in maths class at school, so I can tell you that there’s a difference there of [$1,000].

Which, on the face of it at least, is a pretty nice upside.

Advocates of Value-Based pricing (and I note that many LLMs appear to be fans of it as well, a thought that fills my heart with dread) will often say that their solution is a Really Good Thing because it decouples your output from your input; it’s no longer a matter of “however many hours you work, you charge the client for” and becomes “charge the client the same, even if you work far fewer hours.” Smash the ceiling, scale the business, ad infinitum.

You can see the appeal can’t you: it’s free money!!!11!!

Nothing is free

A few years back when I discovered I was going to be a father, I got in touch with friends that had already become parents, and booked in a coffee or lunch or beer on the basis that I’d be asking them for parenting advice.

Not like “oh dude help me what the hell do I do wtf” advice, but a “what’s something you figured out randomly along the way that’d be useful for me to know” kind of thing.

I learned a lot; principally, that many of my most loved friends are complete dropkicks when it comes to remembering anything useful.

(Though, to be fair, any parent knows that as you quickly adapt to the ever-changing behaviour, preferences and learning stage of your offspring, your brain forgets absolutely everything you learned about said offspring’s behaviour last week let alone several years prior, so in a sense it was a miracle that any dad I asked could remember anything at all. But I digress.)

My question was always: “what’s something you figured out, that you think I should know?”

And the one answer stuck with me: “no plan survives contact with the enemy.”

Whether that’s wisdom from the teachings of Sun-Tzu or Ludacris I cannot say, but I love how this encapsulates a fundamental truth of parenting: you’ll have well-formed and well-intentioned ideas about how something will happen… and as soon as you put the plan into action, it melts and deforms like the face of the baddie at the end of Raiders Of The Lost Ark.

Sorry but what does this have to do with anything?

I think that just like those best-laid-plans, Value-Based fees don’t survive contact with the enemy.

And by “enemy”, I mean “client.”

(Okay, clients aren’t really enemies, though I don’t doubt that you can think of at least one client you’ve had over the years that might possibly qualify as such.)

What I mean by all this is that when you spend all that time putting together a Value-Based proposal for a piece of work, you’re doing so in a vacuum.

You’re looking at the stuff you know how to do, you’re basing it on your experience in delivering that type of work previously, you’re factoring-in some sort of buffer related to how borked similar projects have gone in the past, and probably also adjusting the final number on some blended voodoo of client revenue, ad spend, company size, current temperature in celsius at a random lat/long chosen by a blind octopus in an outsize fish tank, etc.

However you get there, you land on a number. You add it to your Proposal, send it, a day or two later it gets accepted.

At this point: how long will it be before things come unstuck?

Maybe the data warehouse you need access to requires more waiting around than you expected, derailing the project.

Or maybe, even worse, you need to go through security clearance to get access to it; or maybe, when you finally do get access, you find out that the data that the client described as “generally reasonably okay for the most part” is a messy nightmare of unstructured wonk that nobody on the planet could reasonably be expected to make sense of?

Or what about this one: you agree to a final payment only when your recommendations are implemented and they see an uplift in conversion rate of greater than 6%.

It sounds fine on paper, but what happens when their devs drag their heels as though they were in training for the Olympics, if dull tardiness was an Olympic sport?

Or worse still, what if the business decided not to implement all your changes, or they implemented them in a different way, which makes you justifiably uncomfortable because the result you held in your head when you were scoping this out in a vacuum is fading?

You may or may not consider the above possibilities particularly likely, or you might consider them trivial. My point is that it doesn’t take long to envision multiple ways in which a Value-Based proposal could go cactus, in ways that materially affect the health of your business.

Maybe your Value-Based fees contain contingencies for this sort of thing.

Maybe you structured a lovely list of assumptions and requirements, milestone payments and partial payment recovery clauses.

Maybe you included a “ripcord” clause that lets you abandon the project at whatever state it is when you realise it’s never going to be finished in the way you wanted it to be?

Those all address a risk that’s inherent in Value-Based fee structures that simply doesn’t exist in situations where the approach is based on Time & Materials.

Officially less risky than value-based fee structures! Do not try either thing at home. Photo by Michael Shannon on Unsplash.

Hello risk

You can see where I’m going with this: Value-Based is RISKY.

On paper, in a vacuum, and before your plan has contact with the enemy: everything looks sound, predictable, a safe bet.

Taking it out of the laboratory, where the oxygen of the RealWorld(TM) can start to have an effect, the “predictable, safe bet” can morph into something far less friendly.

Let’s go back to the original example.

You’ll recall that we’re charging [$3,000] for work that we’d normally deliver for [$2,000] leaving us with a pleasant cushion of [$1,000].

It’s tempting to think of that [$1,000] cushion as pure profit. But that cushion is doing an awful lot of risk-absorption.

Think about all the things that could go wrong: between access problems, delays on the client end, failure to implement, data complexity, technical environment problems… to say nothing of internal client politics, objectives, stakeholder competition (more of an issue for bigger clients, but most definitely something that has the capacity to completely spoil your day), inflexibly interoperable internal systems, a decision to terminate the project early for reasons beyond your control…

This is the problem I have with Value-Based fees.

In a vacuum: fine. They sound great. Sign me up!

In the real world: they are unacceptably risky.

The delta between [actual labour rate] and [final charge rate] is being asked to absorb an unspecified amount of risk, and I don’t think that’s a great way to build a sustainable business.

Certainly, sometimes it’ll work brilliantly and sometimes it’ll work okay-ish-i-guess. It won’t be a disaster every time, and it would be ridiculous for me to stand here and say that every single Value-Based engagement is doomed to failure.

And don’t forget, if this time Value-Based works out just fine, and you have that [$1,000] cushion, it doesn’t mean that next time things won’t go wonky and you end up losing [$1,000]… where’s that Value now, eh?

Hold on, champ. All business involves risk, right?

Yes, that’s absolutely true. Consulting is, in a sense, more or less entirely about risk -- you’re weighing up chances all the time, particularly in things like hiring, scoping, planning but also across macro-areas like technology, market forces, ability to keep working, etc…

(It fascinates me that while analytics work needs to be predictable and precise, the “work around the work” that builds agencies can often end up being more finger-in-the-wind than I think a lot of people realise.)

But yes, risk is everywhere.

And, to be clear, there comes a time when you need risk. Maybe it’s fine to introduce Value-Based fees on the expectation that over time, you’ll get less wrong and be more consistently right, and be able to deliver at a volume that lets you scale, hire and grow. Whether that applies to you or not I cannot say.

All business involves risk, consulting involves lots of risk, and I’d recommend having a read of this if you’d like to explore this concept a bit more deeply: Consulting is a bet: everyone’s gambling

RISK, rhymes with BISK, short for biscuit, something I’m far more comfortable being around. Chomp. Photo by Pawel Czerwinski on Unsplash.

The balance of risks

I’ve talked about the idea of Chips and Gravy before, where the cost of your outgoings that need to be covered are Chips, and everything else is Gravy.

Perhaps Value-Based makes sense for Gravy, but I think it’s particularly dangerous to introduce that level of risk to your Chips.

(The more I use that Chips & Gravy analogy, the more I realise how supremely silly it renders any sentence in which I deploy it, which only makes me love it more.)

So perhaps the way forward is to develop a bedrock of predictable, safe, low-risk work that’ll cover your Chips quite comfortably.

Then if Value-Based becomes an option that you’d like to put forward to a client for a project, maybe Gravy is an acceptable area to tolerate greater risk.

(Whether or not doing this is a good idea will depend in no small part on the shape of your business, together with its target market, its geo, the number of staff, the nature of your projects…. one size rarely fits all and I believe you should be super-wary of anyone that tries to tell you that it does.)

First ever signed SoW, circa 45000 BC. Apparently legal went back and forth red-lining everything because “it’s not personal or anything, it’s just how this is done…” Photo by Mike Leyder on Unsplash.

Time and materials is the worst form of agency billing, except for all the other ones

So does that mean we’re left with Time & Materials as the main stream of billings?

I guess it probably does, and we return full-circle to the way things were before Value-Based consulting reared its ugly head.

Time & Materials isn’t perfect.

But it’s predictable, it’s controllable, you can see when it’s about to fall over, and tracking it reliably requires a layer of operational hygiene and good-practice that benefits an agency business in many ways.

I don’t doubt that Time & Materials will need to be revised at some stage… as agentic team members become a thing, it no longer makes sense to count capacity in hours. An “hour” is a unit of human labour, in the way that a “token” is a unit of agentic labour, but whether that means that the SoW of the future ends up being a marked-up mash of hours + tokens, I cannot say…

What I can say, with a strong degree of confidence, is that holdcos and large agencies that are currently championing novel ways of billing clients (such as a low initial fee supplemented by a bonus based on final campaign performance, or a single-fee cost for as many “whatever”s that a client wants with no overage costs) will explode in everyone’s faces like a hilariously-tampered-with birthday cake, and everything will swing back to nice, predictable Time & Materials billing within 24 months.

So there you have it

I will concede, it’s not easy to smoosh an entire brain’s worth of thought on is risk good or bad hmmm into a newsletter, so I tried not to do so.

But of course, your appetite for risk will likely say quite a lot about your appetite for Value-Based consulting.

And as I mentioned at least nineteen thousand times above, Value-Based consulting may have worked well for you in the past, and may continue to do so in the future. One bloke’s abject fear is someone else’s gold-plated opportunity after all, and I’d love to hear from you if you’ve made it work.

But hey, enough of my yakkin’. Stay well until next time!

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Thanks for reading. No AI was used in the creation of the words you just read.

I do this for a living. I work with agencies and consultancies around the world, providing the support I wish I’d had throughout my journey of starting, scaling, and selling an agency.

If you think you could benefit from what I know how to do, I welcome conversation: get in touch.

On this site, you’ll also find information about the Analytics Consultants Circle, a free monthly peer-group call that I moderate, where solo and small-team consultants share battle stories from the field, and we talk about the challenges you face when you grow and scale a business.

The last movie I watched: Death In Brunswick (1990).