Professional services companies consistently face the challenge of proving the value of an hour of time to customers and prospects. And this is fair because in services work it’s not always easy to see the value in the money that you spend for an hour of work performed. Because I face this daily, it makes me want to go ahead and talk about the elephant in the room: hourly rates. If project rates were lower wouldn’t it change everything? Projects would be done quicker, better and faster? They would be easier to control? Everyone would get along and all points of view would come together in a swirl of world peace?
No.
Why not? It seems like that would be the case. If all deliverables could be performed overseas for $10.00 an hour, wouldn’t everyone be happy? Well, let’s think it through. You need professionals to help you with your business. You want to know exactly what you’re getting for your money. You may be harder on consultants because of their hourly rates. But remember fixed bid pricing? That didn’t go so well either, did it?
I come at this from my own experiences. When I was a user and hired consultants in the 90’s, I’d sometimes get out my calculator and add up the number of hours they were working and their rates. I’d look at that total and I was sure they needed to work harder. Yes, I needed them to work over the weekend instead of letting them fly home. Why? Because I (as if I were the one writing the check) was paying them a lot of money to be at work. Besides, they were making more money than I was — I needed them working!
Then, when I was a sales rep at a services firm that sold project work, I always tried to get the lowest rate for the customer while getting the consultants the rate they asked for. I was popular with the client and the consultant, but not so popular with my employer. We weren’t getting the margin we needed.
“Needed.” My employer needed more money to pay all the executives who, at that point, played small roles in the business. Was it need or greed?
I discovered the answer to that part of the equation when I owned my own consulting firm. I tried to maintain the practice of being the good guy, giving my consultants and my clients the rates they wanted. I was popular, but not very profitable. Being a good guy was bad for cash flow.
You see the dilemma. Cash flow affects profits. But does it affect value? Shouldn’t business owners make what they need by being good at running their business, by having the best consultants possible for the customers? Well, the best consultants cost the most money. They’ve spent years developing deep expertise on ERP projects — they’re as precise as surgeons. And they are in high demand; everyone wants them on their projects. But guess what? To get them, consulting companies have to pay them. To keep them, consulting companies have to support them with their peers who also cost money. They have to provide a path to management success so they can pass their expertise on to others. Their consulting firms have to lead the industry and have all the right relationships. It all costs money.
Can they use independent contractors? Yes. And they cost money.
There is no new information here. But I don’t feel like people really talk about this. I feel like decisions are made at the hourly rate level and not the value level. And they don’t take into consideration what it costs to operate the machine that makes all of this possible – the internal teams. Bottom line, to keep a business growing, you have to charge the margins that can sustain a thriving business with the best people in the industry. And after being involved in three iterations of trying to charge less, I’ve learned that clients come back for the best, not the cheapest. And at that point. If they went with lower cost consultants, the projects are usually in such turmoil that only the best can undo the damage, redo things the right way, and get everyone back on track.
Consulting isn’t cheap. But if you hire the best, you get your money’s worth. The value shows up in your sales orders, your inventory, your production, and, most importantly, your customer loyalty. Because like you, customers want to know they are getting what they paid for.