Value-Based Engagements
Are You Seeing Your Services as Costs or Investments?
If you’re thinking of hiring an outside resource: consultant, coach or contractor, make sure you are getting a positive ROI.
When to Hire a Consultant, Coach Or Contractor
Language is really important. The words, concepts and labels we use can impact our perception, emotions and actions. So understanding how these three helping roles offer is an important first step to determining what services you’re looking for. Because at the end of the day all exchanges of service are about addressing a problem and these three roles solve for three different types of problems:
Consultants solve for the unknown
They help you gain the capacity or accomplish a specific task that you currently don’t know how to do well.
Coaches solve for missing purpose and accountability
They are not the experts but the compass. They help you align to your north star and make sure you’re moving towards it.
Contractors solve for capacity constraints
They address the actual doing of things, either things you don’t have time to learn or things you know how to do but don’t have time to complete (ie influx of work)
After knowing who to bring in when, the next thing is to make sure it is a win-win situation, with both sides feeling they are better off through the engagement. What this means is that the value extracted (your investment) should not outstrip the value left (their impact) or their inputs (their investment). One great way to make sure this is the case is to use something called a value-based fee structure.
What Is A Value-Based Fee Structure?
A value-based fee structure is made up of two pieces: an identified value and a predetermined ROI (Return On Investment). It is based on the belief that every issue or opportunity within an organization has a value that can be quantified. This could be the money saved by addressing an issue, adding an efficiency, or reducing a risk. It could also be the money gained by landing more customers, increasing employee retention/engagement, or upping the value of a product or service.
Once you have determined this value (and it’s important that you own and agree to that this really is the value) the investment is based on a predetermined ROI rate (usually between 5x & 10x). The variation is the rate is based on the level of risk taken by the outside resource. If an organization wants an assessment of an issue but is comfortable taking on the implementation than that is less risk and therefore a less impactful ROI (say 10x). If the outside resource is taking on the implementation and training than they are taking on more risk and therefore a more impactful ROI (say 5x).
As a quick example if the identified value was $100,000 and the engagement was designing a plan that the you would implement the predetermined ROI would be say 10x and the investment would be $10,000. If in that same scenario the engagement also required onsite training then the ROI would be 5x and the investment would be $20,000. Beyond that there are no hidden fees. If there are roadblocks, that is part of the assumed risk, and your investment does not increase.
How Do You Identify Value?
Determining the identified value is the most important, impactful, and usually difficult part of this. That is because it forces a serious discussion about what the true opportunity or cost is within the situation. This means finding ways to quantify things that you don’t usually quantify or that are difficult to quantity, like say engagement or potential clients. Some potential questions to ask that can help get this conversation started are:
What is the cost of a lost hour of productivity?
How many hours are spent on this issue or will be gained through this efficiency?
Can we quantify the impact on morale (positive or negative)?
What is the cost of losing an employee?
Will we increase our chances of retaining or gaining customers?
What is the cost of losing or gaining a customer?
What potential penalties or liabilities would we take on for not addressing this?
Are we losing any revenue or incurring any additional costs because of this situation?
In the end, this work will itself pay dividends as it brings the conversation out into the open and helps reduce the risk of addressing symptoms versus root causes. It also can help break out of (or not get into the first place) the concept of Sunk Cost fallacy (assuming that past investments should impact future decisions).
An Example
Bill is an executive with a growing organization that is stretching his staff of 20 (16 hourly, 4 salary) to its limits. They are working every other Saturday and most days working about 10 hours. People are happy with their pay, feel valued and believe in the mission of the organization but are beginning to experience burnout. Two of his hourly employees are recent hires, meant to help lighten the load, but they have taken longer to get up to speed because no one has time to train them and there is limited documentation for on-boarding. He is worried that some of his staff will leave if things don’t improve but is not sure what to do next.
Working with a consultant, Bill determines that his immediate needs are clear process documents and an on-boarding process. His organization can also benefit from an organization redesign and role clarification, as well as a process improvement assessment. Bill believes that documentation and on-boarding will help with employee retention and lost hours to haphazard training.
For his immediate needs his rough estimate is three people would probably leave in the next year without any improvement. His valuation is $40,000 per turnover, so $120,000 (one-time) impact. He also believes with proper documentation he could get people up to speed in two months instead of four. His weighted value of an employee's time is $25/hr. So by gaining productivity 2 months faster he achieves $8,000 (2 months x 20 days/month x 8 hrs x $25) in value per new employee. He assumes 3 more new hires for $24,000 (one-time) impact.
Immediate Needs Identified Value = $144,000 (one-time)
He also believes that an organizational reassessment and process improvement could remove the need for an additional manager-level position which he gives a weighted value of $100,000 (on going). He also believes they could reduce the overtime completely with the potential improvements. Currently his hourly employees are working about 50 hours of overtime per month, an hour of overtime averages to $22. He values the elimination of overtime at $17,600/month (16 employees x $22/hr x 50 hrs) or $211,200/annual (on going).
Organizational Reassessment & Process Improvement Identified Value = $311,200 (on going)
Based on the identified value and nature of that value (one-time vs on going), Bill believe the consultants services would equate to a 9x ROI (lower consultant risk) for the Immediate Needs and a 6x ROI (higher consultant risk) for the other activities. So his investment look like this:
Immediate Needs Investment: $16,000 ($144,000 / 9)
Other Activities Fee: $52,000 ($311,200 / 6) [rounded]
