DETERMINING VALUE-BASED FEES FOR SOFTWARE PROJECTS – PART 3

Determining Value-Based Fees for Software Projects – Part 3

I followed up on David Winch’s last points with some more of my own:

“Now, all I need is a few prospects on whom to practice! But I’m sure ‘how do I find clients?’ is a huge component of your workshop, so I do not presume to receive such a detailed response to that one.

“It is quite obvious to me now that I have been trying to sell not only what I do, but very specifically how I do it (right down to promoting my toolset of choice). I should probably be focusing more, if not entirely, on what I do to improve the client’s condition. For example, ‘improving small businesses through technology’ or some such tag line.”

David replied:

“I’m sure ‘how do I find clients?’ is a huge component of your workshop”
“Actually, if I’m understanding you correctly to mean ‘how do I get enquiries and turn them into appointments and thus opportunities to get new clients’ then no, it isn’t a component at all! The ‘Pricing By Value’ Workshop only covers how to turn appointments into clients!

“Getting enquiries and turning enquiries into appointments are two other workshops which I’ve run a few times but never had videoed. There’s a bit of information on these subjects on my website and you could always decide to become one of my Coaching and Mentoring clients to find out more.

“Just to add a brief amount more for you, the key to both of these is the ability to articulate what you do, who you do it for, the pains people who need you are suffering, and how fantastic life is for them when you’ve fixed their problem. This is also known as an elevator pitch! (Trying to anglicise this to «lift pitch» just doesn’t seem right!). I’ve written a sheet on this subject which you may find useful.”

“trying to sell not only what I do, but very specifically how I do it … should probably be focusing more on what I do to improve the client’s condition”

“I’m so glad you realise this! You are the expert. That’s why the client’s called you in. They don’t care how you do it, just fix it! Does the heart surgeon have to describe his procedures in detail in order to get asked to perform a triple by-pass?”

“improving small businesses through technology”

“You need to be communicating what I call ‘Value Outcomes’ and this is a poor example of one! In my blog, last January, I wrote my analysis of value outcomes – the good and the bad”

I was back the next day:

“Having an online discussion with a colleague of mine. He says ‘Value-based billing doesn’t produce quality either. Consultants are encouraged to do barely enough to meet the spec, and anything else gets the response of, Sorry, that’s not in the spec, and we’ll have to go through another round of estimation before we can even think about what to charge for that? If you stick with hourly, you can adjust the spec faster and be more flexible with the client.’

“I can see some value in his claim. Anyone who’s worked on a software project knows that change is inevitable. How do value-based fees deal with change without requiring everything to be knowable up front?”

Again, David was able to pass his ideas on to me:

“Value-based billing doesn’t produce quality either”

“I agree! Merely trying to introduce a culture of Value-Based Billing doesn’t create quality. And besides, behaviour creates culture, not the other way around!

“It’s the way that Value-Based Billing is incorporated into the Sales Conversation and into the relationship that ensures quality, whatever that may mean in each individual case.

“If you believe you are being abundantly rewarded for your efforts, you’ll go that extra mile to please your client. You’ll have an incentive to get better at your job, you’ll be acting in yours and the client’s best interests, and you’ll be lining up the next project and the referrals too.”

“Consultants are encouraged to do barely enough to meet the spec”

“Encouraged by whom? The client sees you’re an expert amongst experts and that he’s getting phenomenal value for his bargain investment, so he won’t encourage it! And you, the Consultant, are getting hugely rewarded, so why do you feel a need to cut effort and ‘quality’ to the bare minimum?

“Does the person who asked you the question equate ‘value-based billing’ with ‘bargain basement prices’? If they do then I can see why they think this way. But they need educating into the true meaning of the term. Value-based pricing means Win-Win. And Win-Win means huge value return for bargain investment, coupled with hugely profitable reward. Both can and do co-exist if you use these methods.

“Unfortunately the expression ‘value pricing’ has been hijacked by the ‘cheap and cheerful’ brigade, so you need to make sure your meaning is correctly understood when you talk about Pricing By Value and Value-Based Pricing/Billing.”

“anything else gets the response of, ‘Sorry, that’s not in the spec, and we’ll have to go through another round of estimation before we can even think about what to charge for that.'”

“Yes! The original project needs specifying, and anything that arises later that’s not within the spec should be discussed separately as a potential additional chargeable project.

“Having said that, you shouldn’t be discussing highly detailed first projects! As I said to you before, the first thing you suggest might be a research project to develop the detailed spec of the first coding project. You deserve to be paid for this initial investigation, and why not! If the client has already completed this exercise internally or with another consultant, won’t you in any case want to check their work to date before you commit to what you’ll do? When you fly your aircraft, do you give it an external visual inspection before you start the engine? I’m not a pilot but I bet you do. Commercial pilots certainly do it, every time!

“And of course you need to know about the new problem and the new circumstances before you can start to price the new project. This needs to be completed but, if it’s closely related to the existing project, this needn’t take a very long time.”

“If you stick with hourly, you can adjust the spec faster and be more flexible with the client.”

“Faster than what? More flexible than what? When you’ve won a few projects on a value-based basis you’ll be adept at doing all that needs to be done very rapidly.

“In my Workshop I stress that you need to be able to handle the figures in your head, so they have to be simple. In fact I advocate (as does Alan Weiss) that you get to the point of doing it by gut feel and not computation. If you need to ‘go away and work out the figures’, or even use your calculator on the spot, you are screaming ‘cost-based and time-based billing’, so this would be a shot in the foot!

“As for flexibility, you will know more than most people about all the circumstances surrounding the client’s problem. Presented with a new requirement, your judgement of what is and isn’t feasible and sensible will be considerable. Without this insight you’ll just be reacting with knee-jerks, even if you charge for them. This would be sticking band-aids over symptoms, not addressing underlying diseases! What long-term use is it giving an aspirin to a brain tumour sufferer?”

“Anyone who’s worked on a software project knows that change is inevitable”

“True! As you and the client understand more about the problem and its solution, some ideas will be jettisoned and replaced. What’s new?

“If the scope of the project is to reach the end result, and not about the means to that end, it’s all still within the scope of the project. And if you’re being paid five times what your hourly-based fee would have been, what do you care if it extends a little? You just don’t want to allow it to extend ad infinitum, aka scope creep.”

“How do value-based fees deal with change without requiring everything to be knowable up front?”

“The real interesting one! And I think I’ve already answered it! If extreme knowledge is needed to price the final project, you need introductory project(s) to discover that extreme knowledge. These can be priced from the knowledge available at the outset.

“Don’t keep thinking in terms of one huge project! Some of the more complex projects need several stages. As Alan Weiss says when he’s suggesting giving the client options, un-bundle your catch-all solution and re-bundle the components into different ‘value packages’. Again, on my Workshop, we look at the question of ‘How will I be able to think of several ‘value packages’?’

“I’ve not tried this next approach myself, but it strikes me that if the client is looking for a bid on an enormous project, you could suggest that they break it down into a series of slightly smaller ones. If you’re worried about not getting the follow-on work, who else has a better relationship and is better placed to get it? I’d suggest the follow-on work is yours to lose!”

And there’s still more!

If I’m not careful, I may end up writing another book here…


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