Years ago, contemplating the start-up of a small business, I had given my accountant (let’s call him Alex) a call to discuss whether I should incorporate, set up an LLC or operate as a sole proprietor. After several minutes of conversation – some of which was spent discussing a venture of his for which I facilitated an introduction to a prospective investor – he offered “sole proprietor” as the best option. “What about potential liability?” I asked. “I understand that as an LLC I’ll derive the protective benefits of a corporation and the relative simplicity of a sole proprietorship.” “Well,” Alex said, “that’s true, and something you might want to consider.”
Thanks a lot.
A few days later I received an invoice from Alex – for $400! For “professional services rendered.”
I quickly contacted him and explained that I considered us to have exchanged services – he provided some advice (20 minutes on the phone, to be precise) and I made an important introduction. What was up with the $400? There was no prior agreement, no understanding whatsoever.
“All I have is my time, Rob,” he explained. “That is my product and how I earn a living. My hourly rate is $400 and we have a one-hour minimum.”
That got me to thinking: If I derived little value from my time on the phone with him (i.e., his initial suggestion was rebuffed and after a fair amount of additional research, I determined the better organizational approach was an LLC), how on earth could he ethically charge me for his time? And that got me to thinking some more:
An hour of my own time is worth nothing. Zero. Zip. Zilch.
The arrangement between consultant and client is a simple one: the consultant provides a service that leaves the client in a better position than they were in prior to the engagement. There is presumably some value attributable to that “better position,” and that value should provide the basis for the fee charged by the consultant. (For an excellent treatment of this topic, see Value-Based Fees: How to Charge –and Get –What You're Worth by Alan Weiss.) Taken a step further, the fee charged by the consultant should be a fraction of the value derived by the client – in other words, there should always be a return on investment for the client, not a fee begrudgingly paid to the consultant for the time they spent doing or not doing something.
Working with consultants can be incredibly rewarding. When you choose well, you get the benefits of a professional who has a diverse set of experiences working with a myriad of organizations, often in a variety of industries. But when choosing keep in mind this critical decision: Would you rather pay $50,000 to engage a consultant for 200 hours, or pay $100,000 to engage a consultant whose recommendations save your company $2 million annually regardless of how much time they spend? Pay a consultant by the hour and you’ll get their time. Pay a consultant for the results they produce, and you’ll have a better business.
Oh yeah, and whatever became of Alex? Now I use TurboTax.