Professional Services need data to deliver pricing models with confidence
Determining the fees you charge for your services is clearly going to have a large effect on profit, and those determining their fee structure may struggle to determine if the price is right for profitability without data at their fingertips.
Moreover, client expectations have changed due to increasing concern about the risk of cost and time overruns. Many firms now provide fixed fee structures and shared risk projects to combat these fears.
Ultimately, if professional service firms have visibility of the Key Performance Indicators (KPIs) and their resource management, they can easily ensure that project overrun is avoided, while also understanding what they need to charge to achieve a profit.
In this blog we will explore some different pricing structures that are common among firms, and how your firm can make the most of these when empowered with technology. To learn more, just keep reading!
Why fee structure is important for professional service firms
In today’s market, clients generally favor fixed-fee agreements as this can provide financial security when provided with clear visibility of how much a service will cost over a certain project. Different firms will deploy different structures based on the service they provide, but clients appreciate the simplicity of the fixed fee.
Yet, this highlights the biggest disadvantage of fixed fee agreements, and why fee arrangements should be strategic and supported by data: inaccurate scoping or inflexible workflows are the most common cause of cost overruns for firms.
This places an even greater onus on firms to accurately manage and gain visibility of resources, time tracking, and reporting, rather than simply estimating their resource expenditures under fixed-fee agreements.
Project overruns aren’t just bad for your clients they’re bad for your firm too, as they negatively impact both your NPS and the likelihood your client will consent to be used as a reference.
Therefore, your chosen approach will require slightly different methodologies to guarantee success and optimize profitability.
How to make fee structuring work for your firm
Let’s take a look at the 4 main fee structuring models and what you need to do to make them work for you:
What is a Fixed Fee project?
In a fixed fee agreement, every project or project bundle you undertake for a client is charged at a fixed rate, hopefully with resource commitments, expectations, failure standards, and project planning requirements carefully scoped in advance.
As fixed fee or fixed time agreements are set well in advance of either payment or project delivery, they depend heavily on the capacity to accurately estimate resource needs in order to ensure profitability. They’re also dependent on excellent project management, good communication, and, critically, on flexible processes and workflows.
The major advantage of a fixed fee structure is that it gives both clients and your firm clear goals, enabling resources to be managed and allocated well, and less chance of service delivery being affected.
However, firms may jump at the offer of a fixed fee without correctly evaluating their time and resources effectively before taking it on, and diligent firms may still be misled by poorly managed data.
For this reason, a fixed fee schedule is best deployed for standardized projects with clear deliverables. They should be avoided for projects involving major uncertainties as a fixed fee will hit the firm hard if there is unaccounted run on, rather than the client.
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What is a Time-and-Materials project?
Time-and-materials projects are the most traditional fee arrangement in professional services. Clients buy the time of your fee earners on a pay-as-you-go basis and cover the cost of any expenses incurred by their work.
The major advantage for this arrangement is that the client absorbs a great deal of the risk associated with overruns and scope creep. They dictate the demand, and so long as you have the resources and time, the contract could run on indefinitely.
They also tend to be significantly more profitable. As SPI notes: "firms who primarily use time and materials pricing are significantly more profitable than those who favor fixed pricing."
The major disadvantage lies in the fact that your clients will generally expect you to be accountable for the accurate measure of billable time, resource usage, and costs incurred.
Since accurate resource management, time tracking, and reporting have traditionally been operational headaches for professional services, this can often pose problems if your systems are not set up to ensure tight project management and resource allocation. Mistakes in this area are likely to damage your client relationship.
What is a Shared Risk project?
The shared risk model, also called a performance-based approach, splits risk and reward between client and service provider. Both parties are expected to contribute to funding in some way, so it exposes both parties to higher risk, but this risk is shared equally by both parties.
This is the rarest of the major pricing models, comprising only 4% of projects according to SPI. This is likely due to the increased risk for both parties, but notably for firms – if a firm fails to deliver, they will lose not just resources but also some money.
That said, if a firm is confident, they can deliver a project, this shared risk model means that more overall capital will be pumped into the project, and that the firm shares in the profit generated.
Shared risk contracts are best deployed for projects which have a relatively high setup cost but a highly variable upside. To make them an effective source of profit for your business, you’ll have to be good at estimating the time to value for projects and accurately forecasting resource and project needs.
What is a Managed Service project?
Within a managed service model, also called a subscription pricing model, your client pays a fixed fee on a retainer, either monthly, quarterly, or annually, with the expectation that a specific quantity or type of service will be delivered.
Clients and firms alike are being drawn to this model because it creates much more predictable cost structures for clients and predictable recurring revenue streams for firms. However, it carries a significant risk for you as a provider because it requires you to be even more adept at packaging, pricing, and delivering on your contracts.
Moreover, if a client has signed a retainer or subscription, your firm must be sure it can deliver on the retainer for as long as it is signed. If a client trusts you to choose this kind of model, the negative press for not delivering would be larger than others.
That said, if a firm can easily predict, forecast, and manage their resources, then a managed service or subscription model presents a myriad of fiscal benefits with the confidence they can provide.
How can Unit4 help you confidently provide pricing models for your projects
Regardless of your approach, Unit4’s ERP system enables you to manage the process from project creation to final invoice, is invaluable in tracking and responding to the KPIs we've highlighted above and managing resources.
When empowered with project and resource data in one single system, your firm can easily understand the projects it can execute and those it cannot, providing greater risk management but also greater confidence in what operations are capable of.
Linking your CRM to your ERP to provide additional insight into the nature, failure points, and projected success rates of your projects is also critical. To see how Unit4 ERP can support your firm with our professional services specific solution, visit our website.
To see how Unit4 ERP can support your organization, check out our dedicated product page, or talk to sales today!
