I was having lunch with a friend the other day who runs vendor management for a large IT organization, an organization that makes heavy use of consultants, contractors and outsourcing companies. He’s now been in the role for a couple years and has clearly developed some opinions on how (and how not to) manage vendors well.

The conversation started when I told him I like to fix fee most everything we do. His eyes lit up. He expressed frustration that leaders in his organization are usually so desperate to get an individual or company working immediately that they do not want to take the time to work through the project details. Instead, they agree to hourly rates without fully defining what the project will entail.

Before I go on, let me explain what I mean by a “fixed fee” engagement in contrast to “hourly” work. This means that the consulting firm and client agree to a flat rate to deliver a project with defined deliverables. The rate may or may not include expenses; I usually leave that up to the company’s preference. I do not consider fixed fee to include projects that have some sort of daily or monthly hourly cap; those to me are just daily or monthly (versus hourly) rates and arguably have more issues than a straight hourly rate, usually in neither parties’ favor.

I see so many organizations waste money on consultants for the very reason my friend expressed. I do think there can be good reasons to pay someone on an hourly (or daily or monthly) rate and I’ll cite some of those reasons later, but I firmly believe the buying company’s default preference should be to fix fee all consulting work. Here’s why:

1. It forces the client and the consultant to think through exactly what they want to get out of the project – deliverables, milestones, outcomes, etc. – versus vague approaches. This means fewer misunderstandings and missed expectations on either side, and better outcomes since objectives were agreed to up front.
2. Generally, consultants who are willing to fix fee work and are still in business are more knowledgeable and experienced in the type of work they are proposing, since without that knowledge and experience it is very hard to make fixed fee engagements profitable.
3. It forces the buyer to quantify the value of the project, up front. They must ask themselves “is it worth $50,000 to have this consulting firm create all the processes and templates for our PMO?”
4. Throughout the project, both parties are focused more on the desired outcomes versus the number of hours being worked. With good consultants, the buyer may even get more hours or more of the right hours because of this. A woman who does contract work for us who is extremely good at what she does and also very conscientious about her costs prefers to be paid on a fixed basis so she doesn’t feel “guilty” when she sometimes wants to spend extra time on something that she doesn’t think we’ll want to pay for! I am the same way with my clients.

So if I have you convinced, you may be wondering why you would veer from the fixed fee preference? I have at least a few exceptions:

1. If the client really wants a contractor, someone who is filling a full-time (or part-time) role within the organization, and wants to pay this person in a temporary versus employee manner. I don’t even consider this consulting work; this is contract work.
2. If the client has a very large and complicated project that will take a long time to define in a fixed fee structure, it may make sense to do a short “paid proposal” or planning phase up front. I like to fix these too, when possible, but sometimes hourly is more practical.
3. If the client truly has an urgent need that is not fully defined and needs a consultant to come in and figure out the situation, in a maximum of a couple of weeks. I had a CIO call me on a Friday afternoon and say she needed to run a quick re-organization and needed me there Monday morning for two weeks. We verbally agreed to an hourly rate and I showed up, but that was only after years of working together on a fixed fee basis that we both thought this exception was warranted.
4. If the consulting firm is truly only providing advisory services without a specific desired outcome or deliverable. Sometimes the client needs to have a consultant on retainer for advice, like they might for an accountant or attorney.

For project-based work, fixed fee is the way to go. Clients who don’t push for it either don’t have all the facts or are avoiding the tough thinking. Consultants who don’t push for it may be inexperienced or focused on the wrong things. Consider it. Now if that doesn’t rile a few people up, I’m not sure what will. I look forward to your comments…