In defense of IT consultants' rates

Consultants shouldn't have to defend our hourly rates but we often do. Usually it is to more junior staff working alongside us, or to not-so-smart managers. Many managers I have worked for made less per hour than me but they understood how the world works. I wish more did - it becomes tiresome. Consulting rates are driven up not only by value delivered, but also by risk absorbed, slack capacity, and scarcity.

The value is there. Real consultants inject IP into the employing organisation: they bring in knowledge and experience and a wider worldly perspective. This is not valued per hour: its price should be based on the benefits it yields for the business. Of course there are plenty of examples where it didn't - we are all fallible, and some of us sell better than we execute. But all consultants are (or should be) engaged on the understanding that there will be returns on the investment. Typically these returns far exceed the fee, regardless of what it works out to on an hourly basis.

Of course many workers referred to as "consultants" are in fact just contractors doing a business-as-usual role. Their higher rate may come partially from higher skill levels but depends just as much on those other factors: risk absorbed, slack capacity, and scarcity.

Everyone sees the boom years when a consultant makes more than the CIO he advises, but they don't see the bust times when he makes very little. All high returns are that way because they are pricing in high risks. On average over the last three years I'd have made much the same in a good fulltime job as I have consulting, thanks to this year's leveller.

The ones who say "can you start next week?" are as often the same ones who say "you need to cut your rates". If a firm has staff sitting around playing cards like firemen, awaiting a summons, then they need to charge to cover that slack capacity.

If those who criticised consultant's rates were able to do what a consultant does, the majority of them would be making the extra money as consultants. Very few stick to their own jobs because there is nothing else they would want to do whatever the pay, and very few find consulting so ethically objectionable that they wouldn't do it (whatever some say). But only a few people have the total package: the specialised skills, the IP(knowledge, experience), the ability to run their own business, the life arrangements, and most of all the risk appetite, that give them the capacity to consult. This provides scarcity of supply (even in the current job market).

I've lowered my (already reasonable) rates for the recession, but I've still had two attempts this year to take advantage of the situation to drive them even lower. In both cases I didn't take the work - I'd rather go broke than let someone take advantage of me. I think it is despicable. Consultants open an organisation up to fresh outside ideas, we cross-polinate knowledge, we hopefully have skills in scarce supply, we (sometimes) carry slack capacity so as to be available, and most of all we assume the risk.



We too have found that there is some downward pressure on consulting rates that is unrelated to the actual costs. I suppose in difficult economic times one should expect some additional effort to exploit the situation.

What we do when we the customer policy allows it, is to perform out engagements as value-priced, fixed-price engagements. We believe that value-priced engagements enable a clearer definition of the relationship's goal and ensures that both parties are "pulling" in the same direction. Value-priced engagements are not, however, desirable when there is a significant amount of problem definition and analysis work to be done.

Establishing the value the client will receive - in their own definition - from our services through somewhat more extensive discussions before the engagement also helps us set clearer expectations. And, frankly, it helps us to better know when to walk away from clients that are unlikely to be successful.

Client at the Core is a good reference. So are some of the works by Alan Weiss.

They say there are three reasons to hire a consultant or contractor:
1. To add bodies - the contractor approach;
2. To get outside knowledge and skills that the organization doesn't currently have or cannot get permanently on-staff; and,
3. Get someone to blame.

Having worked for vendors (Peregrine and CA) I've spent time in the roles 2 & 3. We have staff working with customers as a combination of 1 & 2, particularly since we do outside administration of certain products. Most of our work, however, is knowledge-based. What internal staff sees is a lot of the same stuff - and, they usually get very good at it. They don't know, however, what they don't know. It is very difficult for staff within companies to get broad-based experience that can only be brought in.

I've always like Admiral Hyman Rickover's (aka "Father of the Nuclear Navy") quote on this point, "It is necessary for us to learn from others' mistakes. You will not live long enough to make them all yourself."

Cary King
Minerva Enterprises
Managing Partner

Value Based Pricing

This is an interesting comment. I have just read one of Alan's books where he extols the benefits of value based pricing, I am not a consultant, but have thought about going on that direction, I was just today mulling over how value based pricing works with ITSM consulting, when there are so many unknowns at the beginning of an engagement how do you avoid spending too many hours working out value without being paid?

Most of the organizations I have worked for had little understanding of the real value of what they were attempting I can't imagine them grasping value based pricing at the beginning of the effort.

Pricing models

I don't know that there is a right or best way to determine the value for value based pricing. I can tell you what we do -- and it's billed at a daily rate.

There has to be clear metrics so that the value is just as clearly determined. This means the scope has to be clearly defined, understood and agreed by all parties. What is in scope and what's out of scope must be understood. The definition of scope and project dimensions can take anywhere from a month or more. In other words, Value-based pricing typically isn't suitable for a small effort... but that leads to another pricing model.

Project-based. Again, the scope has to be clearly defined. But it's easier to define the boundaries on a project than on "value" for the project. The advantage to "Project-billing" (at least for me) compared to "Fixed Price" is that if the client decides to change the scope, it's easier to change the price. Change the project, change the price. That doesn't work if clients think it's "Fixed price."

One note: On occasion, we have allowed the client to deduct the upfront costs associated with the up-front value discovery from the overall price. It depends on whether or not there's a past association with the client, our view of the likelihood of success, and the current attitude of the client. Sometimes it's all of the up-front, sometimes an agreed percentage. If we think the success factors are low, don't like their attitude, etc., the up-front discovery not only is not deductible, it also has to be paid in-full before work on the value portion commences.

David Moskowitz

grasping value based pricing

I agree. While the concept is great the execution is hard and higher risk. Obviously it works for David so we must accept it is viable, but it makes me nervous. I'm doing a fixed-price ITSM consulting proposal as we speak - it is ugly dealing with the piece-of-string problem.

Also I think you raise a valid point about prospective clients grasping value based pricing. I worked with a bank that made all this noise about wanting us to be a strategic partner vendor. So I spent unpaid weeks researching and scoping a solution that would automate response to console messages, and priced it based on the savings on the cost per message to deal with it manually, to be paid progressively per message we automated. They rejected it. Why? It didn't fit any of their corporate business case/proposal evaluation methods. I was asked to rework it to a per-hour rate plus software capital cost.

Reference Works & Pricing Models redux

I think I mentined (in a prior post on this thread) that I haven't had an hourly rate in years (more than I want to count or admit :-)). One of the reasons we moved away from it was an occasional client would attempt to split hairs over fractions of an hour. It wasn't worth it!

Project- or value-pricing for projects where the issues are understood and agreed by all parties. We separate the definition and analysis work and bill that at a daily rate. One of the things we look for during this phase (besides what you mentioned) is to determine the possibility of a scapegoat project & also politely walk away.

Besides the works you mentioned, I'd also suggest Herman Holtz.

And then there's this: "The Secrets of Consulting" by Gerald Weinberg. To every consultant and would-be consultant I give the same advice whenever the "how do I..." subject comes up in context: Buy this book and read it!

I can't tell you how many times I've applied "The Orange Juice Test" or "The Buffalo Bridle" or, "The Ten Laws of Pricing." If the book was simply a few pages about just, "The Orange Juice Test," the book would be worth the price -- and there is MUCH more.

"The Secrets of Consulting" HIGHLY recommended. This is the book I keep buying (because I lend it and the borrower asks if they can keep it) -- it's that good!

Last word on the subject: One of the reasons I keep buying the book is not to lend it is simple: it's not just about Consulting. I've had a copy since 1989.


Herman & Alan

I'ave had the pleasure to meet both men and also have their books. I was even mentioned in one of Herman's. Going back years ago when CompuServe was King. :-)


Negotiating the wrong stuff?

Most consultants and the people/organizations that employ them don't understand a fundamental issue so they think the most important thing to negotiate is price. Clients ask for a lower price and consultants either agree, compromise on a middle ground price, or walk.

The reason is the neither side really and truly understands the real value proposition.

The problem isn't limited to consultant/client relationships. All too often internal development groups fall prey to the same negotiations.

In both cases it is because of the same reason: Neither side understand the value proposition.

The solution is to change the negotiations from one of price or schedule (the typical internal discussion) to one of scope. Specifically, if this is what you can pay, this is what I/we can do within your budget. Or, if this is the amount of time you'll allow, this is what we can accomplish in the allotted time frame.

Just so that there is no misunderstanding or the suggestion that this is theory and doesn't work. I've been an independent consultant since 1984, starting in 1986 for for nearly 14 years thereafter a member of the Independent Computer Consultant's Association (ICCA), 2-term part president of the Delaware Valley Chapter (including metro Philadelphia area), consultant to consultants, and more. I have not had an hourly rate in 15 years, and for the last 12 only negotiate scope, not price or schedule. I've worked with an unknown number of other consultants and internal development organizations to help them understand and apply this negotiations approach. It works.

Before you can apply this approach, it's critical that you do your homework and understand EXACTLY what the client (internal business customer) wants, the outcomes they expect, how they'll know (i.e., both Critical Success Factors, CSF, and Key Performance Indicators, PKI). it requires more research, setup, and in depth knowledge about what the customer wants and expects. It also demands that you have a similar understanding (and ability to make and meet a resulting commitment) what you (or your organization) can do within the constraints established by the customer.

Easy? No. Does it work? Yes? Is it a win-win for everyone involved? Yes, if you do your homework as indicated above.


(PS Logged in, and still says not verified)

Agreed in full

I spend a good part of my time teaching people to value base sell or consultative selling.. Some of it is about scope, but as you identified, alot of it is about homework. If you can understand the customer to the required level of detail (warning, cost of sale is generally higher in this method) then the price almost always comes off the table (at a minimum, your engagement is actually a roadmap of projects which allows for you to drop price initially and pick it up later). Its your unique understanding of the customer that allows the discussion to move to scope etc.. Selling your resume, experience, methodology in a specific framework like ITIL is almost the same as selling a product. You have a feature/functions sale, moving the discussion up into business objectives, drivers, CSF etc.. becomes a more consultative/value sale.

(Note: I am not making an presumptions of anyone's selling strategies. Just my opinion)

I truely believe if what is being said, and also believe it applies in many cases. But not all.. Whether you choose to qualify out of these customers so you don't have to price negotiate, but some customers purposefully separate price negotiations. All those who use RFP process and one such case, but not the only. For this reason most people choose not to engage with these customers.

As a aside;

I had a classic true story from along time ago. A CIO of a company I was working said the following when I brought up the topic of a software license tool we had acquired, "That was the best deal I ever did, we purchased pretty much the whole portfolio of software for $X, or about 1/100th of the list price". to which I responded, "How much of it have we actually implemented. I would argue its the worst deal you ever did, $X completely wasted. The vendor sold his soul, but as a result (maintenance is based on purchase price) he has no interest in supporting us with our use of the software. We have not successfully used any of the product in the last 3 years"

If highly paid people can make such poor decision with something as simple of software. Imagine the battle getting them to understand consulting.

Brad Vaughan

Hornets nest

Boy you've opened a potential big one here..

A few additional dimensions to the discussion;
- many consultants (not sure if the majority) are employed by consulting companies & vendors (can hear the howls) etc.. the risk reward equation is very different. Brand name examples of these companies get paid premiums because the brand is worth litigation of the result is not delivered. This is the different from the risk (I believe) you are talking about which is around delinquent payments, low utilization etc..
- even (probably more so) in recession, the market is flooded with independents or free lancers who are that way because they were the first to be let go in the recession
- difficult to measure quantitatively the value of the consulting (in most cases) hence the grey area in engaging customers and the ability for them to debate the price. If you had the quantitative measure it would be easier (and of course you would be in a commodity market and not able to get the higher margins in good times of high demand)
- for products that have high potential return, but cannot be quantified, success is always in the sell. Too many people put forward the resume and the list of previous projects and think, this should sell itself. But as we know, the best technical product is not always the most successful (VHS vs Beta, ATM vs Gb Ether, Sony Walkman vs. iPod, etc.. etc..). Its how its packaged and sold that makes the difference and attracts the premium.

I would say what you describe is a classic small business in a recession. Market has shrunk as projects get delayed, the supply has increased and for those, good enough will do. Either you have squirreled away for these periods or you make the jump into consulting company employ to weather the storm.

I would debate this is probably exactly how you want the market to react. If it wasn't this way, you maximum profit would probably be around 20% and you would need to have a utilization around 65-85% to survive (typical commodity based professional services).

Probably need to expand your addressable market or broaden you portfolio of offers, with a dash of find additional routes to markets (partnerships etc..)..

You probably like free lance consulting because of the challenge, freedom and diversity of work.. I am sure that hasn't changed..

Brad Vaughan

get all twisted up

Excellent comments Brad, spot on.

Absolutely the value of any consultant depends on their personal capability and track record. I object to my value apparently suddenly changing in recession. In one case where I had to argue for my rate lately, they had previously engaged me. Other clients are happy to pay my rates - it's an issue of perception of consultants not me personally (or so I believe :D)

The general thrust of my post was that there are plenty of folk around who don't get the overall consulting paradigm - that you can't compare consulting and fulltime hourly rates, but they do, and get all twisted up about it. The risk premium I referred to was the margin we need to put on in order to be able to "squirrel away" for downturns and flexibility. (But I doubt many consutants have squirreled enough to ride out the biggest recession since the 30s).

Yes consulting firms and vendors can charge a hefty premium for their sue-ability and supposed ability to deploy additional or alternate resources. But:

  1. I carry over a million bucks in professional indemnity and directors' insurance
  2. Several vendors I know of charge the same rates as a lawyer to provide product implementation "consultants"
  3. Large firms are very good at rolling out consulting "show ponies" for the sales cycle then bait-and-switch kids-in-suits for the actual work (the show pony doing just enough work to keep the client from calling their lawyer)

Personally I think the premium over freelancers is too high, which is great - it presents an opportunity.

Believe me I am doing all the things you mention in response to the current situation: hustling work, opening new channels, creating new products and revenue streams, and chasing fulltime employment.

Love the show pony comment

Confessions of a "show pony."
Vendors do bring in people for the sale who, except in some cases, they'll never have direct access to again. When I worked for Peregrine and CA, I was a, in some areas the "show pony." So was my now partner.

We got called in for sales. And, for customers in trouble that had enough clout with sales.

In my case, I also headed the team that created the standard solutions for all the products worldwide (ServiceCenter, AssetCenter, Facilities, Transportation, Remedy, etc.) and packaged the services for execution. Implementations, customer questions, timeframes, etc. - are really quite predictable.

What may be missed here, is that, at least with us, we became a resource for every consultant in the field that had a real challenge. This forum seems to attract a lot of independent folks that used to work for vendors. I'm fairly certain that many of you on this forum are also, quite often, the real resource behind others. So, working with Development and Support we would lead on creation of solutions that, eventually, got fed back into the product. In fact, we still do that, we have contracts to work with vendors to incorporate our field-proven innovations back into product. Right now we're working on solutions to better manage Virtualization Sprawl (SAM) and on managing work applied to infrastructure so that it better reflects actual costs (discrete decision making and TDABC integration with PPM).

What we all know is that consultants are not fungible. One consultant can bring innovation and value to the customer by leading a customer through to a solution and helping them make knowledge-based decisions. Others just ask the customer, "what do you want me to do?"

Some consultants, like my partner, work many times faster than others - their per hour rate is high, but their production compared to others is astounding.

The challenge for the customer is to figure out who is who - good consultant vs. individual who has done the same thing year after year (one year experience many times). So, we've found that they often go to the vendor - as if there is some warranty for their work. I've always found that interesting, especially since they're already paying significantly for support (a warranty on the product, of sorts). I'd like to talk with customers that choose vendors to understand the reasons better.

Prospects that define consulting rates by some average market rate are likely to get some average (or below average) consultant. The hourly price may be low for those average consultants. The cost of the solution may, however, end up being very high indeed for lack of skill. Rather like a construction contractor getting a person with lots of experience and skill as a framer to do fine carpentry finish work - the outcome may not be what you want, and the wasteful rework may end up costing a lot.

Some 65% of projects fail to meet their goals. Perhaps some of this failure has to do with unrealistic optimism-bias about the quality of the personnel hired vs. their actual skillset?

A good chunk of our business has been referrals from vendor staff - when the customer has reached a point where they won't buy more product because they're "stuck" we get called. This year, however, since the vendor has PS staff on the bench, they send in their own staff for free. Tough to compete against free. I'm concerned about the long-term effect of this because those prospects got stuck by following vendor advice - hard to know how following the same peoples' advice and doing the same things will result in meaningful change.

Cary King
Minerva Enterprises
Managing Partner

Today's demand and supply model

For the last few months an idea has been incubating in the back of my mind.

During a recession we have an idea of how a rational market should work, but we really need to consider how an irrational one works.

Rationally the market should pay a premium for expert advice in a recession because it could make the difference between survival or going out of business.
Irrationally the market will go for the cheapest advice and drive down the market rate even though the advice it gets will be sub optimal as a result.

Rationally the market should consider the overall cost of an assignment, not just the day rate.
Irrationally they drive down the day rate, and get cheap consultancy that doesn't deliver.

Rationally in bad times you need a consultant who will rock the boat and challenge preconceptions.

Why companies go with vendor ProService

In my experience it has varied from company to company, here are a couple of reasons given to me:

1) single throat to choke...the same as your warranty discussion, in theory if the solution doesn't seem to be progressing there is less finger pointing and there is one name on the check (cheque), in reality I think this grossly underestimates the capacity for the big vendors to point the finger, even internally :).

2) Great sales, often the sales process has been very long and by the time a proposal is on the table the software vendor is extremely familiar with the challenges, personnel, business rhythms etc. this results in a better proposal or at least one that speaks the same language as the client.

3) Cost, at the pointy end of most software tool sales are a few sales people, when it's time for the numbers to appear on the dotted line a battle ensues as to who is going to deliver the discounts - PS or software, often this leads to a theoretically cheap PS engagement.

The entire sales process is actually quite bizarre as I am sure you know, the first half of the process the vendor spends all their energy explaining how perfect the tool is, answering every question with "well if you need the functionality we have that in X product" almost nothing requires customization and just a few configuration changes and you'll be off and running...

Great you shout, show me a proposal.....

Which turns up to show you just how much work will be required by very expensive "highly talented" individuals.

Fair enough, BUT

If the companies you are consulting for, and the profit and revenues they make are decreasing. The executives making the decisions on funding are not making "on-target-earning" because they cannot achieve growth or profit (we are talking mainstreams companies here, not financial services), why should you be able to maintain you rates. As a salaried employee who is also a consultant, my annual income and therefore hourly rate (because I ain't putting in less hours) has gone down (not comparing absolutes here, just relativity in a down market) because of "at risk" portions measured against revenue, profit and utilization.

1. I carry over a million bucks in professional indemnity and directors' insurance
-> Its easier to create a media disaster for a brand name (and cheaper), than actually engaging lawyers. To you media would be less impactful.

2. Several vendors I know of charge the same rates as a lawyer to provide product implementation "consultants"
-> See point 1, its the threat not the mechanics of the actual.

3. Large firms are very good at rolling out consulting "show ponies" for the sales cycle then bait-and-switch kids-in-suits for the actual work (the show pony doing just enough work to keep the client from calling their lawyer)
-> True enough. I use that as a competitive strategy every day (as I am sure you do). But mostly funding (pre-sales) gets done on a total cost basis. We all know the profit for many consulting companies is in change orders and list rates and all that.

Wouldn't agree or disagree on the premium. I think the "big five consulting paradigm is completely broken. Anyone who uses them is somewhat ignorant. The mass assembly of consultants is as stupid and certification schemes, unless the "big five" can show me a true mentoring scheme and a genealogy of consultants to people who actually matter. Why do I always run into the same "industry vertical specialists" for these consulting companies in APAC. Don't they have more than 1 or 2. They don't even keep 1 per language. Why ? Because the people who know the industry the best, are not IT people. They make there money, making the companies they work for grow and prosper (because companies pay really well for these individuals). Or they consult in business models free lance and not for vendors/consulting firms. (Anyway, getting off track)

I am confident you are exercising the most important muscle to open up more revenue :)

Brad Vaughan


Despicable? Get off your high horse dear sir, it's simply a matter of supply and demand. Simple economics, right? Also, to me it seems it's just a tad too easy to use "consultant" as a generalization in a semi-personal story like this one. What is a consultant nowadays?

always paid people on value

High horse eh? read The Grapes of Wrath? It is OK for employers to drive rates down because they know you need the money? people should not be paid what they are worth only what the market will bear? I may be right wing but I'm not that right wing. As an employer I've always paid people on value, not the minimum i could screw them down to. They have lives and families - they aren't a commodity. That doesn't mean you don't have to bargain down, as a few have an inflated expectation of their own worth, and many make a high opening offer as simple business. My current rate was desribed the other day as a "bargain" by a potential employer so i suspect I'm not one of those.

Of course it's not as

Of course it's not as simple, and we're dealing with people, not commodities, true. But you provide little background. A little negotiation doesn't harm anyone, and what's a bargain?

Working with lots of external people myself, I'd like to think we pay reasonable rates from both our pov as from the pov of the external consultant. But that doesn't mean we do not negotiate. If you'd like to work for us, you have to invest moneywise as well. Because if we do well, the concerned consultants do well -> more work, even in times like these. But hey, this is a very personal view on this topic, based on my day to day experiences.

It does work the other way around, a couple of my friends and ex-colleagues work as independent consultants and earn their yearly income in < 4-5 months time. In practice, when you stay sharp, this leaves sufficient margins for times like these.


yes indeed part of the premium we consultants charge is to compensate us for times when work is not around, both short-term gaps and longer term recessions. I'm not whining about the lack of work. Regular readers know I've been calling this for nine months.

One bit of background I didn't give was that in one case I was offered 42% of the previous rate to do much the same work for a client - different managers in each case, same site, both ITIL consulting, three years apart. That's not negotiation. I walked.

Consultants v contractors

A big issue for me is that many clients, and not a few consultancy companies. do not understand the difference between contractors, consultants and interims.

I need to do a lot more thinking at some point to clarify what follows.

Contractors are bodies. You employ them to get skills you lack in house, and you treat them, generally, the same way you would in house staff. They know about things like Citrix. You can switch them on and off according to demand/projects. I am not, and I don't think Rob is by nature, a contractor

Interims you employ because they have experience and are change agents. In many organisations I work with they are more valued than consultants. They are old enough and ugly enough not to worry about upsetting people and focus on what needs to be done. They focus on a task. In theory they also do a lot of knowledge transfer. I have to say I used to look down on the role, but the older I get the more I enjoy it. Age comes into it - I don't think are many young interims.

Consultants should be cherished. They have a world view you don't, at least the proper ones do. Bear in mind just because you employ a consultancy company doesn't mean you are getting a consultant. I reckon about 10% of consultants actually are what it say on the can. You will know they are the real deal because:

- They will disagree with you
- they have moral values
- they want an office not a desk/cubicle
- their language/experience is about other industries/areas of expertise
- they will, like Rob, chose to walk away.

The mistake many organisations make is to not recognise what they are dealing with, Treat me as a contractor and I will deliver 10% of my capability, because that is all you allow me to deliver.

Scope, scope and scope again

I think much of the danger in consulting lies in a client who doesn't really know what they want. Scoping the work and agreeing the terms of reference should provide a very clear cost/benefit breakdown. Then everyone signs up to it.

Some organisations hire consultants because a senior manager likes the idea. Some organisations do it because they don't trust their own staff. If a team member recommends something, it can't be right. If a consultant says it - it must be true!

'Consultant' as a term has become very devalued.


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