December 16, 2003

Nuts and Bolts: Pricing

By Brigette Rouson

 

How do consultants place a value on what they offer clients in the form of prices? For a snapshot, Enhance took a closer look at how 12 leading Alliance member-practitioners approach the process, and selected resources.  Here is what we learned.

Typically, as has long been the case in the nonprofit world, flat fees are offered.  Where continuing assistance is desired, a strict time-based model may be used.  In either case, the price of consulting is based primarily on time projections and reflects the:

    • Type of engagement
    • Client and level of resources
    • Market rate


Type of engagement

The type of engagement influences many practitioners’ fees. Complexity, based on the scope or scale of the work and also the substantive or functional type, can increase the cost because of a higher level of expertise, seniority or specialization.  The range, at the low end, may be a simple facilitation or training, at the midpoint making a brief assessment/diagnosis or guiding a less time-intensive strategic planning process (such as a prelude, or a refresher after an earlier process).  At the high end, it might involve guiding full-scale strategic planning or being involved in implementation in a hands-on or coaching capacity (for example, following up an organizational assessment and planning process—where a group’s mission is clarified and its strategies updated—with assistance to set a new staff structure and make the transition, or with a detailed audit of fundraising practices and work engaging stakeholders in resource development). 

In some instances, the complexity factor translates simply into estimates of the overall time required.  When the engagement is likely to eliminate the consultant’s availability for other work over an extended period, fees would be put at the higher end of that consultant’s scale. This basis for price variation may also relate to the necessity—or wisdom­—of using a team approach, especially one that involves more time by consultants highly experienced in an area such as financial management.  If a team is doing the work, the fee projection typically includes some overlap time, when more than one team member will be working simultaneously.  However, a more senior consultant working solo may require less time, so a steeper price tag is not inevitable.

Often, base fees are projected higher for engagements that are complex in ways other than the  time involved or the number of consultants—for instance assignments where the client has a number of organizations, large staffs, multiple locations, major restructuring, and the like. 

Certain areas of specialization such as fund development, particularly for capital campaigns or for building a major individual donor base, often command higher fees (though, as experienced fundraising consultants know, ethical practice requires not constructing fees as a commission).

 

Client and level of resources

A nonprofit that has a relatively low budget, or is a return client, often will be given a break either in the base fee, or in the tasks and activities figured into the estimate (given a consultant’s familiarity with the organization), and may get a break in the form of a cap that reflects the funds a nonprofit has on hand to commit.  Some client organizations negotiate to reduce costs by performing more of the work themselves, where appropriate, such as collecting some data from peer organizations to fill out the context. Increasingly, savvy nonprofits also do their own internal budgeting to account for the time absorbed by staff involvement in an organizational development process.  This approach may limit the amount of a grant available to pay consulting fees—but can also engender a greater appreciation for the time and array of tasks involved in consulting services.

One option is to distinguish the work by phases and have the client revisit what they can afford and need to do at the different points, which has the advantage of allowing both parties to rethink and place value on the work.

 

Market rate

Whether charging a flat fee or daily rate, the consultants interviewed typically charge based on a day rate of $500 to $2000, with most charging between $1000 and $1500 per day to clients that are 501(c)(3) organizations.  Conventional advice for newer consultants is to focus on the level of income they are seeking in relation to projected business expenses and pay history, then calculate actual billable time available (as distinct from business development and administration), and from there determine what rate per day would generate the desired revenue. 

Still, market rate is an ever present influence—either as a cap or in some instances to allow people to set their sights higher—so we focus here on factors that influence the market.

There is geographic variation, of course, but level of experience and demand are much more the deciding factors than location.  Some practitioners find that their higher fees—those that genuinely reflect their level of experience and ability—are more accepted further away from home base.  Closer to home, they find that the circles of people they know expect a kind of familiarity discount.  At times, capacity builders charge more in big cities than smaller or rural communities, based on client expectations of what they should pay; in other instances, the great demand and limited supply of consulting translates to higher rates in rural or smaller areas.

Some consultants stick to a single daily or hourly rate.  As one noted, what makes or breaks an agreement is not the rate but a client’s sense of confidence and control. This may be bolstered by the opportunity to take or leave aspects of the services offered to stay within a certain range.  Also helpful is regular (monthly) billing that reports progress as well as accounts for time.

Pricing that is fundamentally time-based has its downside.  As one practitioner notes, “a lot of clients don’t realize . . . a day’s fee is not just for one day.  It covers the preparation, facilitation and follow-up.  It also pays a portion of your marketing and overhead.”  An MSO operations director emphasizes that successful consulting requires that all the factors be considered - and their costs determined - in making an estimate. Though consultants need not share actual overhead allocations with clients, they do well to describe preparation and follow-up in the scope of work.

Given the perennial challenge of covering all costs and achieving net income, more consultants may consider “value-based consulting” (see www.charitychannel.com Nonprofit Consulting Review). This principle departs from time-and-expense based fees, and uses a classic business practice of charging based on what the results are worth to a client. Though intriguing, it seems unlikely to catch fire quickly in nonprofit consulting in the midst of an economic downturn.  Assuming flat fees continue to be popular, and nonprofit executives maintain a sense of the price range for various types of engagements, these fees can be a gauge of value to nonprofits. 

As a reality check, consider that many management support organizations (MSOs) that are themselves nonprofits offer or broker consulting services at fees well below what an independent consultant would ordinarily charge.  They may do so by delivering a range of training and other services that complement the consulting, which attracts grant support and membership dues (usually in exchange for discounts).  As such arrangements continue and grow, the result might be a downward pressure on rates--especially if nonprofit executives see as comparable the services they can access through a volunteer consulting pool tapped by MSOs. A related factor may be the growth in distance consulting or coaching (by telephone and/or e-mail), which some MSOs offer free of charge to members.  In truth, these practices need not lower fees of independent consultants or firms; they might instead encourage nonprofits that otherwise would not to get outside help to take that path—and possibly turn them into more sophisticated users of, and partners in, capacity building.

 

Rolling with the Tide

In view of the continued aftershocks of September 11, 2001, and as hardships of wartime and economic turbulence, we asked a question: Are practitioners finding that they need to negotiate more and reduce rates?  Typically, we heard, no.  However, one practitioner experiences a bit more negotiation, greater competition, and fewer available resources.  Another has always made a point of being more generous (for instance not billing phone and travel expenses or e-mail consulting time), but—given these uncertain times—now requires a two-week notice for cancellation, and charges a fee if work is cancelled with a shorter lead time.

The bigger picture will be based on what value capacity builders themselves—consultants, grantmakers, researchers—place on consulting services. As one seasoned practitioner noted, “the culture of scarcity within the nonprofit sector leads organizations to live very much in the present, using their money for necessities and emergencies rather than investing in the future.” Still, in many quarters, demand for consulting is up as nonprofits seek to be ever more effective in serving their missions. As the sector faces cutbacks, the possibility is that many nonprofits may keep up or even increase their demand for consulting services—and when doing so they are likely to be more selective, risk-averse, and results-oriented. That reality presents a challenge, and an opportunity, for the field.

 

TALK back on the Alliance website in our members-only online discussions:

  • What are your main considerations in pricing consulting services? 
  • What new practices, new thinking, new directions on consultant fees have you identified?
  • What resources do you rely on, and what more do you see a need for, to guide your fee-setting and negotiations? 

 

RESOURCES

For more information, see the Alliance document library, online at www.allianceonline.org for sample contracts and TALK discussions.  Also, see:

 

Nonprofit Consulting Review

http://charitychannel.com/resources/Detailed/361.html 

http://www.charitychannel.com/resources/Detailed/356.html

 

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