How to Negotiate Professional Fees

Originally published by Forbes Business Council.

Professional service firms conduct lots of negotiations for their clients — with customers and suppliers, entities they want to acquire (or who want to buy them), and sometimes even with regulators or bankers. They negotiate deals for them and help resolve conflicts.

And yet, despite all the expertise they demonstrate when negotiating on behalf of their clients, they struggle to negotiate their own fees with these same clients. Why is this? Here’s what I’ve observed by working with some of the world’s largest consulting, accounting and law firms.

Why World-Class Negotiators Have Trouble Negotiating Their Fees

Mindset When Negotiating On Behalf Of Clients:

• Clients define the objectives and how aggressively they want you to pursue them.
• Clients tell you how “low” they’ll go.
• It’s OK to get aggressive or hurt the relationship to get a good deal for your client.
• These counterparts don’t pay your bills and they can’t fire you.

Mindset When Negotiating With Clients:

• You don’t know how low we’ll go — it may depend on how busy you are and how “strategic” you perceive this client or project to be.
• You don’t like feeling adversarial to your clients. You want them to like you and hire you, for this and other work.
• You might not like talking about what your time is worth.

These divergent mindsets make one thing crystal clear: When negotiating with a client’s supplier or potential acquisition target, all tactics seem like fair game, including applying any kind of leverage we have. But, negotiating with a client or potential client is an entirely different game. Those negotiations end up being mostly about discounts and trying to minimize the damage.

In fact, negotiating discounts is one of the least productive ways to talk about fees.

My advice for service providers is to treat the fee negotiation as you would an advisory engagement: focus on what the client is really after. Is it predictability or some degree of budgetary control, as it is for many? Or are they under pressure to achieve an actual year-on-year reduction in total spend? Or, is it mostly about good optics and not feeling duped? Or, is it something else?

If you can understand and frame the problem through these lenses, rather than “they want to drive down my profit,” then you can bring all your problem-solving expertise to bear. To be most effective, act like a trusted advisor instead of a used car dealer!

Let’s look at some typical scenarios in professional services where clients push back on fees and consider how you can be more creative.

Rethink how you bill for your services.

Many large corporate clients adamantly tell their law firms they won’t pay for first-year associates because those young lawyers are not experienced enough to justify rates higher than a much more experienced in-house lawyer. Law firms recoil at this demand. They must put first years on client projects—not only to do scut work at a somewhat lower rate but to help “young” associates become more experienced second-year lawyers. One way to meet both sets of interests is to move to fixed-fee billing. Then the client pays for work produced by the team, rather than the enumerated hours of individuals (including those of people they don’t think are worth what the firm charges). In this arrangement, the firm can staff the project to meet quality, professional development and efficiency goals, and with good project management, still earn a tidy profit.

Align with your client’s interests.

Financial industry clients of consulting firms often don’t want to pay for deals that fail to close. They don’t want to carry costs for work that don't lead to a new acquisition for their portfolio (where costs are apportioned differently). But consulting firms that embrace their client’s portfolio view (“We make bets, some pay off and some don’t”) are able to come up with creative risk-sharing fee structures—ones that don’t leave them having to choose between advising the client not to do a marginal deal or getting paid.

Apply what you know about your client to deliver even more value (while improving margins).
The eight- and nine-figure multi-year deals that large IT firms typically land often come at the expense of a brutal, margin-threatening bidding process. During implementation, they’ll seek ways to reduce costs and rebuild margins. But near the end of the term, the process starts all over again. New firms join the bidding war, driving margins further down until the incumbent decides they can’t afford to keep "winning" this work.

But smart incumbents approach clients 18 months — or earlier — before the end of the contract, launching a problem-solving process that identifies ways to meet the client’s updated business priorities: Is it now price or flexibility? Should we apply process and technology improvements to service enhancement or cost reduction? Can we make these changes now, or must the client wait for the term to end and a new bidding process? The more the service provider listens, and the more collaborative the problem-solving, the better for the client, and for the incumbent’s chances of retaining a profitable relationship.

Fees don’t have to be a four-letter word. Talking about how much a client should pay for a professional’s service is a legitimate and crucial topic for problem-solving — just as important as the client’s other business priorities. The key is to encourage and enable partners and deal teams to get curious, rather than defensive, and engage in client conversations in a creative, relationship-enhancing way.

As in all an advisor’s work, success starts with listening to the client’s interests and bringing their expertise to bear to help meet them.