SW&A Pricing for the “Business of Value Creation”

Sam Waltz & Associates LLC Strategic Capital & Business Counsel (SW&A) is in the “Business of Value Creation.” Although it’s neither a common or frequent Business Model, neither is it a unicorn in its uniqueness. Many professionals are paid based on and for Value Creation.

Value Creation is a good way to look at the objectives and goals of Strategic Counsel, Advice and Advocacy. It’s helping an organization get from where it is to where it wants to be, can be and should be. It’s not about a tactical product (e.g., press release, website, direct mail piece), but about making a strategic difference in the life cycle of the business or organization.

Benefits from Value Creation

Although Value Creation itself seems an abstract term, it yields to some definition, with a focus on the Bottom Line, and Key Concepts like…

  • Increased Revenues;
  • Increased EBITDA, or Profits;
  • Cost Reductions;
  • Smart Capital Investment Decisions;
  • Expanded Business Concepts;
  • Problem-Avoidance or -Management; and
  • Many Others.

Variable Contributors to Value Creation

A variety of factors can Create or Add Value, among them…

  • Work / Task Time expended, perhaps the least important;
  • Knowledge / Experience / Credentials applied to the situation;
  • Asset Value of Market / Functional Segment Knowledge, Access, Credibility deployed;
  • Asset Value of Personal Knowledge of & Credibility with VIP Opinion-Leader StakeHolders & Influences brought to bear on the opportunity;
  • Business / Organizational Creative Problem-Solving applied;
  • Strategic Capabilities in Negotiation, Human Capital, Organizational Development, Marketing & Sales, R&D, Manufacturing, or others used to advance the Client’s interests; and
  • Many Others.

Case Histories in Value Creation

Applied Examples of such are varied, among them…

  • Recruiting Investor Capital, or Providing Bridge Capital to a Client experiencing Liquidity / Working Capital issues;
  • Intervention & Advocacy, e.g., leveraging a contact on Congressional sub-committee to build a “fire wall” so that an unfortunate incident would not jeopardize a contract worth $millions;
  • Intervention & Advocacy, e.g., accessing a peer in a Fortune 50 company to “explain” and build empathy and understanding of an issue that could have jeopardized business worth $millions;
  • VIP Introduction, assisting an early-stage Client via intro / access to a CEO who is presently buying $6million worth of services from a larger, prominent and successfully entrenched vendor;
  • Capital Costs Reduction, understanding Business & Manufacturing economics sufficiently to counsel a client that a $47million (MSRP) non-performing asset on a prospective supplier’s Balance Sheet likely could be purchased for $25million-$30million, with favorable terms; and
  • Many Others

If not but for…” the efforts of the individual Professional Services provider

That’s one key principle that exists to drive compensation for the non-salaried independent contractor. The value would not have been created, “if not but for…” the efforts.

And the “if not but for…” enjoys a certain evergreen value in compensation, some override, e.g., on a key account brought in (even if the provider is not servicing the account), or a subsequent investment after the first one, because, if not but for the provider, that prospective investor would never have been known or have come into the enterprise.

Compensation Models

Having said that, there are a number of ways that Professional Services can be compensated, among them…

  • Hourly Rate;
  • Monthly (or Other) Retainer, based on a scope of work for the period;
  • Project Fee, based either upon forecast time usage or Deliverable Value Creation;
  • Success-Sharing Fee, based upon Value Creation plus Risk Accepted; and
  • Equity in the Enterprise.

The Fee Structure in any Agreement represents a variety of variables, among them Risk and Risk-Sharing. No attorney can guarantee that she will win each case, and no physician can guarantee that every procedure she does will be successful. It’s simply not ethical to guarantee the outcome, simply because too many variables exist that can impact the outcome. No PR professional should guarantee that he can get a Client on the National News, or keep the Client off 60 Minutes.

In the presence of routine, where outcomes are likelier, it’s easier to put the risk on the Client, or Patient, to let the Client pay in advance or pay-as-you go, simply because of the likelihood of success. In fact, that’s when some Clients opt for the Employer-Employee Model. The Client / Employer accepts the Risk, as well as the ownership of the welfare of the Employee, who is expected to “earn” her or his keep in terms of compensation as well as contribute to the profitability and success of the enterprise. If the Employee fails, for whatever reason, the Risk Capital is the loss of the Client, or Employer.

Shifting Compensated Risk to the Professional Services Provider

Without the likelihood of an outcome, the Client may reasonably be less enthusiastic about paying the going rate, and, in the case of the Early Stage Enterprise (ESE), simply be unable to afford to pay. Instead, she or he will prefer to transfer that Risk to the Professional Services provider by not paying in advance and not accepting the Risk, but paying after the fact, compensating at a higher rate or level because the Professional Services provider was willing to accept the Risk, effectively, to “gamble” her or his paycheck on the outcome.

In another dimension, what happens if the value created is orders-of-magnitude greater than the effort, simply because of the unique talents or assets of the Professional Services provider? What happens when the provider can make a phone call, create an introduction, and add an account for $6 million in new business in the next year, 50% of which will be profit? Is that worth paying for an hour’s time? Or is the more appropriate payment some measure of success-sharing? Is it fair to pay the Professional Services provider $100 for making the call, one-third of the $3 million in profit, or $1 million, or some number in between reflecting a slightly different approach?

In the case of our SW&A work, some examples…

  • FFS Project Fee for Deliverable, or Fee For Service, e.g., Business Planning where SW&A and the Client agree on a Scope of Work, e.g., Good – Better – Best, with fee(s), and Client pays SW&A for that, typically 50% upon start of work, 50% upon deliverable. That of course is based on the premise that the Client has liquidity, working capital;
  • FFS Monthly Retainer for Counsel, e.g., ongoing Business Counsel, where SW&A and the Client agree on a Scope of Work, a level of effort at some monthly Retainer Fee, also assuming the Client has liquidity;
  • Capital-Finding, 10+10, as described, 10% of raised capital and 10% of equity the investor’s capital buys, e.g., $1mil for 10% in Client’s enterprise yields risk-based (on SW&A side) success comp of $100K plus 1% of Equity; and
  • Value Creation Success Fee Custom Comp Plan, to be determined (TBD) in a custom program, based on measurable outcomes of Value Creation and Success. Always difficult to accomplish because of abstractions on both input and outputs, certainly it involves some measure of risk-sharing by both the provider and the Client.

Complexity Can Provide for Win-Win Outcome(s)

On one hand, many can say “pricing should not be this complex,” in terms of investment in creating a business or organizational outcome. However, the modest complexity is a product of the inputs, that is, that assets and variables much more important than time are at play, and the deliverables that are the outcome can be dramatic and significant, in orders of magnitude.

In addition, because not all Clients are the same – e.g., many early-stage Clients have little or no liquidity or investment capital to fund what they need, effectively shifting Risk from Client to Professional Services provider – some improvisation is critical to accommodate such situations, in a way that compensates the provider for the risk inherent in willing to accept the speculative prospect of future compensation if the entity is successful.

Finally, (1) some Clients simply cannot afford the up-front Capital – they simply don’t have it – but they have a desperate need for the services that a provider like SW&A can provide them, and (2) SW&A wants to provide those services, but no one wants either to drain critical liquidity / working capital to hire us when it’s the “oxygen” for the business.

And, yet, in figuring out some arrangement, “all the risk” shifts to SW&A’s side, (1) in terms of time, (2) value-add without fair comp when delivered, and (3) opportunity cost when SW&A could be working on other projects. Yes, SW&A can bill out FFS, or a Retainer, which goes unpaid if the venture does not make it. But, if SW&A bills it out at standard rates, then SW&A is not being compensated for the pretty dramatic risk of not being paid that it’s taking, and forgoing other opportunities, as well, e.g., the opportunity cost.