5 beginner mistakes when negotiating the "success fee"
If you agree an "success fee", your project succeeds and the client keeps his word, your reward shall be pretty amazing. Such a positive outcome is in reality in fact far from automatic. To make it come closer to such an amazing one, below is a list of the most common beginner mistakes you should avoid.
1. You pick a wrong assignment
As I mentioned in my previous article, you need to be sure that you will most likely be able to create an effect and that you have found a client, who will keep his word until the end. The third - and no less important precondition for a successful settlement - is that the effect of your work can be clearly quantified and demonstrably measured. If you are not able to agree at least principally the method of the financial effect calculation and the approach to its measurement with the client upfront, do NOT try agreeing an "success fee".
2. You ask too much
The fair share of the effect created is typically somewhere between 10-30%. The exact value depends on the subjectively perceived degree of your added value in the eyes of your client and on his willingness to share with partners. In the case of larger corporate clients (corporations), who have a large financial “lever” of the generated effect, I strongly recommend agreeing a cap (maximum) of your total compensation. That is, if the project is a great success, your partner - corporate client management - will not be punished for unjustified spending instead of praised.
The aspect of time is also very important. The most commonly used and natural period, during which the effect is measured, is 1 calendar year. If the implementation of changes with a (corporate) client needs more time to take effect, it can take 2 years. I certainly do NOT recommend a longer calculation period than 2 years. This is a too long a period of time, during which unexpected events may occur that unnecessarily complicate the overall execution and final settlement (e.g. the management, with which you made a deal, changes the employer in the meantime).
If you have a long-term engagement and deliver your services to the client on a continuous basis, the only sustainable effect-based deal is the share of the GROWTH. No matter how excited your business client is at the beginning of your cooperation, no one will pay you a share of his profits for outdated ideas and solutions indefinitely.
3. You underestimate the definition and calculation of the effect
The definition of “financial effect” takes on many forms and can be tricky. Your aim should always be to compare the financial performance (net margin) before and after your improvement - net of changes in the ongoing costs needed to generate that performance. You must always look at how much EXTRA the client earns / saves thanks to your contribution. If the fixed costs of running a business do not change, they should not be taken into account. Similarly, any one-off investments should be taken into account only if their payback period is too long. The investment pays off to the client long after your settlement.
If the exact (accounting-friendly) calculation of the financial effect is too complicated, you should agree a proxy KPI that is easily and clearly measurable and has a clear impact on the overall financial performance of the company (e.g. number of new customers, or orders, average revenue, total sales, number of terminated contracts, etc.). In any case, it is necessary to agree in advance the formula for calculating the effect and how your share will be determined.
The agreement on the calculation formula must be made at right at the beginning. If the nature of your project is too creative however, and it is not clear at the beginning yet just how exactly the value will be generated, good practice is to agree that you will agree an "success fee" deal, its maximum, the types of the KPIs to be used in the effect calculation formula, and a milestone until which that formula will be finalised.
4. You risk too much
Opportunities that are almost risk-free are very rare - rather they do not exist. Therefore I recommend to offer a pure "success fee" agreement only if you control your own costs, you have no pressure on cash flow, you are sure about your ability to delivery and fairness of your client. Typically try to cover at least part of your direct costs using a standard forms of pay during the project.
Also, if the conditions allow, do not wait until the deadline for payment. If the results allow it and the client agrees, agree on a partial payout earlier - ideally in clearly beforehand defined milestones. (Attention - at the end of the period, once again calculate the overall effect and the resulting reward with the client - business seasonality may be tricky.)
Last but not least, prepare for a situation where the effect is not only amazing but also only above average or average. Don’t forget that you are entitled to a reward in this case well - though of course to a lower one. Thus take it into account in the beginning and be flexible and ready to adjust your agreement at any time.
5. You forget the "last mile"
Your work is far from complete even at the moment your main assignment is done. On the contrary - the critical period only begins. Although it is a client that needs to implement your ideas, you need to be in close contact with him and his team. From the very first days of implementation you need to be looking for any indication of a risk that your project will not be implemented as expected. In that case you must intervene quickly and either adjust the project outputs and ask for re-implementation, or if not accepted escalate and file a claim of client’s non-compliance with his part of the deal.
Of course there must be a detailed agreement on the effect calculation process, the source of the underlying data, and the regularity of the calculation itself. The first formal calculation can be done after the first week past roll-out - you should definitely not wait longer than 1 month. If something is wrong, you still have enough time to make it right. Best is to have the effect report sent on a regular basis and ideally and automatically.
Summary: To agree an "success fee" is both a science and an art at once. There are many things that may fail. In addition to more effort and energy, experience is very valuable and will also come in handy. Therefore at Pricewise will be happy to help you set up and manage these agreements - whether you're a service professional or a corporate client that wants to use these deals.