Setting the Price. Establishing the rate of compensation and the methodology to be used is the most basic and yet critical point in the negotiations. Regardless of compensation methodology used, the firm would be well advised to understand its projected costs by estimating the total number of hours by each type of staff required to complete the project. This analysis allows management to determine, a priori, the break point at which the firm will walk away from the negotiations. Compensation methodologies can take many forms and include:

Time and materials: Under this type of agreement, the client agrees to pay the firm for its actual time and all out-of-pocket expenses. Normally, this type of arrangement is applicable to situations where the client recognizes that the scope of work is difficult to determine and thus it would not be fair to force the firm to commit to performance of a project that cannot be well defined. Sometimes the firm is able to negotiate prices to be at its standard hourly rates. Alternatively, rates for each level of staffmay be negotiated separately. In some instances, the rate may be a simple flat rate irrespective of the level of staff (e.g., $250 per hour no matter who works on the project).

Fixed price: In situations where the scope of work can be fairly well defined, it may be appropriate to negotiate a fixed price arrangement. This gives the client the comfort to know that the firm cannot exceed its budget without prior approval (assuming such a provision is negotiated), and it gives the firm a virtual guarantee of revenue. To negotiate this type of deal, the firm should first confirm the scope of work; then it can estimate the total number of hours required to complete the project and multiply those hours by standard hourly rates for each person or class of staff to participate in the project. It is important for the firm to recognize that it will be obligated to deliver the project in its totality even if it takes more time to complete than estimated originally, so it should ensure that it can in fact deliver within the time allotted; otherwise, it could face a significant financial liability.

Commissions: Depending on the nature of the services to be rendered, it may be appropriate for the client to pay the firm as a percentage of the projects total costs. This method has been used for decades in the construction management and advertising industries. Depending on the volatility of a clients spending level, this method may provide potential for significantly increased or decreased revenues as compared to a labor-related cost-based approach.

Hybrids: Depending on the specific circumstances of the client and the work assigned to the firm, some combination of the basic compensation plans mentioned earlier may be appropriate. For example, a time and materials contract may include a provision that the fees will not exceed a certain dollar level. A commission arrangement may guarantee the firm a certain minimum compensation level to ensure that it can provide

the staff necessary to support the clients assignment. Also, the client may agree to add in a bonus component to the base compensation structure to incent the firm to achieve certain performance standards. In some cases, these standards may be objective and quantifiable whereas in other situations, criteria for payment may be more subjective.

When to reject a clients best offer for compensation: In many cases, a clients budget will not be sufficient to cover the firms initial cost estimate and the two sides must then negotiate a mutually beneficial fee. At some point, the firm must walk away from the assignment if the financial terms and conditions are not sufficient to meet its requirements to properly service the account. Determining that point is very difficult and involves both objective and subjective factors. Short-term projects that can be squeezed into the firms normal schedule with its existing staffcan, and probably should, be accepted if the revenue is anywhere near its direct labor cost, irrespective of its overhead component. Longer term or large-scale projects should be accepted as long as all of its direct and indirect costs, including overhead and a minimally acceptable profit margin, are covered. In some circumstances, there may be valid strategic reasons to accept an assignment that does not provide sufficient net income to the owners and may not even cover all fixed overhead allocations. Senior management should sign off on any client contract that is below the firms guidelines for profitability. Acceptable profit margins vary by industry, but it is not unusual for professional services firm targets to exceed 15 percent to 20 percent of gross revenue.

Nonfinancial Terms and Conditions. As noted earlier, financial terms are only part of the equation in negotiating a mutually beneficial contract. Certain clients demand that the firm adhere to its standard vendor agreement, ignoring the fact that most of those agreements are written to cover the procurement of materials, not services. Accordingly, the firm that recognizes that everything is negotiable will insist on the negotiation of a contract that is applicable to the type of work being performed. In many situations, the clients procurement team will try to accommodate that request, generally to a lesser rather than a greater extent. Whenever these types of contracts are being negotiated, the firm should employ legal counsel to ensure all terms and conditions are acceptable and understood. At a minimum, the firms negotiations should address the following issues:

Liability and indemnification: Terms of the contract should identify the circumstances under which each party will indemnify and defend the other party in the event a claim is made against it, often in the form of a lawsuit. The firm should be careful to insist that, in cases where the client will indemnify the firm, it will also defend it against any claim as well as indemnify a judgment or settlement. The difference here is that, without such a provision, legal costs to defend the firm against the

claim remain with the firm and only the judgment, or settlement, is paid by the client. In many cases, legal costs to defend may be significant and may even exceed the amount being sought by the plaintiffs. By including the words and defend in the terms of the agreement, the firm can minimize its exposure against potential claims.

Timing of payment and billing frequency: As noted earlier, the timing of payment from the client should be actively negotiated. Payment of fees ideally should coincide with the firms payroll cycle (e.g., two times per month) and, when appropriate, include a provision that allows the firm to prebill certain types of approved estimated costs.

Notice period: Every contract, by definition, has a termination date. The extent that the firm can negotiate a longer termination period while fees continue to accrue can provide a significant contribution to the firms profits. For example, if the client is willing to initially offer the firm only 30 days notice (which should always be required to be in writing) and the firm is able to extend that termination period to 90 days, it may have been able to improve its revenue and profit position by simply asking for and justifying a longer termination period. Many professionals are reluctant to ask for such terms, but many clients are willing to agree to them in exchange for other contract provisions.

Scope creep-getting paid for everything you do: One of the most vulnerable areas of professional firm management is the definition of scope. Invariably, clients expect the firm to produce much more than the firm ever envisioned when originally accepting the assignment. Professionals, always eager to please their clients, may be reluctant to ask for additional funding if their actual work borders on a gray area not well defined in the original agreement. The key here is to ensure that the original agreement defines fully, and in objective terms to the extent possible, all the work that will (and in some cases wont) be performed. If well conceptualized and well written, it will be reasonably clear when the client has asked for something that is out of scope and thus entitles the firm to additional remuneration.

Administrative Efficiency

Administrative functions in professional services firms normally are not the focal point of executive management attention, nor should they be. Finance, accounting, human resources, IT, and facility management, the so-called back office functions when well managed, require little executive management attention. However, when back office functions receive little oversight, they may become suspect if their accomplishments are not well publicized. To ensure that such functions are productive and their results easily understood by executive management, tasks should be quantifiable and results measurable. If every staff persons position were organized in such a way