A few weeks ago I posed the question, How can you build a budget before you know the work involved?

I’ve covered three strategies: working in phases, using risk premiums, and doing up-front analysis.

Today I’ll talk about a fourth strategy. (Remember, don’t read anything into the order in which I’m writing about them.)

Strategy 4: Do What You Can for an Agreed Amount

You go round and round with the client — or maybe figure it out quickly — and discover that the client has a fixed budget for the work in question. Your preliminary analysis, or even instinct, says that you cannot do a complete job for that amount and maintain your profit margin.

That seems to leave only a few choices:

1. Cut your margin. That’s probably fine if you’re talking a percentage point or two in a high-margin business, but there’s not too much room here.
2. Walk away. That’s fine in many cases, but let’s assume you want this business or want to keep the client happy and in your camp.
3. Staff it with cheaper resources.
4. Cut scope. Do less work.

The first two aren’t very interesting in this context, so I’m not going to write more about them. However, numbers 3) and 4) are both related and useful approaches.

For Part Five of this series, I’m going to focus on 4), cutting scope, pulling in 3) where it applies.

“Zealous”

The ABA Model Code of Professional Responsibility contains the famous phrase, “A Lawyer Should Represent a Client Zealously Within the Bounds of the Law” [caps in original]. However, those “canons” have been supplanted by the Model Rules of Professional Conduct, which now contains the mandate that a ” lawyer shall act with reasonable diligence and promptness in representing a client.”

Or as an attorney colleague put it when another lawyer uses the “zealous pursuit” argument to defend what the client considered serious overbilling, “Where does it say you should zealously spend all the client’s money?”

This is the point that attorneys get hung up on, again and again, in my seminars and master classes. Because I’m not an attorney, I won’t try to further the case based on the ABA models. However, I am a businessperson and for decades a purchaser of professional services. Every business unit I’ve run has had a budget. I cannot overspend that budget without approval from someone near the top of the corporate food chain, and that approval is a) not a given, b) costs political capital I’d rather spend elsewhere, and c) is rarer than ever in these difficult times. I don’t expect something for nothing. Rather, I want to find the point where I get the most value for the least cost. And I will not accept going over budget; whatever my failings as a business leader, overspending wasn’t one of them.

Consider this graph. For simplicity, let’s call price¹ something that is directly proportional to time. That’s an oversimplification but useful for this example, since even an alternative fee or value-based billing is usually aligned with effort to some extent.

Note that at first the client receives no value; then the value grows significantly, but eventually it starts to level off (which is where we get to the issue around that “zealous” stuff). As a client, point X) isn’t very interesting, since I’m getting about what I put into it; as a businessperson, I look for more. Points Y) and Z) are the sweet spot. At Y) I’m getting the greatest value in proportion to the price I pay. At Z) I’m still getting additional value, though not proportionately as much as at Y). As long as my budget is between Y) and Z), I am likely to be highly satisfied with the practice’s work, assuming it’s delivered competently.

So if my budget number is Y), I’m very happy to make a deal for that level of value at that price. Yes, I understand I could get more value if I spent more, but I’m good with where we are.

As a seller of services, you might want to test the waters by saying, “If we go to Z), you’ll get more value. That’s a bit more than you were thinking of spending, but here’s what you get for it.” The client can then decide whether or not to do the Z) deal, or something in between.

In reality, I might not tell you my budget, just what I’m hoping to spend, which might be Y). If my budget is actually Z), you might or might not be able to convince me that the additional services is the best use of that money, which I otherwise might spend on another matter, or put into salaries, or even (gasp!) return money to the company by coming in under budget.

In  other words, this is a perfectly legitimate conversation to have. More specifically, business clients are used to these conversations, and expect them. (They may also be pretty practiced at concealing their actual budgets, although I personally rarely operated that way; I like transparency for its long-term benefits.)

The important factor is the project charter. You must detail what’s in scope — and what’s out of scope — for the matter in order to minimize misunderstandings. The client should sign off on the charter, a/k/a Statement of Work; formal acknowledgement is best, but for smaller matters or longstanding relationships a brief email acknowledgement is likely par for the course.

Summary

The client expects to get a certain, limited amount of service for a limited budget. That’s the way the business world works.

The client may negotiate — hard — for as much service as possible, but in the end it’s still the same facts — limited scope, limited dollars. It’s perfectly reasonable to turn the price question around: “For Y), I can deliver the following services. How well does that work for you?”

Next up, the using the “wisdom of crowds.”

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¹Definitions: Price is what the client pays; cost is what the practice spends to deliver the work, including all overhead, salaries, etc.; and value is what the client receives. The client perceives price as cost, because it’s a cost to the client, but I want to use price and cost with specific meanings to avoid confusion.