Starting a consultancy business: 2. Working out your fee rate

In this series, Calvert Markham, former Director of the Centre, provides basic guidance on starting and running a consultancy business.

A consultant’s stock in trade is time and the fee rate is how much you are going to charge for it.

We need to distinguish fee rate, which provides an estimate of cost, from what we charge a client for a piece of work, which is a matter of pricing and will be the subject of the next article.

So we start with an estimate of the costs of running your new consulting business and need to do some sums. For convenience we’ll take some round figures. Assume that you would like an income of £100,000 per annum. There will also be additional business costs – for example, hiring software, running your web site, professional memberships, attending courses and conferences. Assume a budget for these overheads of £15,000 pa. You therefore need to generate £115,000 pa from fees.

This income needs to be earned from the days that you are working and, although there are 260 working days in the year, not all of them will be on fees. You should allow for holidays, time for continuing professional development and general networking, maybe some time for pro bono or other charitable activities and perhaps also a budget for sickness. After these are taken into account, you may have 200 days left to deploy in the business. (You may need to work at evenings and weekends at times of peak workload, but this should not be part of your budget; you should aim for healthy work-life balance.)

You cannot devote all 200 days to earning fees; some time has also to be given to sales and marketing, to administration (you need to send out invoices and make sure that they get paid!), and to product development. The latter reflects how you use the experience you are accumulating as a consultant to enhance the value of your services, or perhaps add new ones.

You are then left with 140 – 160 days on which you can earn fees. One of the key indicators of a consulting business’ performance is utilisation – the percentage of time spent on fees – so this represents a utilisation of 54 – 61% (assuming 260 days are available). These are the days during which you need to earn your annual revenue, so taking the figure above, if you have 150 days to do this, you need to charge £115,000/150; about £770 per day.

This, of course, is a breakeven figure, so you may want to use a higher figure for pricing purposes, for example to allow for times when you have no work or the start of a project is delayed, or when you cannot fill all the time available.

Conversely, you may have a lot of work which occupies you fully and allows no time for non-fee earning activities. The risk here is what is called the ‘feast and famine’ syndrome, when you get to the end of a full-time contract (the feast) and have nothing to follow on, as you have neglected business development. There is then a period of famine while you generate new business.

I have assumed in the above that there are lifestyle reasons for your wanting to start your own consulting business, working as a sole practitioner. Running your own business gives you more freedom to choose the work you undertake, the clients you do it for, and when you work.

The number of fee-days times your fee rate sets an upper limit to your fee income. If you want to earn more then you should consider extending beyond being a sole practitioner and developing non-time related sources of income, for example, by taking on associates and taking a percentage of their fees. Conversely, you can reduce the time spent on selling and marketing by becoming a sub-contractor to another consulting organisation. If you run courses, a per capita charge per participant is non-time related; or there may be proprietary knowhow that you can licence or franchise that can also yield a revenue stream.

This indicates the case when you package your offering into a standard well documented process to which you can give a name. So, for example, years ago there was a management consulting practice – let’s call them ABC – that had developed a standard job evaluation process which became increasingly used by businesses. What new clients then bought was not ABC’s consulting services, but the ABC job evaluation process. And this was a virtuous circle with ABC benefiting from the accumulative experience of an increasing number of projects.

Of course, income depends on securing contracts from clients so in the next article we will look at how to price your services.

For more on this and other related topics, see Calvert’s books The Art of Consultancy and Mastering Management Consultancy.