While traditional consulting bears overwhelmingly more risk for the business owner, performance-based consulting still has risks of its own.
It is impossible to eradicate all risk within a consulting engagement because there is always risk of the unknown. There is always uncertainty in the future of any business.
And, performance-based consulting doesn’t intend to solve that problem. Its objective is not to create a 100% risk-free relationship between the consultant and the business owner. Its purpose is to dramatically decrease that level of risk for the business owner and prevent any one party from gaining at the other’s expense.
So, what are these risks?
Risk #1 – Refundable Deposit
Most performance-based consultants require the business owner to submit a refundable deposit prior to the engagement (not to be confused with a retainer). They do this for a couple of reasons.
First, because the consultant bears significant risk by working for free (until there are positive results), they must ensure that the business owner is equally committed to and passionate about the project. Since there isn’t any upfront fee or money to be paid, a refundable deposit is a way for the business owner to have some skin in the game and demonstrate their pledge to the engagement.
Secondly, a performance-based consultant often has access to and control of many different functions within their clients’ business, in order to perform. One thing that cannot be guaranteed, however, is the business owners’ actual implementation of the consultant’s recommendations, when the consultant is not around. Similarly, a refundable deposit assures that the business owner will implement the consultant’s recommendations to their fullest extent.
Now, you’re probably wondering how a refundable deposit can even be a risk. After all, it’s refundable.
Well, while the refundable deposit is typically a small amount, roughly a few thousand dollars or less, there is always the risk that the business owner forfeits their deposit by not holding up their end of the agreement. This is extremely rare, since most business owners are eager to turn around their business, but it is, nonetheless, possible. Otherwise, the refundable deposit is returned to the business owner following the consulting engagement.
Even though the refundable deposit is usually minuscule, especially when compared to the cost of a traditional consulting project, nobody ever wants to lose money.
Therefore, it is absolutely critical that all details are ironed out in the consulting agreement, prior to working together, and that the business owner understands what’s required of them throughout the process to minimize this risk.
Risk #2 – Time
The second risk that both traditional and performance-based consulting carry is the time spent during the project. But, the level of risk is substantially lower and different with performance-based consulting.
A consultant may do everything in their power to help a business and still fail to provide any positive results. Hence, the time that the business owner allocated to the project is then gone with nothing to show for it. This is, however, uncontrollable risk, assuming, of course, that both parties truly believed the consultant would be of value.
Remember, the primary intent of performance-based consulting is to protect the business owner from having to compensate the consultant when there are no results. So, even though some time is lost, at least money isn’t. With traditional consulting, both time and money would be wasted.
Plus, action is always better than inaction. Chances are, it is much more likely that a business owner turns around their business with the help of a consultant, an expert, than if they attempt to do it themselves. And, if the business owner already knows that their business needs help and plans to spend time doing something about it, why not spend that time with a performance-based consultant?
The real risk of time spent lies with them.
For performance-based business consulting, contact The Business Turnaround Group.