Tomicide Solutions, November 2016
Please Show Me Your Cost Structure
By Tom "Bald Dog" Varjan
In the 1960s, some brainiacs in the CIA had a brilliant idea. They decided to use cats to infiltrate the Kremlin and spy on the enemy.
The idea was followed by massive action.
Some CIA people caught a small army of cats, and a vet outfitted them with a sophisticated transmitter system.
Tiny microphones were implanted into the cats' ears, transmitters into the base of the cats' skulls and aerials into the cats' spines and tails.
Ta da... The Acoustic Kitties were born.
The next step was to take the cats to Moscow and release them around the Kremlin.
Both the journey and the release were successful, but then the CIA hit a snag.
Since the cats had no knowledge of the environments, as they tried to cross streets, they got quickly run over. The Acoustic Kitties promptly became acoustic roadkill.
After spending some $20 million on it, in 1967, the CIA dismantled the project.
The surviving cats were flown back to the USA, and after removing the electronics from their bodies, they were released... now on home turf.
I've mentioned this interesting story because just as the CIA came across some serious difficulties and didn't know how to handle it, many IT professionals end up in similar problems when their clients challenge them and want to see itemised invoices of their work.
Clients want to see the exact cost of every nut and bolt IT people have built into their clients' new systems and they can present Acoustic Kitty-calibre challenges for IT professionals.
Since at this point, projects are about to be completed, the IT people don't want to upset clients because this is the time to edge for referrals and repeat business.
So, what to do?
In order to avoid confrontations, many IT professionals do show their itemised invoices, and quite often, clients get upset, because they think they can get the same components from local computer stores at lower prices.
While showing your costs is normal if you work on a time plus materials basis, if you work on a fixed fee basis with clients who trust you, this shouldn't happen.
Let's see some important points here...
Your Cost Is Your Proprietary Information
Do you know how much it costs for the maker of your car, phone or watch to make build your car, phone or watch. Probably not.
Have you ever tried to acquire for these pieces of information? Have you had any luck?
I thought so.
This problem usually raises its ugly head either if you don't have clearly written agreements or clients go rancid on otherwise good agreement.
As the saying goes, the weakest link in the client-consultant chain is not the agreement but clients' character.
Not even the best contracts can compensate for morally rotten clients.
But sometimes even good clients may have this request because they're read about it and at the moment of reading, the author made sense.
So, when you're asked to show your costs, ask clients if this is how they work with their own clients. They usually shut up pretty promptly.
There is a strong probability that they tell you those pieces of information are confidential and can't go beyond their companies' walls.
Then you can say...
"So, you've just answered your question. Then why would you demand me to do something that you're not willing to do?"
More often than not, this solves the problem.
A less blunt way of dealing with this situation is by listening to clients' reasoning.
It's human nature that when we talk something out loud, we find the flaw in our own arguments. That can easily happen to your clients too.
Just stay calm and keep asking "deeper" into your clients' reasoning.
And just as hurricanes blow themselves out, your clients too will "blow" themselves out of demands, calm down and continue behaving properly.
What Causes This Curiosity Of Costs?
In my experience, this interest in your costs is caused by getting involved in buying the hardware and software that you need to do a project.
I think this mistrust started a long time ago with car mechanics.
It's common practice among scumbag car mechanics that they buy either refurbished parts or cheap Chinese knock-off crap, price them out to clients as brand new original parts and build them in.
Then the - often perfectly fine - parts which they take out of a car, they build into another car and bill that car's owner for a brand new part.
We can see this phenomenon in the IT world too. Parts in perfect working order get removed from Client A's system and gets built into client B's system.
Client A gets billed for a new original part but gets a refurbished piece of Chinese rubbish.
Client B gets Client' A's freshly removed part and gets billed for a brand new original part.
Clients never find out what goes into their systems.
But Who's To Blame Here?
Partly the IT companies are to blame and partly their clients.
Clients are to blame because they often haggle contract prices below what they cost IT providers to do the work, so the IT folks try to break even on their contracts.
And IT companies are to blame because they accept these tight-fisted idiots as clients and try to figure out, not so much how to make a profit on the contract, but how not to lose too much money on it.
And now we've just arrived at an interesting statistic by McKinsey & Co...
It turns out that some 50% of consulting clients, both IT and other areas, fail to receive the value they bought and paid for, but they can only blame themselves.
The reason for this is that very often clients don't let consultants diagnose clients' current situations and merely implement clients' home-cooked, hence usually flawed, solutions, which are usually based on symptoms not root causes.
But when the shit hits the fan and solutions blow up in clients' faces, it's just standard practice to blame the IT providers.
Hey, this is one more reason to screen the living daylights out of new clients.
Working Collaboratively
What I've been hearing from clients is that if they work on a "tell me what you want and get out of my way" basis (doping it FOR you), clients trust is pretty low.
There is a great example is from Saul Alinsky's book Rules For Radicals (page 123)...
"One day the government of Mexico decided to return mothers' pawned sewing machines to them as gifts. There was tremendous joy. Within three weeks all sewing machines were back in the pawnshops. The mothers were not interested in "gifts". The initiative failed to change their paradigms."
The reason why close collaboration is important is because during the process, you can have appositive impact on clients' mindset about technology and other great thigs that can contribute to improvement in their businesses.
So, the key is not to do it FOR them but to do it WITH them, so they feel that with your guidance they solved their problems. You want to make sure clients take ownership of the jointly developed and implemented solutions.
It's December and this is the time when I start visiting my European friends to butcher their Christmas pigs.
But I don't do it FOR them. We do it together. I'm the proverbial "orchestra conductor" and people play their dedicated "instruments".
What you find is that if you do your work collaboratively with your clients, your work instantly becomes more valuable.
What I hear from many IT pros is that working together with clients make the work slower. Maybe a tad slower. But the perceived value is much higher.
And if your work is based on value pricing, nit the ridiculous billable hour model, the extra time doesn't make a dickybird of a difference.
At the end of the project, you'll have a happier client who is willing to pay you more.
Granted, you can bump into clients (like Jerry Seinfeld in this skit) who don't want to give you much input just want you to do the work as per your imagination.
I had a copywriting client like that in 2001.
Following my normal practice, I wrote three of each major component (Headline, subhead, opening paragraph, etc.) sent them over to him for approval, but he kept pushing me for writing the whole letter before he was willing to read it.
Then I asked him what happens if I send him the whole letter and he doesn't like some parts?
Without blinking an eye, he said that I would write a new letter for free. And he added...
"And you keep re-writing the letter, until I accept it."
And all for free... of course.
Good consulting is like a dance, but just as in dance there is a leader and a follower, so is in IT consulting. And although you must be the leader, the client must work with you simply because you can't solve other people's problems.
Even if you your firms sets up a new network a client's new location, it's the client who has to integrate the new network into his company's daily operation.
This also confirms the point that we can't improve other people's results. We can only deliver them value, but then it's up to them to convert that value into results.
How To Avoid Itemisation
Clients usually demand itemisation when you provide not only the expertise but the materials too.
Whatever you've paid for the materials, clients think they can get the same bits and bobs at lower prices from some big box dealer selling junk.
Look, for technical laypeople a router is a router is a router. So, they go to Wal-Mart or some other big stores that sell a broad range of low-quality junk, and buyer routers.
Then when they show you, you're about to tear your hair out.
So, the "secret", if we can call it that, is that you let clients do the shopping on their own dimes, but you provide the shopping list and the list of trusted dealers where the materials are available.
Now clients are involved, so they can't complain. They feel in charge, and that's great because, after all, it is their money.
Then you check the parts and if something is not up to snuff, then you can ask clients to return them and get correct part as it's on the shopping list.
When Clients Demand Itemisation
Of course, there can be occasions when some clients demand itemisation and we want to prepare for it.
Knowing this, you can put a close in your agreements that tell your clients that itemisation requires a change request in the original project and it's priced separately as a non-essential extension of the project.
"Client understands and agrees that any request for invoice itemisation on this project is done only with an additional change request with an additional charge of $500 to be paid in advance. This includes invoice itemisation, receipt and meeting requests or any other non-essential reservations on the service provider's calendar and attention."
It sounds a bit wonky, but expresses the essence: "We charge for foolish demands."
But...
All this depends on the tone of voice clients use to ask for itemisation.
There is a difference between asking and demanding.
A friend of mine has been running his boutique electrical engineering firm in Austria since 1983, and when some first-time clients ask him about component prices, he puts the two versions of the same component side-by-side and explains the differences to clients.
"This $XXX switch was made in Germany by Klockner Moeller (est. 1899), the proverbial Rolls Royce of the industry. A company with 117 years of expertise, experience and reputation. The switch is guaranteed for five years, but in most cases, they last over 10. If it breaks down, you contact your assigned representative and replacement is couriered to you for free right away."
But... "This $X switch was made somewhere in Asia by a company that started two years ago. Their switch is supposed to last for 5 years, but, realistically, they start breaking down after 18 months. It's so bad and unreliable that the company offers no guarantee whatsoever on it. Also, since the company's inception, this particular switch has been responsible for three major plant fires killing 31 people and causing $1.27 billion worth of damage.
So, which switch should we use in your facility?"
In 30+ years, not one client has ever asked for the Chinese switch no matter how cheap it is.
All in all, the best way to avoid this "show me your costs" problem is by involving clients in the work as closely as possible.
Not only clients get more understanding of occasional hiccoughs, delays and minor cost overruns, they become the real owners of the solutions.
ROI is great from the company's perspective but from clients' perspective, the pride in a project that was completed on time and on budget is much more meaningful that ROI.
What do you think?
In the meantime, don't sell harder. Market smarter and your business will be better off for it.
Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.
