Getting Paid for What You Know: Four Ways to Get Paid for Services
If you sell services, it is quite likely that your organization is an outsourcing partner to your customers. They are paying you for your expertise as well as for getting a job done. There are basically four ways to get paid for services:
- Getting Paid for Tasks
- Getting Paid for Time
- Getting Paid for Value
- Getting Paid for Solutions
1. Getting Paid for Tasks
The first way to get paid for a service is by the task. This is how a bicycle delivery guy gets paid—there is a fee for each package delivered. Your dry cleaner gets paid for each article of clothing. Doctors get paid by the procedure. Now, many service businesses have been around for years. We fully expect people to argue this point with us. You probably buy our argument that doctors are knowledge workers. But what makes a delivery guy a knowledge worker? You may think that you are paying him because you don’t want to do it yourself. And that’s true. But the good ones get repeat business because they know how to manage their time and use the fastest routes to zip around town.
What would you think if the delivery guy worked for UPS or Fedex? The knowledge component of their businesses is even more obvious. Everyone in their delivery chain has scanners so that it backed up by an automated system that tracks the progress of your shipment as it makes its way across the country or across the world. These automated processes are a key part of what you are buying when you purchase from these companies.
Same thing with dry cleaners. Twenty years ago, we took our cleaning to a man in our neighborhood that had a manual ticket system, washed the shirts himself and would turn them around in three to four days. When he retired, we went down the block to a more typical company. All their tickets are automated so they can look up our order by last name and have the automated hanging system stop at our order. They can turn clothes around in one day and have a list of all the clothes that we have dropped off so we don’t need to keep track of all the tickets. We still are just getting clothes cleaned but the automation is part of the value add of this vendor.
2. Getting Paid for Time
Some services do not break down into simple units like procedures, packages or pieces of clothing. That’s why many services are priced around the amount of time your employee spends performing the task. This is a common pricing mechanism in construction, home and office care, consulting and professional services like those supplied by lawyers and accountants. In all these cases, the underlying unit of exchange is the employee’s time. Sometimes, the practice is to charge for a variable amount of time during each engagement. However, it is also common to offer a fixed fee to provide the service that may be adjusted if the original assumptions about the job conditions or description change.
This category has an interesting mix—manual laborers with what would seem to be a low knowledge component and what appears to be the highest-value knowledge workers: lawyers, accountants, and consultants. With manual laborers, you are essentially charging your customers for time or expertise with a specific kind of physical task. The major knowledge opportunities in this kind of business are around the processes to plan, monitor, bill—that is, to manage the movement of workers and the monitoring of their work.
Ironically, many professionals are not much different than any other hourly worker. In fact, the only thing that separates the business models of professionals getting paid by the hour from manual workers is the content and price of the service (sorry but it’s true). Lawyers, accountants, and many consultants rarely leverage their knowledge into repeatable processes, which, you will learn later in this book, are the holy grail of the knowledge economy because they offer huge opportunities for financial leverage. They cannot imagine that some of what goes on inside their heads could be standardized and even productized. They are happy because they make a good living being paid directly for “customized” knowledge provided to the customer’s order.
3. Getting Paid for Value
More complex problems lend themselves to getting paid for the value of the solution. Some professionals use value-based fixed pricing to increase the return on their time. In this model, the starting point is the expected result of the project: what is the economic benefit of the solution? Then, a fixed price that is anywhere from 5 to 10% of the expected return is set as the fee. This works for small firms where the risk/reward balance of this approach can be managed.
Another way to get paid for value is to leverage knowledge into more scalable forms. This trend has already begun on lower-end problems. Standard contracts and even widgets to produce contracts based on a questionnaire are available on the Internet. Software has replaced a lot of the work of bookkeepers and enables many people to fill out their own income tax forms. More and more assessment tools are delivered via Internet portals. In India, the Aravind Eye Care System is able to treat millions of cataract patients each year at a low cost (the service is free to many) because the have standardized the processes associated with surgery and run their hospitals 24 hours a day.
Many highly compensated professionals—accountants, consultants, lawyers and doctors among them—will insist that all their work is designed specifically for each individual client. This is true and will always be true—to an extent. The same technology that has been disrupting the low end of the accounting and legal fields will continue to push into their mainstream business. We also believe that there will be huge opportunities in the area of consulting. As you will see in the next sections of this book, the dominant information and management paradigms used today were developed during the industrial era. The shift to a knowledge economy is invisible in accounting systems and in the priorities of many management teams. Many, many of these gaps are filled today on an ad hoc basis by consultants of many kinds. The highest-end firms, such as McKinsey, will probably keep their hold the longest on individualized solutions.
However, the real opportunity will lie in the creation of repeatable, auditable information systems that provide the same degree of information as a specialized study at a fraction of the cost. The IC Rating tool we use is a case in point. It provides an audit of the full portfolio of knowledge intangibles in an organization. This kind of review, using a comprehensive but standardized review process, provides a complete review of a company worthy of a large custom consulting project at a fraction of the price.
In a way, the work of professionals is being industrialized in a pattern not that different from the industrialization of production in past centuries. Many “craftsmen” will be disrupted on the low end. But opportunities will continue to exist on the high end and for the creation of high-quality, scalable offerings.
4. Getting Paid for Solutions
The final way to get paid for services is the solution sale. Here, you get paid to just be there and to ensure that something does (or does not) happen. Examples are security systems, copy systems, and so-called “designer doctors” who collect a retainer for being on call to their patients. With a security system, for example, you are paying for some equipment in your building and electronic monitoring services that ensure follow up to any risks that are detected. Today over 70% of Xerox’s revenues come from multi-year contracts for consulting, technical services, and financing. They are selling their customers continuous, seamless internal printing capabilities. Do they sell equipment? You bet. But the equipment has almost become the “razor” in the business—the anchor of the relationship with the real revenue coming over time with the services contracts providing the continuing “razor-blade” income.
The most scalable form of the service-based sale of knowledge is software. It is common today to think of software as a physical product, the recorded code. But software is really a service, an automated form of problem solving for its users. The traditional way of pricing software today focuses on selling the software “package” as a product. Under this model, improvements to the software are often sold as upgrades and new releases. The focus was on the software as a product. The model here is Microsoft, which has been able to charge for a new license each time its users have switched hardware and/or charge for each new generation of its product, through several generations of Windows including Vista and, now, Windows 7.
There is a new trend emerging in software that is shifting this focus and creating a new business model called, “software as a service.” This model was made famous by Salesforce.com but is becoming more common throughout the software industry. Here, the software usually resides on the Internet and emphasis is on providing a consistent service to a company. Service is sold by the month or year. Upgrades and fixes to the software happen in the background. Changes and improvements get rolled out to clients without any need to upgrade the software on the client computer. Over time, customers of this software model may end up paying as much as the license fee for a packaged software. But the value proposition is different and the level of service should be higher over time.
A great example of using software as a way of operationalizing knowledge and making it scalable is a company called Hubspot based in the Boston area where we live. This company has created a platform for what they call “in-bound” marketing—the creation of business leads through blogging and social media. This software automates a lot of the things that good bloggers do: search engine optimization, landing pages, tracking other bloggers in your space (so you can comment), content management, analytics, and lead management. Most bloggers just post and wait for something to happen. Effective bloggers cobble together a number of data sources and platforms (most of them free) to get juice out of their content. But this can be time-consuming and the information is spread across a number of platforms. HubSpot automates a lot of these processes and adds functions that help shape your blog posts for maximum visibility. They can charge for their product because they save bloggers time and increase the marketing yield of their work.
Even if you do not sell software, you need to think about the shift in the software industry. Because, going back to Paul Romer’s argument, it is possible to see all knowledge products as software, that is, packaged knowledge that automates the solution to a problem. As mentioned above, solutions sales are the most scalable business models for direct knowledge sales.
From Intangible Capital: Putting Knowledge to Work in the 21st Century Organization
