What should be our commission/expectation if we can help a big company to stop losing money?


1

Short background: we are 3 developers who formed a small startup for a very niche market. We do mostly programing but recently we started to provide consultancy as well. We've been working with a very big client (2B revenue) and we have a very good relationship with them (5years together)

Few months ago we realized that this company has a 'leak' - they report their taxes incorrectly, that is, they are paying more than they should. We asked few questions and realized that we can fix it. We looked at the data, analyzed it and this is the bottom line: they pay 200K/year more than they should.

Question: if we can fix this, what should we expect in return moneywise.
Few pointers:

  1. Development will take 4 months
  2. This is an ongoing project (maintenance)
  3. This can lead to other project
  4. For other company to do this - it will take ~1 year to understand and execute (building trust is key)

Thanks for your 2 cents :-)

Development Entrepreneurs Negotiation Profitability Commission

asked Mar 23 '12 at 11:23
Blank
Adhg
250 points
Get up to $750K in working capital to finance your business: Clarify Capital Business Loans
  • How long will the savings last (i.e. $200K each year forever or the next 5 years)? Will the amount of savings increase as their revenue grows? – Dnbrv 8 years ago
  • Just bill them for the hourly time to find and fix it. You don't get a "commission" for this. What exactly is your expertise and what were you hired to do? – Tim J 8 years ago
  • TimJ is right. If you appear to be asking too much then you might jeopardize the 5 year relationship. Stick to your standard rates and remind them that you are the heroes that saved them a lot of money. And that should lead to more projects. – James 8 years ago
  • I have been in this situation and I don't agree with TimJ's assessment. The company should pay a proportional fee based on the value of work done, not just the hourly rate. I heard an analogy about a repair man that was called into the factory to fix a broken machine, he looked around, kicked the machine and it started working. He handed his $500 bill to the owner who witnessed the event and said why are you charging me $500 for kicking the machine? The repair man said, $5 for the kick and $495 for knowing where to kick! Expertise and solutions must be paid for proportionally. – Tim 8 years ago
  • Tim, you got me laughing. This issue (extra paying) has been going for years, simply no one bother to ask the right questions, or maybe they did but they didn't have the right 'tools' to fix it. Since we're in the development business, it's relativity easy for us to find a needle in a haystack and point the problem. – Adhg 8 years ago
  • @adhg - what is your arrangement for payment and what was the relationship based on? i.e. - how were you billing and how were the payments structures? If there was an existing agreement to be paid based on money you saved them then you are justified in asking for a percentage. If not, then I'd say you are risking a relationship by changing the rules after the fact. They may pay, but if it were me on the other side I would not appreciate it one bit. – Tim J 8 years ago
  • @TimJ, without these guys finding the issue the company would have no idea there was a loss of income so there would NEVER be a consulting team brought in to fix it. Ergo, these guys should be compensated for their effort. Now, since this "might" fall outside of their current contract the proper solution is to add a line item to the current SOW or another Statement of Work all together priced accordingly. If their contract was so vague as to include this type of change then that's another issue all together. – Tim 8 years ago
  • @Tim, these consultants: "...we started to provide consultancy as well..." – Tim J 8 years ago
  • Maybe I don't understand the situation - why would it take 4 months to "implement" the solution of just not paying/reporting the extra $200k? Why is 4 months of work required? Can you elaborate on why this is not just a quick change to their accounting practice? – Tim J 8 years ago
  • @TimJ, I know and having been a consultant for a long time I always worked under the scope of work which should be defined in the SOW. If the scope of work covers this change then yes it should be at the rate that's in the contract because it falls under their prevue as consultants. – Tim 8 years ago

1 Answer


1

I have a friend whose business is helping companies save money on their utility bills (gas, electricity, telephone etc.). His business model is to approach a prospect and offer to analyze their bills and help them save money in exchange for a fixed percentage of the savings, which if memory serves me is 20% in his case. He will often find that there have been overcharges in the past which he helps the company recoup from the utility as well as helping them save money going forward by perhaps changing vendors, selecting different plans etc. He virtually always find some savings, so it is rarely a waste of his time.

It sounds like you are doing something similar, and pricing based upon a percentage of the actual savings realized seems like a win-win for you and the company. Of course if you are unable to deliver a system that in fact achieves the anticipated savings then you are taking a risk.

One big factor here is that if they do it themselves they save nothing in the first year (since it will take them 12 months to implement). You on the other hand can presumably implement in 4 months, resulting in 8 months of savings in the first year that they would otherwise loose. This is $160,000.

Why not propose splitting the first year savings 50-50 and then a lower percentage (20% perhaps) for follow on years? That way you get $80,000 in year one and $40,000 in follow on years. $40,000 is low enough that they would have virtually no incentive to ever want to replace you with an alternative solution.

Addressing TimJ's comment that you could simply address this as a standard programming job on a time and materials basis. This is a good option as well, and you should probably offer the company both options and let them choose. The big difference would be that under this option it would be a standard engagement, with no incentive for you to finish early.

I assume that your 4 month estimate is based upon doing the job on an expedited basis ( that is you may work nights and weekends) so that you participate in the maximum savings possible. By implication if you only work normal hours it will take longer.

So the choice for them would really boil down to:

1) Handle as a normal programming engagement with completion estimated at perhaps 6-7 months, no overtime.

2) Expedited programming engagement with completion in 4-5 months but with overtime so it costs them much more.

3) Project where your only compensation is percent of savings but where you are highly incentiveised to finish quickly because each month of delay is a month where no one gets any benefit, that us the savings for that month are lost forever. Further you are not just programming to their specifications but rather encouraged to be creative and figure the maximum savings possible. This is much different from a normal programming engagement where you simply implement the specifications defined by the client.

answered Mar 23 '12 at 11:51
Blank
Jonny Boats
4,848 points
  • Your example shows a case where it is well known BEFOREHAND what the compensation is based on. We don't know enough about the work/were not told what the arrangement is with this question. For them to change it because they see big dollars is amateur hour. The real issue is whether this was the expectation BEFORE they found the issue. If their remuneration was based on what they are saving the company, then I agree. If not, then I absolutely disagree. – Tim J 8 years ago
  • @TimJ - I agree. If they were engaged to study the tax system and recommend ways to save taxes then in effect they have already been paid for this consulting and should just give the recommendation to the client. If however they were just programming and not paid as tax consultants, then they should fully disclose what they found and give the client options. – Jonny Boats 8 years ago
  • @JonnyBoats, that is the point exactly. – Tim 8 years ago

Your Answer

  • Bold
  • Italic
  • • Bullets
  • 1. Numbers
  • Quote
Not the answer you're looking for? Ask your own question or browse other questions in these topics:

Development Entrepreneurs Negotiation Profitability Commission