A fixed fee can make sense when you’re confident in the opportunity and want to keep more of the upside. A results-based fee can make sense when you want payment tied to an agreed outcome. Compare what you’d pay if the work succeeds, not just what’s due upfront.
I recently talked this through with a fractional finance operator. He was considering charging a share of the money he helped a company save instead of a monthly retainer.
The attraction is obvious: the company pays when value shows up. But I pointed out something that’s easy to miss. A business can like the opportunity so much that it doesn’t want to give away a percentage of it.
As I put it on the call: “They know what the upside is.”
The cheaper start can become the bigger fee
Think about a company hiring someone to improve margins. If the owner believes the operator can unlock a meaningful improvement, a fixed fee may be an attractive trade. The company takes the risk of paying for the work and keeps the improvement beyond that fee.
Under a performance arrangement, the operator may take on more risk of doing work without getting paid. In exchange, their fee can grow with the result. That can be a fair deal. It still deserves a look at the total cost.
Work through the same three cases under both proposals: little improvement, the result you reasonably expect, and a much better result. What would you owe in each case? What would the company keep?
Agree on what counts
Before choosing, get specific about the starting point, what improvement counts, how you’ll measure it and when the fee is earned. Separate a saving someone identified from a saving the business actually achieved. Decide who has to implement the change.
A mixed approach is possible too. In that conversation, I discussed a smaller retainer plus a performance fee, with the retainer credited against the later fee. That’s an option to discuss, not a standard every operator offers.
First make sure you’re comparing the same work. Reducing the scope is a different decision from changing how you pay for it.
My advice on the call was, “Don’t go in with a preconceived plan.” Start with the problem and the upside. Then choose a payment structure that makes sense for both sides.