Borrowing work hours from your consultant? - A perspective on the success fee based consulting contracts for deep-tech founders.

The success fee model in consulting is commonly regarded as an appealing compensation structure, especially in fields like grant consulting where outcomes can be explicitly measured. This model aligns the interests of the consultant and the client, as the consultant's payment is contingent upon achieving the desired outcome, usually the acquisition of a grant or funding. I have been an innovation funding consultant for almost 20 years now, and I have been holding contract negotiations talks with my clients on a weekly basis. I have always believed that full transparency about the pros and cons of the success fee based remuneration model is beneficial for the long term relationship with our Clients. Here I am sharing with the wider community of deep-tech founders my perspective on how the “success fee” model works for both parties.

How does the Success Fee Model work?

Let’s start with the basics. For simplicity, let’s consider an example of a grant opportunity identification and solicitation contract (non-dilutive fund raising). The consultant typically is assigned with a task to provide a state aid strategy and action plan, but primarily hands-on support in delivery of grant application. Both the consultant and the ordering party are driven by the key expected result which is getting the money granted under the targeted funding programme. This requires a certain amount of hours of work on both sides, but the consultant also provides his unique professional know-how which should increase the chances of the grant application being successful. Depending on the scope of the assignment the work effort can vary from tens to hundreds of person hours. The total value of the hours worked by the consultant and her or his know-how is the basis for calculating the price of the service. Under the “success fee” model the price always includes a cut from the grant money typically expressed in percentages or a fixed amount which is paid by the client only after the money is granted. Under the pure model (aka “no-win, no pay”) the success fee is the only remuneration a consultant expects. In a mixed model under which the consultant’s remuneration is split into parts: (i) an upfront fee which is paid as the work is delivered, and (ii) a success fee, paid after the money is granted. Now, it is important to highlight a few key observations:?

• Success fee is not the remuneration but an expected value of it (ie. the expected remuneration multiplied by the probability of winning the grant and being paid eventually);
• Upfront fee is not the full remuneration expected by the grant consultant. To be profitable consultants working under the mixed success model need to charge success fees with an expected hit rate. This is why a fair consultant would never treat success fee as a “bounty” on top of his normal fee, but a?vital revenue stream ensuring the long term profitability.
• Consultants working under success fee models collectively become “risk brokers”. They transfer the risk of sunken cost of development of the unsuccessful proposals from the losers to the winners, in some part at least.
• The way consultants calculate success fees can tell you quite a lot about the hit rate they actually anticipate.
• The scope, amount and quality of work performed by the consultant should be taken into account when success fee amounts are evaluated and approved. Grant writing service is not a commodity, any offer should not be evaluated against the market success fee % benchmarks without considering the scope of responsibilities contracted as well as the value of the unique know-how contributed by the most experienced consultants.
• Under the success fee based contract you become a consultant’s debtor. In essence, you borrow the consultant's time in exchange of a payback expected when the funds are granted. From this perspective let me provocatively ask: would you really consider taking a loan from just any creditor? Doesn't it call for a trust-based relationship before you decide to put your signature at the last page of the contract?

Benefits of the Success Fee Model One of the primary advantages of the success fee model is its inherent motivation for consultants to perform optimally. Since their compensation depends on the successful acquisition of funding, consultants are likely to be more driven and committed to securing the best possible outcomes for their clients. Moreover, this model offers financial safety for clients, as they are not required to pay large sums upfront; they only pay once the expected results are achieved, which can significantly reduce upfront financial risk. ?

Drawbacks of the Success Fee Model

Despite its benefits, the success fee model is not without evident downsides. For consultants, the upfront risk is substantial as there is no guarantee of payment unless they successfully secure funding, which can lead to financial instability if outcomes are not achieved. An often overlooked fact is that with highly oversubscribed grant schemes, such as the EIC programmes or other Horizon Europe calls there are uncertainties beyond the control of consultants. No matter how skilful they are, the project and the team merits, or rather the subjective perception of these merits by a given set of randomly assigned evaluators, become the key success factors. In such cases it becomes a pure number game for a consultant, gambling if you wish. From the client's perspective, while upfront costs are minimised, the eventual success fees might become ridiculously high. Because in heavily oversubscribed programmes odds of winning are very low, the risk for a “no win no pay” consultant is very high, so the expected value of the remuneration (i.e. the success fee) becomes respectively high. Success fees may in such cases exceed by a few times the value of hours worked by a consultant paid against a timesheet upfront, in full or in part, before the grant decision is known. Paradoxically, these high fees are eventually paid by the winners. As a result, the winners pay partly for the cost sunk in the unsuccessful proposals.

Alternative Fee Structures

Alternative to the success fee model include flat fees, where a consultant charges a predetermined amount for the service irrespective of the outcome, and retainer fees, which involve regular payments for ongoing services. These models provide more predictable income streams for consultants and can sometimes be more cost-effective for clients, depending on the project's scope and nature. Especially if the project assets on the client side are strong, likely to get funded.

Selecting the Right Model

Choosing the right fee structure often depends on several factors, including the type of project, the level of uncertainty involved, the duration of the project, and the client's cash flow situation. It's essential for clients to carefully evaluate their specific needs and risks before deciding on a fee structure. For projects with high uncertainty or those that are highly speculative, a success fee model might be advantageous. In contrast, for projects requiring steady, ongoing support or those with predictable outcomes, a retainer or flat fee might be more suitable.

The success fee model emphasises performance and results, making it an attractive option for both consultants who are confident in their abilities and clients looking for accountability in the consulting services they procure. However, founders of the top deep-tech startups should seriously consider if they prefer to be paying huge success fees instead of a much lower fixed remuneration (e.g. hourly-based) that compensates for the work outsourced to consultants. Under the most competitive funding programmes only the best startups have chances to succeed. This fundability potential is obviously an asset on the startup side, so the questions is if the expensive success fee based model is truly the best option. A reasonable mix of an upfront payment plus a success fee may be a good alternative to consider.