It’s 2009, and I’m in a good dialogue with a CEO from an emerging start-up. I am asked queries and worries regarding her technology strategies, and I am able to have a solution to every issue. There’s nothing to suggest that I’m overly confident or cocky when I respond. The fact is that I’m well-educated, and I can help her. After that, she asks, “How do I involve you in helping our engineering team in a direct way?” My confident appearance turns into a mushiness. In a haze of uhms and ahs, I say, “Well, could I mail you an email to get it started as we go?” I’m sure she is disappointed by my inability to answer. I would like to have an idea of what she’d be required to pay me in order for my time and focus.
Then, it’s a matter of time after a few exchanges via email. The client gets confused by the specifics of my proposal. She eventually ceases to be interested in cooperating with me. If there ever was a contradiction between what I offered to the table and the price I was able to present on paper, this is it. The perfect chance was lost before my eyes.
I vowed to never get surprised in the same way. The only thing that can be done is to create an unending cycle of proposals. It starts with a regular MSA that ends with a concessions addendum. Hourly rates, general availability, tracking hours, blah, blah, blah.
I’m not sure about you. Instead, I devised an easy calculator that creates basic buckets through which I quickly determine whether a potential client is worthy of my time and, most importantly, will be successful with my efforts. This became the foundation for the Fractional CTO Services I offer today. I’ve been using this for nearly 10 years now, and it has brought many million dollars of consulting. It is what I refer to as “The Ultimate CTO Calculator.
It’s Deceivingly Simple to Believe That You’re Skilled When it Comes to Conducting Research
I’ve witnessed a number of successful CTOs have the luxury of working on side projects. It’s a great solution to new challenges. When it’s going well, the successful CTO is able to quit their job and is able to work full-time as a part-time CTO. In time, however eventually, it happens. The existing contracts expire. The prospect of new contracts is elusive. In the shortest time, it is too late for the fledgling fractional CTO to turn into a slave of the flow of deals.
In time, the $800/hr agreement changes into a compromise of $500/hour that then becomes the $250/hr drudge job which, is then the month’s end count of hours, and a block wall calendar, as every availability is wiped out.
It is possible to justify the decline in your rates due to a market-driven effect. Actually, in the wake of the epidemic, a record amount of top executives have swapped their corporate full-time jobs to sell off a portion of their own. The number of fractional CXO employment increased by 18% from 2021 until 2022, while 57% have increased since 2021.
(Source: MDL Partners and Bureau of Labor Statistics)
But, take a look at the following: Gerald M. Weinberg wrote in his book The Secrets of Consulting:
“Within an agreed-upon range,” the higher your cost is, the greater business it will bring. Of course, eventually, an excessive price won’t keep clients loyal to your services. While they’ll surely love the way you conduct business, you will not get the chance to win their business. It is possible to lower the cost in order to gain business, but be aware that there’s an alternative method of saying this Second Law of Pricing: If they don’t pay you more, the less they will respect the value of your services. .”
I can definitely understand what it feels like.
What can you tell if you’re not charging the right amount? Clients won’t take any action they suggest, since they don’t appreciate your advice.
Determine a Retainer That They are Unable to Accept
If I speak to an IT company that needs my assistance, I use some key bits of data to help me with what my contract with them will have.
1. Annual Revenues
The revenue per year of an organization is a quick means of knowing exactly what you’re going to be getting into. It’s also a figure that CEOs don’t hesitate to share. If they are looking for a ballpark, ask them to provide an approximate ballpark.
My experience is that if you’re able to find a figure below $2-3 million, it’s a business that is focused on their technology delivery as well as key hires, and possibly the conflict with founders in the early days. If the company is bootstrapped, they are feeling cash-strapped.
The $5-6 million range is where I typically encounter companies who are struggling to move from an unstructured management system to and more structured one around a C-Suite. A team is pushed against procedures that used to be effective but have now become ineffective. The expectations for speedy progress get crushed because of the strain of managing an organization.
The list could continue, but here are some examples of how I can get an idea of the issues I may be confronted with just by looking at the revenue. This isn’t a precise science. It’s just a number that I would like to carry in my wallet.
This figure will play an crucially in the calculation I’ll be using later.
2. C-Suite Compensation
I’d like to have an idea of how much the C-Suite is earning them. If I’m not sure of what the exact number is I’d like to suggest an estimate. “What is the range you believe your C-Suite salary falls into? Between $100k and $200k, $300k and so on?”
It is a good indicator for me as to whether I will be properly prepared for success or not. They know how much the CEO is paying me, and that’s why I shouldn’t get started negatively.
To my mind’s back I’ll translate the pay into hourly and include a discount, and then use this as my hourly base price for my engagement.
3. Engineering Team Size
Companies are complex systems that are made up of people connected to one another. As the more individuals are within that structure, the more complex it will become. Being aware of the number of people in the engineering department provides me with an understanding of the level of complexity I’ll encounter when working with this organization.
I utilize the size of an engineering team for calculating CTO Levels(tm) in the organization:
L0: Team size 1.
L1: Team size 2.
L2: Team size 3.
Size of L3 team= 10
Size of L4 team= 20
Size of L5 team= 40
Size of L6 team 60
The size of L7 is 100
The size of the team is 120
Size of L9 team= 200
L10 Size of the team greater than 200
If an engineering team comprises 12 employees in-house five nearshore developers and 5 nearshore developers, it totals 17 which is an L4 company.
4. Engineer Team Budget
Tell me how much the CEO has spent on his engineering team, and I’ll show you why they have all these problems. Even though it’s true that a company could overspend, I’ve found that the majority of companies I speak to are unaware of how sluggish their teams of engineers are. A desire for features in products generally far outweighs the nutrition that engineers is able to give.
After I’ve gathered the budget for my engineering team and the engineering team’s budget, I’m able to determine what is the engineering efficiency ratio (EER). It is a benchmark commonly determined by dividing the engineering team’s annual revenue by its budget.
In the example above, if a company has a revenue of $10 million per year revenue and is spending $3M for engineers, the EER will be 3.33. There are of course numerous factors to consider that can affect this, but from my own brain, if the figure is less than 1, I’d consider it to be low. If you see it more than 10, I’d say it must be high.
What could the EER could say to me:
- If the level is too high, I’m looking at issues with the retention of culture, sustainability and
- If it’s not I’m looking for issues in the C-Suite, poor CTO management and fatigue
- If the rate is extremely negative or low, I take a look at the stress of the run rate as well as the overall need to determine the urgency of finding a market-appropriate
5. My pledge
If I take a look at my total availability and my overall availability, it is easy to visualize what time I’d devote to this project over the course of one week. It is more difficult to determine in terms of a month or multiple-month project. Therefore, all I have to think about is the way my week will look and how long I’d like to invest in this project.
The Calculator
Base price = C-Suite hourly reduced by around 25 per cent
The 25 per cent is arbitrary. The reason I don’t believe the 25% is based on my experiences. If my retainer ever gets threatened, and I guarantee that it will be, I can confidently say that my rate of the base is lower than the C-suite’s hourly rate.
Difficulty Rate = EER Ln
It’s an Engineering Efficiency Ratio multiplied by the CTO Levels(tm) levels that the business should have. This is referred to as the difficulty rate since in my personal experience there is a greater gap between revenue and spending on engineering the more challenging it is for CTOs to manage the organization. It’s not rocket art!
Complexity Bonus = Ln * $1,000
In this case, I give myself as a reward for the hassles caused by the complexity the company are going to cause me. Also, the $1,000 amount is somewhat random, so you are at ease to alter it up or down.
Hours = (Hours per week x 52) / 12
It’s very basic, but it helps me to feel more comfortable with the amount I imagine spending for this client over one week and then extrapolating it into the month. However, if you are confident in estimating based on the month, then you’re knocked out.
Retainer = (Base + Difficulty) x Hours + Complexity
The result is simple formulas that take the discounted rate for c-suites and then add in our difficulty rate we multiply by the amount of time we anticipate working with this client throughout the entire month. Important to remember that you should not overlook boosting your rates with the complexity bonus you are able to award yourself according to the CTO of this company’s Levels(tm).
Scenario
Let’s glance at a business that has the following responses to our inquiries:
- Annual Revenues: $30,000,000
- C-Suite Salaries: $500,000
- Engineering Team Size: 25
- Engineering Team Budget: $3,000,000
- The time I’d like to be able to devote each week I want to spend 10 hours per week
The base rate for HTML0 is $240/hr, with a discount of 25% = $180/hour
Difficulty Rate is 10 x $5 = $50
Bonus on Complexity = 5 x $1000 equals $5,000
Retainer = ($180 + $50) x 43 + $5,000 = $14,890
The time in one month is determined by 10 hours of work per week divided by 52 (520) followed by dividing into 12. (43.33).
In the context of $14,890, in the back of my mind, I believe an investment in the ballpark of $15,000/m could win me a fractional CTO contract.
Go invoice!
Now you have access to the ability to calculate your rate based on these factors:
- The psychology behind your C-Suite
- the complexity of the business
- the effectiveness of engineering
When I sign up for a new client, I mail my initial invoice. I’m paid prior to I start the task. I keep track of the speed my client has in paying me my initial invoice since how they pay for the initial invoice determines how they will make sure that they pay your invoices.
I’ve put the calculator in the form of a Google Spreadsheet that can be made into an exact copy of and then played with.
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