Question on Referral Fees…

Should you pay referral fees? That question was recently posted at LinkedIn on the Business Consulting Buzz group:

Referral Fees for Independent Consultants?

Interested in your opinions: As an independent Consultant, would you be willing to pay and/or receive referral fees?

Here is my reply:

As consulting engineers, we are concerned that referral fees might be perceived as conflicts of interest. As such, we do not accept (nor pay) any fees from the vendors serving our technical community.

When asked for vendor recommendations, we give clients at least two. If asked for our preference, we will share that with an explanation. Our vendors understand that no fee is expected, but we hope that the courtesy of a recommendation will be reciprocated.

We do, however, pay a referral fee to marketing partners for consulting business. These currently include a manufacturer’s rep (we are on their line card), and a training firm (we are in their catalog.) We also have agreement letters in place.

The percentages vary from 10 to 30% of the fee, depending on the effort. 10% is for a qualified lead that we pursue/close; 20% for a purchase order; and 30% for collecting the payment and sending us a check for our share. We pay referrals only when we get paid, and only on the fee (not expenses, as we do not mark up client expenses.)

Also, we don’t partner with consulting colleagues. We tried sub-contracting for a while, but it was more hassle than it was worth. When appropriate, we simply pass along leads with no strings attached. We make sure our clients understand that no money changes hands on referrals, and that we are out of the loop. In other words, we passed along a name — please make your own business decisions.

Hope this helps. Feel free to contact me. Been at this consulting gig 30+ years, happy to share, and still learning…

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5 Responses to Question on Referral Fees…

  • I agree with what Daryl has to say, with one caveat. Nearly all of our new business comes from word of mouth recommendations. Consequently, there is a fine line here. When does a friendly referral or recommendation become a payable event?

    Here is how we handle this topic. We are happy to pay a referral fee to an individual or a business if:

    1. The project is with a new client (it’s our responsibility to maintain the business relationship with our existing and past clients)
    2. We didn’t know about the project—it really is a new lead for us.
    3. The referral results in a paid project from the client.

    Finally, we only pay a fee after we get paid from the Client. We never pay an advance fee.

    Our goal is always to “broaden our universe.” We recognize that fostering new relationships with new clients is not only good business, it is vital to our continued success. Like Daryl, we are happy to pay for honest referrals.

  • Agree on both Daryll and John. But John, what rate shall be given (5%, 10%, 15%, 20%) and to what base line – total project cost meaning gross or after expenses from scenarios 1, 2,3? Thanks

    • Hi,
      Thanks for the comment. My guidelines are in the post – 10 to 30% of the fee, but excluding expenses. But hopefully John can answer for his firm.

      • Thanks too. Good thing you could still pick up mails after 2 years of posting. This referral fee have been my stress stimulant for months now..

        • Glad I could help. Debated for a while on how to best handle referrals, and this works here. Used it with sales reps and training companies, as they are bona-fide sales/marketing organizations.

          However, I don’t pay or accept referral fees to/from other consulting firms. This is to avoid any appearance of a conflict of interest (i.e. kick-backs.) In those cases, I use sub-contracts where both parties are providing labor and expertise for a project. For simplicity, I usually use 30% off my full fee for the subcontracting fee, but this is negotiable.

          Hope this helps to lower the stress level some more. Happy Thanksgiving! .

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