Consultants are often considered as very prohibitive resources that only a few can truly afford. There is clearly some truth to this especially if you are a novice consulting buyer. In reality, management consulting services do not have to be viewed as a cost but instead can be an investment with tangible, measurable results. The […]
Consultants are often considered as very prohibitive resources that only a few can truly afford. There is clearly some truth to this especially if you are a novice consulting buyer. In reality, management consulting services do not have to be viewed as a cost but instead can be an investment with tangible, measurable results.
The way consulting services are priced have evolved over time tremendously. In the late 19th and beginning of the 20th century when the first consulting firms can be traced back to – Arthur D. Little (1886) and Booz Allen & Hamilton (1914), companies hiring consultants used them as extra resources focused on very distinct projects and solving spot problems. The pricing model was similar to the one of lawyers, where consultants would price by hour and eventually by day.
Similar to lawyers, the practice of rate cards was adopted by management consultants and a price per day by seniority became the practice for much of the 20th century with very little changes over time. One of the big differences though is that consultants were hired for projects. While rate cards existed, consultants were (and some still are) reluctant to share them with their clients unless the rate cards contribute towards generating millions of dollars in revenue.
So in practice consultants would package a project and use rate cards with an expected contribution of each member to produce a total price for an assignment. Note that partners would almost always charge 20% of their time no matter how much time they end up spending on the project itself.
At the turn of the century, practices started to change and consultants started to open up about their fees and became more transparent about their rates and also the way they charged for administrative and travel expenses. In my day, we were talking about 20% on top of the project fees. The practice of rate card transparency helped in controlling costs and effectively making sure that time was effectively spent.
The most radical change in pricing practice happened when top tier management consulting firms decided to put their fees at stake against results. I personally worked on many of these type of assignments that ended up being mutually beneficial for both the client and the firm.
In practice the consultant decides to waive most or all of its fees to deliver the results promised to management. It is a very similar model to investment bankers. They ask for a set up fee in an M&A assignment and where most of the money comes from closing the deal.
While in banking the sales price is relatively clear to measure, consultants set the value they bring as an incremental improvement towards an existing situation, or baseline. While the starting point can be clear, the prolonged duration of some such assignments can lead to friction between the consultant and the client. The contention often comes from the simple claim that “me the client could have done this without you”.
Getting in a pay-for-performance deal can however be beneficial to all parties but it requires very clear guidelines:
The practice of pay-for-performance is certainly a step in the right direction. However, it could also create further consolidation in the market if not used wisely.
Indeed accepting or even entertaining such a deal not only requires expertise but also size. While a company like Accenture can do it, a small local consulting firm does not have the balance sheet to accept not being paid for a long period of time. So one should carefully assess the type of assignments such pricing should be in place for.
With that being said, no matter how much you pay and how much is performance related, consulting fees do not have to be a cost and can certainly be turned into an investment with tangible results if you are willing to discuss these kind of models with your consulting firm of choice. In the end, if they believe they can deliver they should put their money where their mouth is.
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