Understanding consulting fees to make smarter decisions
You might be nonchalantly asking yourself, why do companies hire Consultants?
To improve a process, to save money, or to get a fresh perspective, but most of all, to get access to very specialized skills that great Consultants can bring in.
And as the business environment constantly evolves, it’s safe to say companies need to evolve as well.
“The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.” Mark Zuckerberg
Now let’s have a look at Consulting Economics –
Consultants are selling their time, or more precisely, the access to expert knowledge and execution workforce during a certain period. The potential of production of a Consulting firm is the amount of time available for billing. Every day not billed is lost, just like an empty airplane seat.
They charge per time spend.
So the fee structure is usually geared to optimize the utilization rates. As for products or services you might be more familiar with, this ranges from Cost Plus to Value Based.
Know the Consulting Category
Businesses today are facing a growing number of challenges. And as an executive, you are often under pressure to find solutions to multiple problems. What value can Consultants bring your organization?
Consulting Project Fees Framework –
Daily Rate: For smaller projects or exploratory phases, the Consultant can propose a negotiated daily rate. The total fee is then calculated based on the real number of days spent on the project.
Flat Fee: The most common fee structure for large projects. The Consultant will evaluate the work to be done and the deliverables to be prepared, and define the expertise and time needed to deliver the project. Afterward, two approaches are possible. Taking the workload based approach using daily rates or use this as a reference but price based on the value to the end client.
While the following breakdown is standard, remember to focus on the benefits and the value, as that’s the most important!
Performance-Based Fees: This fees structure, also called success fees, is linked to the achievements of pre-defined objectives. It is particularly effective for projects when the results can be easily measured, such as cost reduction, or top-line improvement. This often takes place as a bonus on top of a flat fee structure.
There are also other occasional fee structures:
Retainer: A retainer is a monthly fee negotiated with a client, based on a certain number of hours of support per month. This fee structure is mainly used by coaches or trusted advisors. It is often combined with spot projects since a retainer is usually the best way to be the first one aware of projects to come.
Equity-based Fees: This fee structure is often used with fast-growing start-ups that have little cash upfront or in case of turnaround situations. It is then up to the Consulting Firms to adjust the resources to balance risk and value creation.
Percentage-based Fees: The fees here are calculated as a percentage of a project or transaction amount and often used for M&A projects, for instance, where the consulting firms play a facilitation and brokerage role too.
Hybrid Type Fees: And finally, some project fees structure can be a hybrid of various fee structures such as a retainer with a negotiated daily rate when the amount of monthly hours is reached, a flat fee with an additional success fee, etc.
The best parameters to define a project price –
Since Consultants are primarily selling their time, the time spent on a project is the main cost driver. Usually, the price is calculated as the product of the daily rate per the number of days spent on the project.
But another essential parameter is the team composition. The experience can make a huge difference. You can expect a multiplication factor of 5 or more between an experienced partner and a newly-graduated analyst.
Another element is the share of time spent on the project. A full-time assignment is pretty straightforward: the consultant is supposed to be on site most of the days. Any part-time assignment can be vague, and very difficult to verify.
Pyramid structure to explain fees –
Part-time assignments of very experienced consultants can have a significant impact on the bill and can be extremely hard to track. Many of you have probably experienced the team of experts in the proposal at 10% of their time that you have actually never used. In the same fashion, ramp-up and ramp-down of team members should be linked to clear phases.
The specific industry where clients operate is an overlooked driver of the price for Consulting Projects. You will have the high-end of the spectrum – the Financial Services or Energy, where Consultants apply a premium, and at the low-end the Public Sector or Non-Profit Sector.
Finally, don’t forget the expenses when you are evaluating your budget. On certain projects, clients have agreed to up to 30% of expenses. Some Consulting Firms prefer a flat fee, expenses included, to avoid such discussions with clients.
Understanding the Consulting Industry is a pre-requisite to optimizing your Consulting Spend. Knowing your options can allow you to reach for innovative solutions, and to get more for your budget.
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