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However, as a discerning client, the spotlight should not just be on minimizing expenses but on a deeper comprehension of the value proposition offered by consultants. Understanding the nuances of how consultants contribute to your strategic goals, and the methodologies behind their pricing structures, becomes paramount.
This insight allows for a more informed decision-making process, ensuring that your investment not only aligns with your financial constraints but also propels your business forward. In the following sections, we’ll delve deeper into these critical aspects, unraveling the importance of value over cost and the intricacies of consultant pricing.
What is Value in Consulting? Understanding What Consultants Bring to the Table
Put simply, the value created by consultants is the difference between what you can achieve with them versus without them. Consultants bring value to the table in two distinct ways – technical value and political value.
What is the Technical Value and How Does it Contribute to Your Business?
Consultants can bring in outside knowledge in forms of valuable data, benchmarks, methodologies, tools and processes. They also have insights into what works and what doesn’t. Through their years of experience, consultants have encountered many situations and challenges in nearly every industry. Your current predicament is likely familiar to them. And this expertise born out of years of experience can give your organization an edge for success.
The value can come from Accurately Diagnosing a Problem and its Solution. A consultant can gather, analyze a treasure trove of information, and present it to enable Executives to make effective and optimal decisions for the company. Executives must make intelligent decisions for their companies; a consultant can help them achieve that. Through deep data analysis combined with expertise in the field, consultants provide insights that power informed decision-making – what we like to call “analytical skills.”
Now, the technical value can also come from Building Actionable Plans. For instance, consultants can help facilitate the generation of a capability improvement roadmap. We can already predict the response of some skeptics: “We worked with consultants who gave us a plan, but we had no idea how to put it into action.” And actually, you are making my point. The consultants you worked with were not good at building actionable plans, but that doesn’t mean some aren’t. You just chose to work with the wrong ones.
And once you have an actionable plan, the consultants can support your plan execution. Here we go. Consultants can help secure and accelerate the execution, bringing project management expertise and additional dedicated resources.
Now, let’s dive into some examples of projects thar can benefit from consultants’ technical prowess. Picture a Supply Chain footprint optimization or a Distribution network design. Or perhaps, delve into a Strategy project where you dissect various markets to unleash the potential of your groundbreaking technology. Here, consultants bring to the table their wealth of technical expertise, hands-on experience, and top-notch methodologies.
Understanding Political Value That Consultants Contribute to Organizational Success
The second way of value creation relates to political value, which can take many forms. Consultants can help your organization navigate the organizational culture and politics. And it can be precious if your project is visible to the Board or the investor, for instance.
Their advice possesses the power to either seal a decision with an authoritative stamp of approval or become the convenient scapegoat in times of turmoil. Picture this: “It wasn’t my call; it was McBoston’s recommendation, right there on page 213 of the report. Take a look!” They become the pivotal players in the corporate theater, shaping narratives, and influencing outcomes with each word they utter.
Consultants often wield their “soft power” to unite stakeholders and promote agreement on various topics and decisions. Ultimately, they can assist in enforcing unpleasant changes during cost-cutting or restructuring projects. These decisions are typically the most difficult for executives to make and execute as no one likes them.
Have you heard the saying, “It’s lonely at the top”? When it comes to senior leadership, that can be especially true. And consultants can provide a much-needed sounding board and act as an advisor for executives.
Examining real-world examples of projects that offer political value, we find them often associated with critical strategic decisions that involve the board or external parties like shareholders and governments. Pivotal choices, you know, such as significant acquisitions that will shape the company’s future, or cost-reduction projects where you apply set industry standards–requiring 8 FTEs per team in this function, according to Mc Boston.
But actually, the majority of projects entail both technical and political values. For example, a project to develop a new organization will require designing the new setup using methodologies such as spans and layers and describing the new organization through processes, org charts, and job descriptions. And at the same time, it will require navigating the waters, getting approval from the board, and the buy-in of the entire organization.
How Can You Measure Value Created by Consultants?
“Value” is an intangible term and it is not always possible to measure it precisely. The same way, when it comes to consulting, the value it brings is not always apparent to the customer or procurement. Nonetheless, it’s important to find out ways to measure the value created by consulting.
At Consulting Quest, we have identified three categories of value: direct value, long-term value, and cost avoidance. These buckets help us to structure the overall worth that consulting generates.
Direct Value
It is undoubtedly the easiest to grasp and measure. It can be savings, improved efficiency, or a more effective pricing strategy – all of which are simpler to perceive than other values.
Long-Term Value
This is the second bucket where consultants create value. It may be difficult to measure the immediate value of each project, but you can see the effects of your efforts in the long run. For instance, working on sustainability can open new business opportunities and funding.
Changing a commodity company’s organization and business model into a specialty company will improve EBITDA and the multiple. And as a result, the company will have a higher valuation. Working on culture can help create cohesion and increase agility. But these effects can only be measured long after the project.
Cost Avoidance Value
This is the third and final bucket of value creation. This is probably the most elusive of the three. Because this is the cost you would have to pay if you had done nothing, this equation is full of ‘what ifs’ and speculation, or for those with a more mathematical background – it has an incredibly high margin of error. Fall into this category, compliance, risk reduction, or talent management.
The Value Creation Equation for Buying Consulting Services
Consulting can provide enormous value to an organization when done correctly. It’s an industry where the term “value” can be challenging to quantify. However, an understanding of the value creation equation can enable you to measure and maximize the benefits of consulting services.
There’s a vast difference between the simple act of calculating immediate savings from a consulting project and understanding the larger picture of value created over the long term. The spectrum of value measurement can be seen through five primary options:
Option 1: Basic Savings Measurement – This is calculated by understanding the difference between what you were initially willing to pay for a project and what you ended up actually paying. This represents immediate savings.
Option 2: Comparative Savings – Here, the real savings are quantified by comparing the actual cost with the cost you would’ve incurred if you had gone with the highest bidder. By considering a sample of proposals, one can achieve a more accurate assessment of the value saved.
Option 3: Inclusive Savings – This method incorporates the concept of cost avoidance. It considers whether every element of the service bought was essential or if some expenses could have been avoided, like paying for a full market study when only a segment was required.
Option 4: Theoretical Value Calculation – This considers the expected returns on the consulting service. It’s a forward-looking approach that evaluates the long-term value a consulting project will bring.
Option 5: Comprehensive Value Analysis – This is the most holistic approach, factoring in the impact of the project, expected returns, actual cost, cost avoidance, and more. It gives a multi-dimensional view of the value derived from consulting.
Behind the numerical values and equations, there are tangible factors driving the results:
- Demand Management: This determines the expected returns from a project. A clear understanding of the demand ensures that resources are allocated to projects that promise the highest returns.
- Sourcing and Negotiation: A quality sourcing process and skilled negotiation can lead to significant savings.
- Project Scoping: Proper scoping ensures that resources are not wasted on unnecessary aspects of a project.
- Consultant Selection and Management: The right consultants can exponentially increase the value derived from a project. Their management during the project is crucial in maximizing this value.
Presently, many organizations leave consulting procurement to executives, who primarily concentrate on project scoping and management, often neglecting the sourcing and negotiation aspects.
Organizations should instead adopt a more holistic view of consulting procurement, focusing on the entire value equation. This involves selecting the right projects, sourcing the appropriate consultants, and managing them efficiently to achieve the highest impact.
When considering the value derived from consulting, it’s crucial to remember that the project’s expected impact often outweighs immediate sourcing savings. This holds especially true when examining a single project.
However, for organizations regularly engaging with consultants and managing a provider portfolio, numerous strategies can further maximize value. Implementing performance and demand management systems and aligning consulting investments with the organization’s strategy are just a few ways to go beyond the basics.
In essence, the value derived from consulting isn’t just about the immediate savings but about the long-term benefits and improvements it brings to an organization. By understanding and implementing the value creation equation, businesses can ensure they’re extracting the maximum benefit from their consulting endeavors.
Understanding Consultants’ Pricing Models and Their Profit Margins – Valuable Insights for Clients
Here, our aim is to help you grasp various pricing models used by consultants and understand the hidden details in consulting agreements that may not be apparent to those unfamiliar with the industry.
This is crucial for you because while their fee structure champions transparency and a clear link between time invested and costs incurred, it also places a significant portion of the risk squarely on your shoulders. Consequently, the cost of your consultancy journey becomes as unpredictable as forecasting the weather, leaving you vulnerable to potential financial turbulence.
Daily/ Hourly Rate – Checking the Other Side of the Coin
On the sunny side, this model is a beacon of transparency. You’re only paying for the work done and the time spent, making it a neat, tidy package for projects with a finite timeline. There’s a certain comfort in knowing that every penny you spend is directly linked to tangible hours of work.
But here comes the twist—every rose has its thorn, and every billing model has its pitfalls. And sometimes efficiency isn’t the consultant’s middle name. Suddenly, ‘just a few more days’ becomes the mantra, and before you know it, the costs are mounting like climbers on Everest. The incentives, you see, are aligned more with the consultant’s time on the clock than with hitting those project milestones in record time.
And what if the stars don’t align, you’re unavailable, or some unforeseen hiccup halts progress? The clock doesn’t stop, but the work does, leaving you pondering the mysteries of the universe—or at least the mysteries of project management.
Here lies the rub: as much as this fee structure champions transparency and direct correlation between time and money, it places the lion’s share of risk squarely on your shoulders, the client. The journey’s cost becomes as unpredictable as trying to forecast the weather—leaving you, dear client, to weather any potential financial storms.
However, let me tell you, despite the pitfalls of the daily/hourly rate-based pricing model, it is particularly favored for smaller projects, the preliminary phases of grand ventures, or interim management assignments.
Flat Fee – Revealing the Other Side of the Story
The beauty of a flat fee is that it puts the consultant in the driver’s seat to navigate through the workload, even if it turns out to be more than anyone bargained for.
And where do the consultants find their silver lining? In the anticipation of repeat business and the art of resource optimization. It’s not just about getting the job done; it’s about doing it so well that ‘goodbye’ turns into ‘see you next time,’ all while ensuring the team isn’t running a marathon in flip-flops.
But, as with all tales, there’s another side to the story. What if the consulting team crosses the finish line faster than Usain Bolt in a 100-meter dash? The flat fee means you’ve paid for the marathon, not the sprint. And let’s not forget the consultants’ knack for packing their resources like sardines in a tin. It’s their way of buffering against risks, ensuring that if things go south, they’ve got a life raft.
Then there’s the old ‘bait and switch’—painting a picture of an A-team in the proposal, only to have you wondering if they’ve all gone on an extended vacation once the project starts. Yes, the resources allocated on paper might as well be unicorns for all the real work they do on your project.
Retainer Fees – Peeking Behind the Curtains
The greatest per of this arrangement is, the consultant becomes something akin to a guardian angel for the client’s organization, always hovering, always ready. For the client, this means guaranteed access to a brain trust on tap, ready to dispense wisdom or roll up sleeves as needed.
Now, of course, every silver lining has a cloud or two. Your consultant, juggling multiple retainer gigs like a circus performer, might not always place your project at the top of the pecking order. After all, with your retainer securely in their pocket, where’s the fire? This can sometimes lead to your pressing needs taking a backseat to more immediate, albeit less secure, opportunities that come their way.
And then there’s the age-old retainer quandary: some consultants view this as their golden ticket to paid commercial time—less about delivering value and more about ensuring their presence is noted, like paid wallpaper. Effective? Perhaps. Engaged? Questionable.
Let me share a little anecdote to bring this home. A client once brought in a consultant, let’s call him David N., on a retainer to sprinkle some magic on their leadership team’s effectiveness. The results? Subtle yet noticeable. No one could pinpoint exactly what David was doing, but somehow, the ship sailed smoother when he was around. It’s the retainer paradox: sometimes, the value is in the vibe, not the visible.
Having shared both sides of the coin, let me now tell you that retainer is an ideal setup for those times when the path ahead is as clear as mud, with deliverables as stable as a house of cards. Remember, that this model thrives on flexibility, adapting to twists and turns with the grace of a seasoned improviser.
Value-Based Pricing – A Look at All the Different Paths One Can Take
All these pricing models are based on one simple formula: the daily rate multiplied by the number of days spent on the project. This daily rate itself stems from a simple calculation—total costs divided by the number of billable days, plus a margin for profit. It’s a model that emphasizes the cost of inputs, clear, transparent, but perhaps not always perfectly aligned with the value delivered.
But, and here’s the kicker, it doesn’t always waltz in time with the value delivered. Enter stage left: value-based pricing, a strategy that turns the spotlight away from the time and materials waltz, focusing instead on the show-stopping performance of perceived value.
Now, imagine a world where consulting fees aren’t just about the hours clocked in but about the treasure chest of value unlocked. In value-based pricing, the golden rule is that the clients and consultants share a common quest—the more value created, the greater the reward for both. But, as with any good adventure, there are different paths one can take.
First off, let’s talk about the road more commonly traveled by the giants of the consulting world—the likes of McKinsey, BCG, and Bain, affectionately known as the MBB. These powerhouses tend to set their sights on a version of value-based pricing where the flat fee is adjusted skywards to mirror the anticipated value. Think of it as tuning into a broader ‘willingness to pay.’
The logic is pretty straightforward: the massive value these consultants are set to unlock couldn’t be achieved without their Midas touch. And if the ROI of the project looks as promising as finding a pot of gold at the end of a rainbow (say, a return of over 5 times your investment), then it’s all aboard the value train, right? Ever wondered why these firms play their cards close to their chest, refusing to break down their fees? Mystery solved.
Then there’s a road less traveled that’s catching the eye of forward-thinkers and game-changers: value-sharing models. Think of this as the consulting world’s equivalent of entering a local bingo night with a modest buy-in, but with the jackpot holding the promise to turn modest investments into substantial gains. It’s not just a different way of doing things; it’s a strategic bet on the transformative impact of the work, with the payoff contingent on hitting it big.
And here’ break down the options on the table:
First up, we have Success Fees. This model is the consulting fee world’s nod to performance-based rewards. Here, the consultant’s payout is directly tied to achieving specific, agreed-upon outcomes. It’s somewhat discretionary, reliant on the client’s assessment of the consultant’s performance, with a cap set to keep expectations aligned.
Next, there’s the Percentage-Based Fees approach. Particularly popular in the high-stakes arena of mergers and acquisitions, this model ties the consultant’s fee to a percentage of the transaction value. The bigger the deal, the bigger the slice of the pie for the consultant. It’s a clear-cut case of the more value created; the more value shared.
Then we have a model-based Metrics and Thresholds. This refined mechanism sets specific performance markers that, when achieved, trigger the payout of performance fees. It’s a model that rewards hitting or surpassing particular milestones, making it an excellent fit for projects where success can be quantified and measured against predefined standards.
Value in an Evolving Consulting Landscape. What is in it for You?
Cutting costs for consulting services with the singular goal of realizing short-term savings is myopic. Instead, as leaders, you should view consulting expenses as a precious investment in the business, linked to your company’s future. When you focus on value, you can automatically backtrack to make a decision how much to invest, where to invest and what you should invest on. In other words, it’s about leveraging the power of strategic sourcing to optimize value creation.
Over the years, consulting has evolved from optimizing work to strategic thinking. Digital layers are now an essential part of the game, transforming how values are delivered. The value chain is experiencing shifts in marketing, knowledge accessibility, data analysis, management tools, services, talent, and even substitution.
Marketing and sales, once built on relationships, are now tapping into digital platforms, with even smaller players making a mark. Knowledge, once a guarded secret, is now out there for everyone to grab, thanks to search engines and expert platforms. Data analysis is no longer just a consulting offering; companies are doing it in-house, changing the game. Management tools and methodologies are becoming products, accessible at lower costs, and services are getting a facelift, becoming more accessible to all.
Medium-sized and boutique consulting firms are not sitting back. They’re innovating, productizing, and adopting flexible strategies for growth. Automation, partnerships, reselling arrangements, internationalization, and a commitment to innovation are their key tactics.
Under this circumstance, embracing smarter consulting sourcing practices is no longer optional for clients; it’s essential. However, you may face challenge in finding the right balance between cost-saving and value creation while striving to maximizing value, acquiring top-notch expertise without overspending, and ensuring each project exceeds expectations. To overcome this challenge, you need to refine your procurement processes, stay updated on consulting market dynamics, and eliminate outdated practices hindering collaboration with emerging firms.
In this evolving landscape, you can benefit from these changes in several ways — engaging with boutique firms for specialized knowledge or demanding more value from traditional consulting partnerships. Whatever may be the case, the power is shifting into your hands. All that you need to do is, ask the hard questions, demand transparency, and ensure every consulting dollar you spend brings the desired impact.
Conclusion
To address our initial question – “What is the most crucial factor when procuring consulting services?”, here’s how we can break it down: think about what tasks or achievements would be feasible without the assistance of consultants. Then, contrast this with what becomes possible with their involvement. That is the true value they bring. It is all about the transformative impact they bring to the table, enabling your organization to accomplish goals and overcome obstacles that would otherwise be insurmountable.
We’ve outlined how consultants create value and how this influences their pricing principles. While the substantial value generated through their expertise justifies their fees, it’s equally important to actively measure this value by carefully managing the process.
As an organization, you can utilize various strategic approaches to maximize the value from your project, such as defining the scope accurately, implementing demand management to prioritize projects strategically, selecting the right consulting partners, and leveraging negotiation backed by data. Shifting your focus from a cost-driven perspective to one driven by value and outcomes requires a change in mindset, but it’s a beneficial change for your procurement team as the rewards are significant.
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