Hello and welcome back to Smart Consulting Sourcing, the only podcast about consulting procurement.
I am Hélène, and today we will discuss Consulting Fees: a state of the market.
However, before that, let me give a recap of last week’s episode.
A Request for Proposal is a document that businesses use to solicit bids from potential vendors.
The RFP typically outlines the objectives and scope of a project and includes a timeline for completion. Vendors then submit their proposals, which are evaluated by the business. The RFP process can be used for a wide range of projects beyond consulting, from web design to event planning.
And the reason why it is so important for consulting services is that it helps to clarify what your requirements are and what type of consulting firm you should hire to get the best value out of the project.
An RFP helps you to set a timeline for the project balancing the project’s scope, manpower, and internal milestones. It would define the results that you seek and additionally, RFPs help to ensure that projects are well-planned and organized from the outset.
In short, RFPs are a vital part of the modern consulting world, and there’s good reason why they’re here to stay. So, the key to writing a successful RFP for consulting services is to be clear and concise about your needs. This will help you to attract the right consultants and get the best proposals.
And consultants love nothing more than a well-defined RFP. That’s because it allows them to focus on developing the best solution for the client, rather than wasting time trying to figure out what the client actually wants.
Consultants also prefer RFPs that are clear and concise. This makes it easier for them to understand the scope of the project and identify any potential red flags.
So if you’re thinking about issuing an RFP, remember to keep it clear, concise, and cost-effective.
Listen to the complete podcast about why even without the competition, you still need an RFP?
However, this week, I want to discuss “Consulting Fees”
When you’re hiring a consultant, it’s important to have a clear understanding of the fee structure. Knowing how the consultant charges will help you set a budget for the project and understand the overall costs. It can also be helpful in negotiating a fair rate.
Be sure to ask about the fee structure up front so that there are no surprises later on. By knowing the consulting fee structure, you can be sure that you’re getting a fair rate for the services you need. Otherwise, you could end up paying more than you expected – or worse, not getting what you paid for.
How does a consultant define their consulting fees?
Despite all the bad press about consultants and their fees, discussions should primarily be about impact and value. This does not prevent us from having a closer look at the structure of the fees and to make sure you are using the right compensation model when working with consultants.
Depending on the sort of consulting work being done and the location of the consulting business, consulting costs can vary greatly. While working on a project, a consultant will incur a variety of costs, which they will include in their compensation.
In general, consulting costs are determined by the project’s complexity, the consultant’s level of. experience and the time needed to finish the project.
But how can consulting firms figure out the number of billable days?
There are several common principles that consulting firms follow, it might vary based on the job. The project’s scope and anticipated completion time are taken into consideration first.
They also take into account the quantity of workers needed for the project and their daily availability.
Last but not the least, consulting firms also take into account their own overhead expenditures, such as hotel and travel costs.
So, when a consulting firm sets its rates, it must take into account both the expenses of doing business and the desired profit margin. The total of these two figures is then divided by the number of billable days in a year to arrive at the daily rate.
This daily rate is then used to calculate the fee for each project. The consulting firm must also set aside a portion of its fees for employee bonuses and reinvestment. This portion is typically a percentage of the total fees earned.
By carefully setting its rates and budgeting for expenses, a consulting firm can ensure that it remains profitable while also providing its employees with fair compensation.
Everything beyond this target is partner bonus!
After all, consulting fees can vary widely, and it can be tough to know whether you’re getting a good deal. Here’s something to keep in mind: the daily rate of a consultant includes all fixed costs, like administration, marketing, commercial thought leadership, and idle time.
Don’t take me wrong. I’m not saying that some consulting fees are not outrageous. I’m just explaining the logic behind them. And let’s not forget that when you hire a consultant, you pay for the value you get, not the time.
Here’s the thing: consultants are in the business of selling their expertise. And their expertise is worth a lot of money. After all, they’ve spent years honing their skills and knowledge, writing white papers, developing new methodologies. And while they are doing that, they can’t bill hours to their clients, right?
To put it bluntly, they know things that you don’t. And they can provide insights and solutions that you wouldn’t be able to come up with on your own. And that’s what you are paying for.
The different fee structures and the associated risks for the clients
When it comes to consulting fees, consultants typically use different structures which come with their specific set of risks.
The first is Deliverable-based fees or flat fee
For their projects, the majority of consulting firms employ a flat fee structure. The consultant will assess the work that needs to be done and assemble a small team. The overall cost for the team to complete the task will be included in the charge.
And the risk involved for clients is very low. Even if the workload is greater than anticipated, the Consulting Team will complete the task. To reduce the risks, the consultant can be inclined to “supercharge” their resources, which is not a plus point.
The second fee structure is Time-based fees or daily rates
This technique is quite popular, especially with small projects and freelance consultants. It is also applicable to temporary managerial positions.
Based on the number of days actually spent working for the customer, the consultant will determine a daily fee and submit an invoice to the client.
In this structure, the project’s overall cost is not entirely under the client’s control and the client bears the majority of the risk. And you can see that it is an incentive to slow down, since the consultants will be paid more…
Coming to the third fee structure, we have, Retainer-based fees.
Retainer-based payments are an option for clients who want ongoing part-time assistance. The number of days each week, month, or quarter where the consultant will be “on stand-by” is decided upon between the consultant and the client.
Independent of the consultant’s work, the retainer might be paid in one single payment or on a monthly basis.
Retainer-based fees are more secure, but clients might not be as happy with the overall experience. Because if they don’t use the consultants, they will still have to pay for their time. Besides you might become a “secondary” client if your consultant lands a full-time project, and that’s never a good thing.
And finally let’s talk about performance-based fees.
Clients just love the idea of a performance-based fee. And why wouldn’t they? It’s a way to pay based on results, rather than time spent working. After all, the consultancy world is all about results, right?
But here’s the thing: performance-based fees can be tricky to navigate for both clients and consultants. First of all, you need to make sure that the consulting firm you’ve hired is on board with the idea. Both parties need to be clear on what kind of results they’re looking for, and they need to be comfortable with the fact that those targets may not be met. Nevertheless, as the client, you need to agree with a fee structure which is fair and reasonable. After all, no consultant would want to end up working for free if things don’t go according to plan!
If you’re thinking of implementing a performance-based fee structure, make sure you do your homework first. For consultants, it’s a great way to get paid, but it’s not without its challenges.
The risk involved for clients is very limited in this scenario.
Let’s get to know some numbers.
First of all, it’s difficult to know the details of daily rates since it is rather secret and often blurred by huge discounts offered under the disguise of a commercial effort.
In major companies, there is a 5 to 8 fold difference between a senior partner and an analyst due to seniority, knowledge, and the fact that most partners spend half of their time on business, networking, and thought leadership.
Looking at the MBB and Big 4s, MBB sure makes the most of of the revenue because it is more expensive. The numbers regarding the revenue per consultant have grown since past 3-5 years where the average total of MBB is at more the $500k/consultant/year while the big 4s stand at a bit more than $200k/ Indeed the big 4 are hybrid players who sell more than just management consulting unlike MBB who are pure consulting firms, and that could explain the difference in revenues per consultant.
The difference between capabilities and industries,
The cost of a PPM project is often much higher than the price of a high-level strategy study. Indeed the daily rates are not standard across capabilities. Strategy consultants can charge up to 7/8 times more than operations consultants.
More surprisingly, the differences between industries like financial services and traditional manufacturing is 3 times for instance. One of the reasons is that consultants’ salaries are higher, just like some industries pay better than others.
And the team composition is also a big driver for cost.
Let’s take an example of an innovation strategy project for instance, a small boutique will come with 1 senior partner who will also be the project manager and 2 side kicks (that can be consultants or partners). The large consulting firm will come with one senior partner, 5 experts at 5% of their time, one full time project manager, 2 or 3 full time consultants and potential back office expenses.
But if we talk about team Flexibility; The tiny boutique will have the ability to experiment with staffing and resource ramp-ups and ramp-downs. But the big businesses will be Less flexible as the partner must reserve the resources for a specific time period.
But to be true what you get with big firms is potentially a more exhaustive study and a stamp of credibility!
In recent years, we’ve seen consulting fees increase for many firms, as demand for consulting services has outpaced supply. This has led to a competitive market for consulting talent, and firms are increasingly willing to pay top dollar for the best consultants.
However, not all consulting firms are created equal. Some still operate on a lower-cost model, offering competitive rates that can be appealing to budget-conscious clients. As the consulting market continues to evolve, we can expect to see changes in consulting fees charged by different firms.
Let me explain why I think it’s important to consider the value you get from your consultant. When hiring a consultant, one might be inclined to just focus on their daily rates. The problem with this approach is that it overlooks the team composition and the expertise of each individual in this team.
Because you might end up with a team with higher daily rates, that do the work much faster. And you will be on the wining side. Because you are not buying time, but value.
And that marks the end of our podcast. Next week, I want to talk how consulting buyers can stay ahead in a market booming for consultants. So, stay tuned.
Till then, stay safe and happy sourcing!
If you have other questions about consulting fees, remember you can always contact me directly on LinkedIn or by email because I am always game for a chat!
Bye and see you next week! Au revoir!
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