How to choose the right structure for consulting fees?
Consulting fees are always a hot topic. Many clients feel like consultants are too expensive. They might be reluctant to invest in a consulting project, even though the stakes (and the potential value) are incredibly high.
How to choose the right structure for consulting fees?
Understanding how consultants build their price is interesting, and it gives some keys to negotiate the deal. However, clients & buyers should always keep their eyes on the prize: the impact the consulting project can deliver.
“Price is what you pay. Value is what you get.” – Warren Buffett
But let’s go back to the beginning. Consultants are selling their time, or more precisely, the access to expert knowledge and execution workforce during a specific 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.
Analyzing your consulting spend is an excellent place to start putting your expenses under control. Besides, it is a mandatory step if you implement category management for the consulting services category.
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.
The key parameters used to define the pricing for a consulting project –
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 multiplied by the number of days spent on the project.
But another essential parameter is team composition. Again, 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. However, any part-time project can be vague and challenging to verify.
Part-time assignments of very experienced consultants can significantly impact the bill and can be extremely hard to track. For example, 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, out-of-pocket costs included, to avoid such discussions with clients.
What are the different structures of consulting fees? –
Most projects use one of the three following fee structures:
Workload based, using 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 actual number of days spent on the project.
Even though convenient and flexible, we recommend using a cap when using this structure of fees to avoid opening the door to exponentially growing fees.
It is the most common fee structure for large projects. First, the Consultant will evaluate the work to be done and the expected deliverables and define the expertise and time needed to deliver the project.
Then, when combining the expected workload and daily rates and some additional costs, the Consultants can compute a pricing proposal. Some Consultants might also propose a flat fee based on a share of the value at stake.
When looking at a flat fee, we recommend combining two approaches: Take the workload-based approach using daily rates or use this as a reference and compare with the value at stake at the end.
Does the result make sense? Is the ROI satisfactory? While the following breakdown is standard, remember to focus on the benefits and the value, as that’s the most important!
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. It often takes the shape of a bonus on top of a flat fee structure.
But there are some other fee structures:
A retainer is a monthly fee negotiated with a client based on a certain number of support hours per month. Coaches or trusted advisors mainly use this fee structure. It is often combined with spot projects as a retainer is usually the best way to be the first one aware of projects to come.
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.
The fees here are calculated as a percentage of a project or transaction amount and are often used for M&A projects, for instance, where the consulting firms play a facilitation and brokerage role too.
Hybrid Type Fees:
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.
How to select the right fee structure for a consulting project? –
Understanding the Consulting Industry is a prerequisite to optimizing your Consulting Spend. Knowing your options regarding fees can allow you to reach for innovative solutions and get more for your budget.
If you are just starting with using consultants, going with a flat fee structure and cross-checking the workload declared is probably the safest route.
If you have more experience and want to push your consultants further, do not hesitate to explore performance-based solutions and risk/reward sharing schemes.
Last, if your project is still in its early stage and you need to go for a daily structure, do not hesitate to implement a weekly follow-up to keep costs under control.
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