With McDonald’s corporation and Wal-Mart reporting their most recent quarterly earnings an underlying message shone through the numbers which was that of margin pressure. It’s a similar story in the Eurozone too. Driven by increasingly cash conscious consumers and rising input costs, firms are looking to find creative ways to boost profitability through efficiency gains. For management consultancies this offers both a boon and a challenge in how firms respond to structuring deals. The hay day of an army of external consultants working on client site are changing to smaller, more focussed teams working on delivering specific targets, yet fewer resources on client-site means lower utilisation and chargeability for a firm.
There’s a growing focus on outcomes
As the consulting landscape adjusts to this ‘new norm’ so too will the deal structures management consulting firms negotiate as clients become increasingly focussed on paying for performance and outcomes as opposed to purely time-based work orders. Traditionally there have been three types of work orders: ‘time & materials’, ‘fixed price deliverables’ and in some cases a hybrid ‘bonus’ based agreement whereby a portion of fees are tied to certain milestones being met, for example the ‘deliverables completed within x time period to enable 123 cost savings.’
In each instance the level of risk has always favoured the consulting firm where providing that the resource effort has been put in & deliverables created – the consulting firm always gets paid. There’s very little recourse for a client who takes a calculated risk if that the hypothesis turns out to be incorrect or the strategy is poorly executed. Real word examples of this can stretch from failed product launches, to systems that crash or badly calculated market expansion strategies. Sceptics may argue that in any major initiative there are too many ‘moving parts’ which are out of the control of a single entity let alone an external consultancy to manage and hold responsibility for. While this is true, there is an argument to be made for consulting firms to hold greater accountability for the outcomes delivered directly from their work.
Evolving ‘outcomes’ to value-based outcomes
Greater accountability brings with the opportunity for shaping hybrid deal structures around performance linked fees and fixed price deliverables. This concept is not new and already exists in different guises with the Wall Street Journal reporting that an increasing number of CEOs are seeing their salary tied to achieving specific shareholder results. From an industry perspective, the financial services market has long offered high value wealth management advisory services where clients are expected to pay fees of x% of their managed capital and 20% of any investment gains generated above a 20% per annum threshold. People want to pay for value based outcomes, not just a service.
Applying this to a consulting context, it’s possible for management consulting firms to measure a client’s operational performance against specific parameters and have a hybrid deal structure where a percentage of fees are tied to uplifts in performance. Afterall, why shouldn’t small businesses be able to demand results? I believe that as corporate budgets tighten, a degree of value will become demanded. Virtually any data point that can be measured, benchmarked and then a target is set to deliver an improved outcome can be applied to a value based deal. An example of a value-based proposition in the mergers and acquisition space is already common place and I suspect the trend will eventually grow into other service areas. That said, nothing comes without risk both for the entrepreneurial firm and the client.
Risk assessment & control is key
Value-based deals while attractive to clients come with a unique risk profile that means they are not suitable for all projects. Where there is a high degree of uncertainty or a changing landscape a time and materials based fee structure will likely be more appropriate. Similarly, projects with complex stakeholders or limited control favour a fixed price deliverables model. However in certain scenarios where a consulting firm can maintain delivery control over a specific area an opportunity exists to move from being an ‘outside advisor’ to a trusted delivery partner. Ultimately though, every opportunity will need to be risk assessed and then closely managed.
Having a tightly defined scope for delivery with clear baseline measurements and methodologies pre-agreed with the client are absolutely paramount as it will provide an objective yardstick by which to measure potential & actual results. In delivering results, it’s important for the consulting firm to have mandated end-to-end control / delivery management of the specific process or area that they will be measured against and a defined set of obligations on the client to deliver their part of the deal. These factors combined with a solid analysis backed execution plan should greatly minimise risk though it will be interesting to see how the model evolves over time and firms adjust to maximise management consulting opportunities with clients.