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Consultants to Regain Negotiating Leverage in 2013

APQC’s analysis of consulting procurement practices finds that pricing pressure should be less intense in 2013.

In 2012, 94 percent of organizations surveyed by APQC said they expected larger fee discounts (below book rates) than the year before; that percentage plummets to 14 percent in 2013. In fact, 72 percent expect less discounting in 2013 than in 2012 and 13 percent have no change in expectations.

It’s not that clients won’t still demand discounting, but the degree is far less. Putting aside the nature of the relationship between individual firms and clients (which can lead to significant variance based on volume, relationship building, competitive and opportunistic discounting), mid-single digit percentage point discounting may be the new norm in 2013—half to one-third of what the same companies demanded in 2012.

After ramrodding significant discounting for the last four years, why are buyers consciously letting up on the pressure? The phrase “squeezing blood from a stone” comes to mind.

How Consultants Are Successfully Pushing Back

While every consulting firm likes to think its business model is unique, there are really only four variables to managing profitability:

  1. „overhead costs (primarily salaries, bonuses, and benefits);
  2. „number of hours worked;
  3. „ratio of senior talent to more junior talent; and
  4. fees charged per hour.

All four are trending negatively.

External forces are pushing salaries ever higher. Firms are in the midst of giving offers to second year MBAs, culminating one of the most intense campus-recruiting seasons in the history of the profession. Investment banks have returned to campus after little to no hiring during the financial meltdown. They are aggressively bidding for talent against several major industries and federal government agencies. Consulting firms have to counter by raising their salaries, which gradually increases compensation up the ladder. Moreover, industry continues to raise their pay for experienced talent, forcing consulting firms to counter to remain competitive.

The number of hours worked are at, or near, burn-out levels for many firms. Between the two downturns of the last decade, utilization rates spiked to new record levels and have continued to inch higher every year (when typically we would have expected them to slide back to historic norms as pent up demand dipped and firms staffed up again). In 2010 and 2011, firms were running red hot utilization rates; firms’ HR managers worried about burnout.  And in 2012, consultants worked “harder and longer hours,” according to Consulting magazine’s annual employee satisfaction survey. The result was the third consecutive year of drops in work/life balance, client engagement, and confidence in firm leadership, according to this annual survey of more than 10,000 consultants. In other words, firms that want to continue to push their consultants to work more hours are doing so at their own peril.

Now, add the rise in client sophistication detailed in APQC’s findings. Buyers of consulting services say they value experience over all else, which runs counter to most firms’ desire to leverage senior talent with support from junior (and thereby cheaper) consultants.

The result is that firms know they can’t also let fees fall by 10 percent or more per year again—even holding billing rates steady may mean a drop in profitability for many firms. So, as much as clients may want to push for steep discounting year after year, consulting firms are finding themselves with their backs up against the wall and pushing back.

And for now, clients appear to be heeding the message.