Turnabout is fair play: Consultants spent decades helping companies squeeze out every bit of margin across supply chains and within their internal operations. Now, consultants are the vendors feeling the vice clamps.
The last decade was bookended by two downturns, both of which led consultants to lower their average hourly rate. And those rates have been slow to climb as the steady migration of consultants into industry has turned clients into smarter buyers of consulting.
And the macro trends that have driven intense pricing pressure show no indication of letting up. Client sophistication is primarily driven by two trends: 1) The seemingly ever-increasing number of former consultants going into industry and becoming buyers of consulting (or at least playing a role in professionalizing procurement and other internal processes); 2) the ongoing march toward cost cutting.
As we’ve reported the last two months, employee satisfaction among consultants is low and getting lower. And, as a result, consultants are more easily lured away by industry as demand for their talent increases. And as more consultants transition to the other side of the table, clients will only become more sophisticated buyers over time.
Gone are the days you could sell a project solely based on your personal relationship with a CEO, or even the firm’s experience with a client’s specific issue. Selling the client on the project manager’s experience is no longer enough.
Now, there’s increasingly an RFP process, followed by rounds of interviews – including detailed reviews of every member of the proposed engagement team. And that’s just to form the short list. From there, internal consultants may serve as gate keepers, line managers are involved in the vetting process, the CEO typically needs to sign off if it’s a six-figure project or larger, and then it goes to procurement to hammer out the details of the contract.
Bigger discounting is certainly occurring among IT and HR consulting, especially for those services deemed to be commodities. Discounting is less severe among higher-value engagements, i.e., anything tied to a company’s key strategic goals, new products, or an offering that is truly unique due to a consultant’s differentiated mix of experience, knowledge, tools, etc. Even then there is pressure to keep fees from rising by much.
And clients are demanding discounts based on the nature of their relationship, which can supersede the relative “value” of the service being offered. Examples include:
- Current volume: “We do a lot of business together.”
- Future volume: “We could do a lot of business together.”
- Opportunistic: “You need this project to prove your bona fides for other clients, to show you’re an expert in this area, to keep your staff busy between other larger engagements, etc.”
- Competitive: “You want to keep a competitor from winning this engagement and building a relationship with me.”
- Relationship building: “I’m a new and/or an important client.”
And relationship-based discounts can be steep – sometimes exceeding 20 percent. Clients are also getting smarter about pushing back on so-called “pass-through” costs by limiting, placing caps, or more tightly managing consultants’ travel costs.
However, the more sophisticated buyers of consulting aren’t just focused on lowering fees. They know the real value comes from an improved holistic approach that runs from efficient purchasing to more effective engagement management.
Companies are increasingly using internal resources to staff parts of the project (either by using internal consultants or by using their own rank-and-file staff to supplement the consultant-led team), more sophisticated vetting of team members (i.e., treating each member as if they were hiring them as an employee and requiring a say in who gets rolled on and off of the project over time), managing the process (i.e., through use of independently verified benchmarks) and the knowledge transfer at the end of the project.
More sophisticated buyers are also leveling the playing field by considering bids from small to mid-sized firms. While there are certain big-scale projects that only a select number of global consulting firms have the breadth and depth of resources to handle, lesser-branded firms are increasingly taking market share from the profession’s giants when it comes to smaller engagements.
A relatively small engagement can be a higher priority for middle-market firms than it might be for a larger firm, thus ensuring getting the “A” team. Middle-market firms often have lower overhead and can set a highly competitive price. And local consultants have no travel costs.
And you thought business would improve as the economy strengthened?
To discuss further, please contact Cathy Hill at firstname.lastname@example.org.