My recent comments challenging a scathing critique of the consulting industry have in turn generated a flood of feedback from our loyal readers. Many of you felt the original article was outrageously one-sided, whilst a few of you actually admitted that consultants’ clients can sometimes be taken for a ride.
The whole debate reminded me of a pertinent statement John Niland made at a recent Top-Consultant seminar. He said consultants should, at all costs, avoid situations where the client ends up receiving a bill based on a calculation involving day rates. His argument was essentially that the very concept of day rates puts the interests of clients and the short-term interests of the consultancy fundamentally in conflict. (As an aside, John will be speaking in London on 17th June – details here for those of you interested)
So if John’s theory is right, are purchasing departments shooting their organisations in the foot by forcing consultancies down a day-rates approach to pricing? Many consultancies would say they are…
Fixed Fee vs Day Rate billing
Given a fixed fee project a consultancy can deliver on the assignment as it sees fit and earn its profit by working smart and by creating a winning solution that turns the client into a lifetime customer. The consultancy is incentivised to achieve results quickly and cost-effectively, because it’s their margins that are eroded if they don’t.
What happens all too often in practice is that consultancies are engaged to provide a consulting team on a day-rate basis where there's additional profit to be made each day that the team remains on site. This creates an incentive for scope creep, where the boundaries of the agreed project are pushed further and further and cost overruns are passed onto the client.
In this kind of scenario, the essential challenge of completing an assignment on time and within budget is sidelined. The client 's interests are no longer aligned with those of the consultancy, pure and simple.
However where does this problem originate and are consultancies therefore really to blame? In my own experience, it is clients’ insistence on breaking proposals down into the component team members, their day rates and volume discounts that poisons the consultant-client relationship. Clients are scared of committing to a fixed budget - and therefore paying “excessively” for actual services delivered. The temptation to challenge the fee by breaking it down into its parts is just too much.
Oh for a world where consultants were paid an agreed amount for an agreed project deliverable and then left to run the project like the mini-business-venture that it is. Unfortunately the proliferation of purchasing departments and PSLs is driving the consulting industry further and further down the day-rates path – and away from this ideal. So the consultant-client relationship is increasingly poisoned and consultants take the rap, when actually we're on the receiving end of pushy purchasing departments. I kind of feel this is like the pot calling the kettle black!! Anyone out there agree with this sentiment or care to add additional thoughts?