The Pricing Monster
Thursday 11th Jan, 2018
By Edward Haigh.
In the depths of the financial crisis, organisations looked at their consulting expenditure and started asking the obvious question: What, exactly, are we getting for our money?
On the whole, they didn’t like what they heard. In some cases, consultants were providing services that delivered a tangible and measurable outcome, but too often they weren’t. Consultants weren’t always to blame for this -- some services have always been more difficult to measure and quantify than others -- but that didn’t do much to calm their clients’ nerves. This was not a time for spending money on something you couldn’t measure.
But the case for throwing out consultants completely was a hard one to make. In London, at the time, there was a view being put forward by some people that a zero-tolerance policy to the presence of consultants within the UK’s biggest bank -- RBS -- was part of what led it to the edge of the abyss. The bank had closed its ears to external input to the point where it didn’t hear the warning signs, they said. Mind you, virtually nobody else heard the warning signs either. More plausibly, CEOs found themselves facing economic conditions the like of which they’d never experienced in their professional lives, and needed help figuring out what to do about it.
The inevitable result was a surge of interest in tying fees to outcomes. Whether in the form of risk-reward deals (in which consultants bore some of the risks of failure in return for a higher fee if things worked out), or as more simple no-win-no-pay arrangements; outcomes-based payment models suddenly became the talk of the market.
There was, though, a lot more talk than action. While the financial crisis may have led to an uptick in the amount of consulting work paid for on the basis of outcomes, other payment models (chiefly time and materials, and fixed price) continued to dominate, and do so today. That’s starting to look like one of the biggest opportunities ever missed by consultants, because what they couldn’t see then, and can see now, was the monster coming over the hill.
Before coming to that, we need to stop and recognise that consultants are only one part of this story. While it’s fair to say that many consultants did drag their feet into any discussions that put their fees at risk, the absence of any immediate incentive to do so was often what stopped them. Clients, as it turned out, were much more interested in simply shifting risk onto consultants, by withholding their fees, than they were in sharing both the risk and the reward. They went into negotiations worried about what would happen if things went wrong, and, finding themselves sitting across the table from a bunch of bright, confident consultants, ended up more worried about what would happen if things didn’t go wrong.
Nevertheless, what was happening represented a gilt-edged opportunity to shift the basis on which the consulting industry makes its money, from inputs (access to clever people for a unit of time) to outputs (your problem fixed), and that could come back to haunt consulting firms.
Fast-forward to 2018 and the monster is rearing its head: With robots starting to perform many of the more routine tasks undertaken by consultants, consulting firms now need to use fewer people on projects, and have the opportunity to bolster margins that have been under pressure for years. All they have to do is hold their prices where they are…
You can see what’s coming here, and so can clients. All of a sudden, consulting firms are desperate to shift the conversation away from inputs while clients want to do anything but. Two conversations we’ve had recently summarise the situation quite neatly. The first was with the person in charge of procuring consulting services in a very large UK-headquartered multinational (think multiple-hundreds of millions spent on consultants every year): “They’re trying to put the same price on services that they can now deliver at a fraction of the cost. They want to talk about outcomes, but it’s just an attempt to shield us from what’s actually happening behind the scenes. They’re trying to rip us off.”
The second conversation was with the leader of a mid-sized consulting firm in Europe (we’ll keep him deeply anonymous, for reasons that will become obvious): “We’ve created internal efficiencies using digital and AI, we’re using fewer people on projects, and are delivering a better service, but we aren’t paid the same amount given the flaws of the time and materials approach to pricing. How do we ensure that we don’t pass our efficiency gain onto clients?”
Setting aside the moral issue here, and even the promise of better outcomes, the answer to the question is that you can’t. Any attempt to shift the conversation onto an outcomes-based footing now runs the risk of being met with deep suspicion by clients. That horse has bolted. And even if you were successful in doing so, how long could you continue to hold prices where they are anyway? With technology providers waiting in the wings, a consulting industry already on the cusp of disruption would surely fall over the edge and run the risk of losing its clients. Indeed, having tried, and so far failed, to come up with a mechanism for challenging consulting firms on the issue, it’s on this last point that clients are pinning their hopes. “The simplest thing is for us to put our trust in the market, and hope that it forces prices down,” one told us.
And therein lies the most convincing reason of all: When the market for trusted advisers has become more trusted than the advisers themselves, there are things much bigger than margins to protect.