Posted , in Business model
Going down, coming up? Consulting prices in the pandemic
Every crisis puts consulting fee rates under short-term pressure and changes clients’ long-term views about what constitutes a reasonable price. Will this crisis be any different?
So far, so much worse than the past. Whenever we would ask the question prior to the pandemic, we always found that only a small percentage of clients expected consultants’ rates to fall over the short-term future. Now, things are very different: In our latest data from the US market, 33% of clients thought this would be the case, while 25% thought that fees, which faced intense pressure particularly in the second half of 2020, would stay the same.
This tallied with what we were hearing from discussions with clients: “We asked for the firm’s best ‘COVID price’” was one especially memorable comment. At the same time, there was no discernible increase in the amount of contingent pricing—something that helped many firms survive the 2008-09 financial crisis. Clients we’ve spoken to say that, while they love the idea of doing this, they recognise that such deals can be complex to manage (another lesson of 2008-09). They’re uncomfortable, too, with the idea of adding uncertainty on top of uncertainty: When little is predictable, a fixed price is preferable.
The good news, though, is that the situation appears to be improving: Back in September, the equivalent numbers were 37% and 30%. Most significantly, the percentage of clients saying that rates would rise has grown from 33% in September to 42% in December, meaning that expectations have moved from a net-negative figure of four points five months ago to a net-positive figure of nine points. If this crisis has had a worse impact on fee rates than previous ones, it looks as if its aftermath might be better.
Which raises the interesting question of why. One possibility is that even the most aggressive discount-seekers among clients eventually recognised that prices had become unsustainably low. But clients have never been especially sympathetic when consultants complained about rising costs in the past, and they’re rarely altruistic—even buyers who say they’re comfortable in theory with the need for rate increases are rarely keen to accept them when it comes to the consulting projects they personally purchase.
A more plausible argument is that, as demand has recovered, consulting firms have become more confident that they can push back on price pressure without losing work. There’s perhaps also a collective recognition on the part of the consulting industry that it—literally—can’t afford for discounting to stay at its peak-pandemic level.
But the final part of the answer may lie in clients’ views about expertise. We’ve known for some time that scarce, specialist knowledge commands higher prices—but that truism has become even more entrenched during the last few months. Clients, under pressure to respond to an unprecedented set of urgent challenges and short of in-house skills, wanted consulting firms to provide experts who could get up and running without all the usual discussions and processes that slow consultants down at the start of projects. Saving time was worth paying premium rates for—especially if those rates were partially offset by a reduction in travel costs. With clients keen to continue having easy and instant access to world-class expertise, consulting firms may find that they can not only charge more for highly experienced people, but also allocate those valuable people to more projects simultaneously.
This crisis has been like no other; perhaps its aftermath will be different too.