Posted , in Business model
It’s the outcome that counts
As much as we like to think of ourselves as intelligent and discerning consumers, the reality is that many of the day-to-day purchasing decisions we make are driven by our primitive reptile brains. There is some fascinating academic research out there that illustrates exactly how quickly our capacity for critical thinking departs us when we are put in a buying scenario. In one study on women’s clothing, the exact same product shifted 24% more units when priced at US$39 than when priced at US$35; another found that using fewer syllables to describe a price tag—saying “fifteen hundred” instead of “one thousand five hundred”, for example—drastically reduces how big consumers think the number is.
So wouldn’t it be nice if there was a way to take out the subjectivity from questions of pricing? This is the promise of outcome-based pricing: By making a project’s cost dependent on the value delivered by it, it allows clients to make sure they are spending money in ways that actually offer a return on investment, and not just a dopamine boost. It is unfortunate then that putting together such a deal in a way that works for both parties is often easier said than done.
However you measure it, clients are extremely positive towards the idea of tying their project spend to outcomes: In the survey we conducted for our new report on pricing, 39% of them told us that they wanted to “significantly” expand their use of outcome-based contracts, and a further 49% wanted to make more moderate increases. Among clients whose most recent projects had deployed an outcome-based pricing mechanism, 61% thought that doing so had had a substantial positive impact on project outcomes.
Consultants, however, are not sold. When we raise the topic with them, it typically gets a much frostier reception. At best, they think clients are being overly optimistic; in reality, there are so many external factors that can affect project outcomes—particularly when dealing with complex strategy or transformation projects—that you would have to be naïve to think that you could ever find a mechanism of sharing the risk/reward burden that works for both parties. At worst, they think that clients’ desire to couple fees to outcomes is just a smokescreen, and that what clients really want consciously or unconsciously—is lower prices.
The fear is that clients will use these mechanisms not as a way to equitably share value but rather as a cost-cutting tool, inevitably leading to squabbles over whether a project’s outcomes have been fairly and accurately assessed. After all—many firms reason—if a client were actually confident at the outset of a project that the desired outcomes would be achieved, then why even do an outcome-based deal? All consultants have stories about clients backing out of such deals at the last moment when they realised how much they could be on the hook for; as a result, the only outcome based deals that do get signed off are ones where the deck is already stacked against the consultants.
In our view, however, much of this scepticism is misplaced. While there are no doubt some clients out there who just want bargain-basement rates, they seem to be the minority. When we asked buyers of consulting services to tell us why they wanted to do more outcome-based deals, reducing project costs ranked relatively low down the list, with only 28% citing it as a factor. Moreover, the clients who are most positive about outcome-based pricing are the same ones who expect their total consulting spend to grow the most over the next few years: The Venn diagram of “spendthrifts” and “outcome evangelists” actually has less overlap than you might think.
If the big consulting firms want to protect their market share, they should seriously consider acquiescing to client pressure and tying a greater percentage of their revenue to project outcomes. Firms are increasingly having to compete for work with smaller and more nimble competitors (such as digital agencies) who don’t have the same compunctions about sharing project risk; if consultants don’t give clients what they want, someone else will.
But doing more outcome-based deals needn’t just be a pandering response to client demands. Firms should recognise that they too can stand to benefit substantially from this type of arrangement. For one thing, having a stake in the outcome necessitates a new type of client/consultant relationship: If you as the delivery partner stand to lose out financially should the project flop, then you have much more claim to a seat at the table when key decisions are made, in turn creating more scope to shape the end point of the work.
Moreover, having a conversation with a client about what an outcome-based deal would look like forces them to think in more concrete terms about how the project will create value for them. Even if you then both decide to employ a more traditionally structured contract, the fact that you had that conversation before the start of delivery means that they will be able to make better-informed decisions when it comes to questions of project scope, and you will have the clear understanding of value being delivered necessary to protect your price point during negotiations.
At the end of the day, not all client engagements are well suited to outcome-based pricing. But almost all of them would benefit from having a frank and open conversation about project outcomes up front. Consultants and clients alike will find that asking, “How would we structure an outcome-based deal? ” is an illuminating enough exercise to be worth doing, regardless of where the question ultimately leads.