Posted , in Differentiation
Value in consulting: Have we put the cart before the horse?
Talk about outcome- and value-based pricing is on the rise. Again.
In research we carried out about pricing in the US market earlier this year, the vast majority of clients said they expect to do more outcome-based pricing in the future. That proportion rises to 100% among the very largest organisations—the most important market for consulting firms.
Such enthusiasm is an early indicator that clients are getting jittery about their often considerable expenditure on consulting services: Worried about the possibility of tougher economic times ahead, they start pushing fee rates down, and consultants respond by trying to find ways of keeping their margins up. In theory, value-based pricing works for both sides: Clients can justify their investment; consulting firms avoid protractive and reductive conversations that result in lower prices in the long as well as short term.
But splendid theory hasn’t always translated into solid practice. That same research revealed that around two-thirds of consulting projects, rising to around three-quarters of projects delivered by technology firms, have an outcome-based component. But the proportion of fees actually at risk remains vanishingly small. Clients blame consultants for not taking the initiative, for demanding too high an upside to success, and for creating too much complexity around how value is measured and attributed. Consultants blame clients for dragging their feet, for trying to penalise consultants rather than reward them, and for creating too much complexity around how value is measured and attributed. The result is a gigantic stand-off, with neither side apparently able to crack open the opportunities that would undoubtedly stem from this approach.
I think this is because we’re approaching the problem—the opportunity—the wrong way. We’re trying to put a price on value before we’ve understood what value is. We’ve already argued in this blog that clients have a complex, multifaceted view of value, and that value isn’t one thing, but a combination of five things: providing a better solution than a client could deliver by themselves, and/or doing so faster, cheaper, with less risk and less internal politics. That means that if we want to be paid according to the value added, we need to understand precisely what value an individual client is looking for. Until we’ve had that conversation, there’s quite obviously no way we can create a price that’s based on value.
Consulting firms are making a huge investment in outcome- and value-based pricing, not just in promoting and talking about it: Even the relatively modest percentages of fees at risk can still have a materially negative impact on margins. So, let’s at least imagine a world in which these same firms invested that money in understanding and delivering value. If they did this, I’d argue, they wouldn’t need to spend as much time arguing among themselves and with their clients.
There’s a parallel here with hospital beds—bear with me. Based here in the UK, with a health service that’s free at the point of use, managing capacity is critical. People need to be moved through the system and out of the hospital as fast as is clinically possible, to free up beds for others. As a result, hospitals have had to invest in resources to manage the process, and I always wonder what would happen if the time spent trying to move patients on was invested in more beds. Now, I’m not a health economist and clearly one of the issues here is increasing demand, so you could add more beds only to find that you need more. And yet…
There is not a finite amount of value in the consulting world: It is not a scarce commodity that has to be fought over. The extraordinary thing about value is that a consulting firm creates it—and the more it creates, the easier the conversations about pricing will become. We need to spend more time thinking about the horse, and less about the cart.