Summary
Understanding consulting pricing structure and engagement costs can be challenging. We wrote this blog post to help demystify that structure for our clients and prospects. Anytime you evaluate a consulting proposal, it is valuable to consider:
- Price in the form of a daily or hourly rate is the easiest factor to find and evaluate, but it can be misleading if you are not considering it within the context of expected value.
- A “consulting day” is not a standard measurement, the value you can expect to get from each consultant varies widely based on their experience and specific skillset.
- While cost is an important consideration, return should be the focus of your evaluation. Management consulting is an investment in your company, you should not only expect a return but a strong ROI.
Introduction
Estimating and projecting management consulting costs can be a challenging task for many companies. For some, the difficulty arises from needing to consider all elements involved, such as the scope of work, expertise required, firm reputations and relationships, and time investment. However, understanding project cost can simplified by focusing on the two primary components: rate and quantity.
Daily Rates
Rates are often expressed on a daily or hourly basis; we typically consider daily rates. For the sake of simplicity, this post will only reference daily management consulting rates.
Daily rate is the number that most clients primarily associate with management consultant pricing, as it is a straightforward figure that provides an immediate sense of cost. However, this focus on the rate alone can be misleading if it is not placed within the broader context of the industry and expected value from the consulting engagement. To accomplish this, clients must consider not just the rate, but the context around the resources they will receive for that rate. Larger firms may have access to more resources than smaller firms, but that can be compensated by the smaller firms’ agility, expertise and experience on the job to be done.
Through a simplified lens, the management consulting industry can be divided into five groups:
- The Top Three – at the top of the management consulting food chain you will find the strategy firms: McKinsey, Bain, and BCG.
- Big Box – The next group are large consultancies comprised of PwC, Deloitte, Accenture, A.T. Kearney, and their competitors.
- Boutique Firms – the boutique firms are smaller firms offering similar services to the larger management consulting firms but generally with a more narrow, specialized focus. Examples include Alvarez and Marsal, Alix Partners, or FTI.
- Off-Shore or Tactical – this is a bit of a more amorphous group generally comprised of firms that either use off-shore, low-cost resources or younger on-shore consultants to deliver cost conscious engagements. These firms sometimes, but not always, started in another space, like IT consulting, before entering the management consulting market.
- Independent Consultants and SMEs – this is a broad grouping that encompasses everything from 1099 consultants to highly specialized SMEs. The group can be accessed directly or through intermediaries like Catalant, OnDemand Resources, or Mindbench.
Another key consideration when evaluating consulting rates is whether a firm uses individual resource rates or blended rates. Individual rates are typically employed in firms with a high degree of variability in consultant experience and skill sets. This approach allows clients to precisely match specific consultant expertise with their project needs, potentially optimizing both cost and outcome. On the other hand, blended rates are often seen in firms where consultants possess similar levels of experience and capabilities, offering a unified pricing structure. Blended rates can provide simplicity and predictability, potentially streamlining budget planning for clients.
While daily rates provide a fundamental basis for calculating management consulting costs, it is imperative to evaluate these rates within the broader context of each consultant’s experience and the value they bring to the engagement. A consultant with significant industry experience and specialized expertise may command a higher daily rate, but their contributions can offer substantial benefits that justify the cost. Moreover, the total number of consultants involved in the project can impact the overall cost. Thus, it is not just the daily rate that matters, but also the collective capability and effectiveness of the consulting team, which can significantly influence the outcome and success of the client engagement.
New Dominion Consulting is a boutique firm specializing in supply chain, procurement, and operations. We offer our clients a single blended rate per day for our consultants.
Quantity or Level of Effort
Determining the level of effort in consulting engagements can present challenges that surpass the complexities of rate structures. This is largely because a “consultant day” is not a standardized measure; the expertise and efficiency of consultants vary significantly. A highly experienced and proficient consultant may achieve outcomes in 20 days that exceed what three less-experienced consultants could accomplish together in 60 days. This disparity arises from the seasoned consultant’s ability to swiftly navigate challenges, apply advanced problem-solving skills, and leverage deep industry knowledge to deliver high-impact solutions. Therefore, the level of effort is not solely a function of time but is intricately tied to the consultant’s ability to drive effective and meaningful results within the allocated timeframe.
When evaluating consulting services, it is crucial to consider the daily rate and the number of days in conjunction, rather than as isolated factors. A seemingly lower daily rate might appear cost-effective, but if the number of days required to achieve project goals significantly increases, the total cost could surpass that of a consultant with a higher daily rate but greater efficiency. Conversely, a higher daily rate may be more justifiable if the consultant can complete the engagement in fewer days due to their superior expertise and strategic acumen. This intertwined relationship highlights the necessity of a comprehensive assessment that balances both cost elements to ensure optimal project value and successful outcomes.
Other Costs
Travel expenses are typically the other cost that needs to be considered in a management consulting engagement. If the engagement requires the consulting team to travel, the client should expect to be billed for travel expenses. Any additional costs besides travel should be carefully evaluated to understand the benefit to the client of those costs.
Understanding Engagement Price and Value
Balancing price and quantity into the total cost of a consulting engagement is a nuanced and intricate process, necessitating a careful analysis of both input and outcome. While the upfront engagement cost is an essential consideration for many enterprises, it is crucial to focus more significantly on the engagement value—essentially, the tangible and intangible benefits that the client company stands to gain. The complexity arises from understanding that a lower overall cost does not necessarily equate to better value if the outcomes fall short of expectations or fail to deliver a strategic advantage.
A consultant who demands a higher fee may bring stronger expertise, innovative solutions, and a strategic vision that ultimately yields a substantial return on investment. The evaluation of consulting services should prioritize the long-term benefits and measurable impacts that the consultancy will generate, ensuring that the resources invested translate into meaningful and sustainable value for the organization.
An Argument for ROI
Evaluating a management consulting project through the lens of investment rather than merely a cost expenditure allows organizations to align their strategic objectives with meaningful value creation. The essential question shifts from “How much does it cost?” to “What is the return on this investment, and over what time frame is it realized?” This perspective empowers decision-makers to gauge the success of a consulting engagement by examining the measurable impacts it has on business performance, competitive positioning, and long-term growth. It is imperative for companies to establish clear metrics and timelines that align with their strategic goals, as these will define the parameters for assessing the return on investment (ROI). By doing so, organizations can better determine the efficacy of the consultancy, ensuring that the resources deployed lead to quantifiable improvements and sustainable business advantages over an anticipated period.