Buy now, pay later

Another permutation of the sensitivity about prices in the consulting industry at the moment is the rather novel proposal, suggested by some clients, that they’re willing to pay more for a consulting service, but only if they can pay next year. 

 

I say “novel”, but this approach to pricing is implicit in many long-term outsourcing and IT deals: contracts are back-loaded so that clients get the benefits up-front, before they start having to pay for them. However, because the supplier is effectively funding the client for a year or so, they get paid extra in the later years. There are two things that are significant as this approach is now extended to consulting. The first is that consulting projects are usually shorter, so does the consulting firm get nothing at the time but has to go back to the client perhaps several months after the project has finished, asking for their fees? The second is that clients are quite explicitly offering to pay more.

 

That raises a far more fundamental question (and one that should be asked in outsourcing and IT projects as well). Does it make sense to borrow money from your suppliers? It can look like a great idea in theory, but how does the rate of interest you will effectively be charged, if you take into account either the back-loaded fee or next year’s hike in rates, compared to the rate at which your organisation normally borrows money?