Don't ask, don't tell

Economic downturns invariably trigger renewed interest in paying for consulting services on a risk-reward basis. This one is no exception: every consulting firm I’ve spoken to recently reports that clients are talking about this and many believe there’s an opportunity for them to steal a march over their competitors by actively offering it. The jury is still out, of course, because past experience suggests that risk-reward deals are easy to talk about but hard to implement.

While we’re waiting to understand how that trend develops, we might take a look at something else the consulting firms are talking about – the growing number of clients who are announcing what the budget for a piece of work is before consultants put their proposals together.

Conventional wisdom says that, when you’re buying a customised, non-standard service such as consulting, you keep your cards close to your chest. You talk to several possible suppliers and use their responses to gauge what a reasonable market rate would be, then negotiate accordingly. There have always been drawbacks to this. The consulting firms end up vying with each other to see who is best at guessing the client’s budget, a corporate version of pin the tail on the donkey. All the attention given over to working out the price eats into that which could have gone into thinking about the client’s requirements.

Buyers can end up with five proposals, all at wildly different price points, none of which may have really identified what they need.

The way people have got round this is to use scope, scale and size as substitutes. The consulting firm will float an estimate of the time involved and the number of people who’ll need to be on the project, to see if the client baulks. A client who’s asked a big firm to pitch will know their rates will be higher than a small one.

But why not go the whole hog? Why shouldn’t clients tell the consulting firms exactly what their budget is for a given piece of work? Consulting firms would be able to compete on the basis of how much they could do for the money. Clients would find it easier to compare proposals and there would be nothing to stop them negotiating the fee down at the end if they wanted to because who knows what a “market rate” is in the current climate?

Risk-reward deals may change the consultancy industry in the future: asking and telling is doing so now.