Fee rates: down but not out

As part of our research on consulting in Europe, the Middle East, India and Africa, we inevitably asked consulting firms how much they’d seen prices fall during the recession.

Overall, we estimate that fee rates among multinational corporations have dropped by between 10% and 15%, and those among large regional or national companies by as much as 50%. The most precipitous declines have now levelled off and in some highly specialised and sought-after areas there are even indications that prices are edging up.

But will they recover more generally? History and logic says no. We see six main factors which we expect will keep rates low for the foreseeable future:

1. The blurring of boundaries between client segments: Consulting fee rates are – very broadly – dictated by the size of the client and the scale/brand of the consulting firm. The bigger and better-known the consulting firm, and the larger the client it serves, the higher its average fee rates will be. However, this simple model starts to change the more permeable the boundaries between client segments become. During the 2004-2008 boom, the premium rates of the Big Four firms drove up fee rates for mid-sized consulting firms. However, now that those firms have graduated to be among the biggest consultancies, their fee rates are being compared with the big strategy firms, against which they look low. The result: strategy firms’ rates are falling.
2. The involvement of centralised purchasing: The increasingly active role played by procurement in multinational corporations will not only keep consulting rates low in these organisations but promises to bring down prices elsewhere as regional and national corporations increasingly adopt this approach.
3. The fight for market share: Many consulting firms plan to grow faster than the market creating a situation in which they are quite transparently fighting to take market share from their competitors – something that is as true in established consulting markets as it is in emerging ones.
4. The shift towards implementation: Implementing tends to mean sticking around for a lot longer, which in turn means greater scrutiny on price. Implementation also means working with different layers of an organisation, against which the difference in the cost of doing something internally set against bringing in external consultants, can look alarming to clients.
5. The continuing barriers to articulating and measuring value: None of the above issues would matter if it weren’t for the fact that clients question the return on investment they earn from consulting.
6. The low penetration of performance-based payment: Risk-reward and other, more innovative payment structures might raise effective fee rates for some types of work. However, all the evidence points to a small increase in the consulting work done on this basis, but no substantial shift.

There are two problems here: that, as explained above, fee rates have not just fallen but are likely to carry on falling and that they’re not falling across all areas at the same rate.
Of the two, the first is the more familiar scenario: as each successive recession has reduced fee rates, consulting firms have had time to adapt their business models to accommodate them. Thus, considerable effort in the last two years has gone into raising utilisation levels and cutting back-office costs in order to shore up threatened margins. Challenges remain – recruiting and retaining high-quality staff when there’s less money to pay for them – but they’re well-understood.

As long as a firm offers services at one price or the other, the situation is manageable, but the pyramid structure around which most larger consulting firms are built combines both price points. In the past, that wouldn’t have been an issue as both sets of prices were moving in the same direction, making it possible, for example, for firms to raise their fees by the same proportion. But where the already high prices at the apex of the pyramid are rising and those already low ones at its base are falling, the distance between the two business models may be stretched beyond endurance. Clients may query why the experts are so expensive when the junior consultants are so cheap. The resulting salary differentials may be so great that the profile of recruits and even the firm’s culture may start to diverge, to a point where we end up with two quite clear segments of consulting firms: the cheap and the expensive.