| | By Fiona Czerniawska
As part of our
research on consulting in
Europe, the Middle East,
India and Africa, we
inevitably asked
consulting firms how much
they had seen prices fall
during the recession.
Overall, we estimate
that fee rates in
multinational
corporations have dropped
by between 10% and 15%,
and those in 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 | |
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| | the larger the client it
serves, the higher its
average fee rates will
be. However, this simple
model starts to change as
the boundaries between
client segments become
more permeable. 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 | |
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| | 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 | |
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| | 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. | |
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