• Sixty-eight percent of consulting projects cost more than US company estimates

• Technology firms more likely to significantly overshoot client expectations on cost

• Discounting plays vital role in US consulting market...

Although US companies expect to pay between US$2,000 and US$5,000 a day for a management consultant, new research has found that almost three-quarters (68%) of consulting projects end up costing more than the client’s initial estimate, with only 3% of projects costing less.

The research found that three-quarters (75%) of US companies arrive at estimations of project costs before they receive any proposals from consulting firms. Technology firms in the US market were the most likely to overshoot these client expectations on cost, with a third of projects (33%) costing significantly more than client expectations, compared to 26% of MBB (McKinsey, Bain & Company, and Boston Consulting Group) projects and 18% of Big Four projects.

This data is published today (15th April 2019) in a new report by Source Global Research, the leading research and strategy firm for the global professional services industry. Source surveyed US-based senior executives from major organisations that had all been directly involved in buying and managing consulting projects. Seventy-four percent of the organisations had annual revenues of over US$1bn, with 23% in excess of US$5bn.

Source found that most clients think consulting firms are setting their rates too high: 74% agreed that consultants do not create enough value to justify the prices they charge. However, it also found that it is the rule rather than the exception in the US market for these rates to be discounted, with consulting firms offering clients some sort of discount on two-thirds (66%) of projects.

Fergus Blair, a Senior Analyst at Source Global Research, said:

“This is an industry in which service providers routinely provide quotes that are well above client expectations. These quotes may then get negotiated downwards but still end up landing somewhere between the client’s initial estimate and what the consulting firm would ideally like to charge.

“Discounting is also playing a vital role in the US consulting market, and when clients extract discounts from the firms they negotiate with, they come away thinking that they have ‘beaten’ the market—even if the reality is that they are ending up with the same deal that everyone else is getting.”

Source found that more than three-quarters (79%) of senior executives said all or most of their organisation’s consulting projects include some sort of outcome-based element, and 88% wanted to make more use of outcome-based pricing in the future. The top two reasons clients gave for why they want to do more outcome-based deals were to make consultants work harder (64%) and to make sure that consulting firms staff their projects with only their best people (50%).

Furthermore, 96% of senior executives who had used outcome-based pricing said that it had a positive effect on project outcomes, with 61% stating that it had a significantly positive effect and 35% a somewhat positive effect on the quality of the work delivered by the consulting firm.

Fergus Blair from Source added:

“The US probably has more appetite for outcome-based deals than most markets, but anecdotally we can say that we have yet to encounter a region where clients didn’t, on the whole, tell us that they were interested in doing more of them. In general, however, outcome-based fees are still seen as an add-on to projects, not as a way of pricing the majority of the work; both parties see them as “bonuses” that the delivery partner will receive should they hit certain targets. We expect that to change in the future, as clients look to tie more of their consulting spend to the actual value that consultants deliver.”

Dr. Georg Tacke, CEO at Simon-Kucher & Partners, said:

“Outcome-based pricing is another mechanism that firms can use to link price more closely to value. Of course, that doesn’t work in all cases—in some areas, such as strategy, there can be too many external factors that might affect the final result of the project.”

Consulting fees and client spend to go up

The majority of US-based senior executives surveyed by Source (84%) expect consulting fee rates to increase over the next five years, with the most commonly cited reasons for fee rises being the increased demand for consultants to have specialist or technical skills (58%) and the increased use of proprietary tools and assets in the consulting process (45%). A similar number (80%) expect their overall spend on consulting projects to grow over the same period. Another recent Source report found that this is also true for shorter time frames: 59% of clients said their spend on consulting projects would increase over the next 18 months.

For more information on Source reports contact ella-sian.jolley@sourceglobalresearch.com, telephone +44 (0)20 3478 1204, or visit www.sourceglobalresearch.com.

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