I have always been curious as to why consulting firms hesitate to commit to their clients, “We will deliver an ROI”. The ‘smarter’ and the bigger consulting firms price their services on a ‘Time & Material’ (T&M) model, sometimes linked to milestones but very rarely does a firm commit to deliver a tangible Return On Investment (ROI) and more importantly assign a portion of their fee to the ROI’s being delivered on the ground. The risk to reward ratio in both the T&M and in the milestone-based model is fairly and squarely on the client, only the degree differs. ROI while it appears risky from a consulting firm’s standpoint, could also be hugely rewarding and provides huge confidence to the client they are working with someone who has a ‘skin’ in the game and is willing to partner with the client in delivering a higher return. What about the risk and will this work for all companies and under all circumstances? Risk for a consulting firm can be mitigated by ensuring that one spends adequate time with the clients that it proposes to sign on and does a ‘dipstick’ to understand what can go wrong. Linking the fee to delivering tangible business outcomes need not be provided to every company that the firm signs on, even if this is done for 10% of the clients, to begin with, will be a huge step forward. It can change perceptions about consulting firms, establish trust, and build a stronger bond with clients.
So, the question remains, if an ROI-based fee allows consulting firms to charge a higher fee, then why are consultants not willing to share the risk?
The short answer, of course, is, It requires getting out of one’s comfort zone, moving away from something that everyone has been used to for a very long time (remember this hasn’t changed since the time consulting began maybe about 2 centuries back) and it provides a ‘stable’ revenue streams without the need to change.
But by and large, if it is possible to share the risk with clients, it not only presents higher rewards to the consultant but also establishes a strong differentiation and helps such firms stand out in the long run. As Peter Drucker said, “All profits are derived from risk.” To slightly modify what Peter Drucker said, “Significant upsides are derived from risks”
A study by market research firm KLAS in their report – Value-based Consulting 2019 which covered firms in the healthcare consulting space, concludes that consulting firms including Deloitte, Lumeris, Navigant, PricewaterhouseCoopers, Optum, Premier, Chartis, Health Catalyst, and Milliman, provided ‘value-based’ consulting, performed well at a rating of 85+ out of 100 points, and were recommended by their clients to other companies.
When all of us seek concrete, tangible ‘value’ or ‘return’ in everything that we do, why not seek ‘value’ from the firms that we hire? It is time that consultants realize this if they haven’t already, may not be too long before this becomes the most preferred engagement model.
