It’s perfectly reasonable to ask how much something costs when you’re considering whether or not to buy it…surely! But how many times have you asked business consultants that question, only to be given the vaguest of answers: “well, that depends…”?
Of course, both sides of this are reasonable to some extent. You, as a prospective client to a business consultant, should be able to get a feel for how much the service you will be receiving costs, even if not an exact amount.
But looking at it from the other side, when you buy a different product such as a car, you only find out the exact amount when you have worked out the complete specification of the car, maintenance plans, financing options, etc. Business consultancy, however, covers such a wide range of activities, skill sets, and desired outcomes that it’s not as easy as a car to price. This is the main reason business consultants are not always able to give a solid price before understanding the exact requirements from the client and how much resources they will have to put in.
The concept of Value vs. Cost is a very important one and is also often avoided, or at least only discussed in very general terms, in initial conversations. Many consultants are wary of being held to value targets, while clients often focus too much on the cost. As with all price negotiations, both sides should feel they have come out of the transaction with a satisfactory result. Therefore, to help you better evaluate offers from business consultants, we’ll look at some of the elements that drive the cost for the consultant, and how those translate into benefits that create value for you as a client. At the end of this article, you will be able to determine what you should be focusing on when requesting an offer from a business consultant and what the consultant is factoring into the final price they present to you.
5 things to consider when hiring a Business Consultant.
1. Your motivation – why are you considering hiring a business consultant?
Clearly, there are many types of business consultancy, and we will look in the next sections at how these different types drive cost and how they can create value. But they all have one thing in common – they involve bringing in external resources to help your business to change.
As a business owner or leader, you have looked at your business and decided that it needs to change. There are, of course, lots of quotes about ‘change’ and the imperative to “change or die”, but it’s often not that simplistic. Obviously, some businesses need to change radically to survive, particularly in these very harsh economic conditions. However, some are simply not showing the growth that their investors and stakeholders believe they should be producing, and these businesses also need to change. It may be a more personally driven change – as the business owner, you may feel you want to focus on other opportunities and need to stop working “in” your business, rather than “on” it.
Common to all these scenarios is the fact that the change needs to be significant ‘step change’. It is also a fact that this is incredibly difficult to do successfully with purely internal resources i.e., your management team and organisation structure. They all have their ‘day jobs’ to do, and change is a major task in its own right. They may also not have the experience or specific skills required, and these can take a long time to develop or acquire. The external business consultant can bring specific focus to the change program, particular areas of expertise, or literally just extra resource to handle the additional workload. It comes as no surprise that 84% of businesses use consulting services according to a survey of 250 UK industry decision-makers from companies of varying sizes across the public and private sector. Those who did not use consulting services indicated that the reasons were mainly related to budgetary restraints and/or because they have an existing in-house solution.
2. What drives the cost of consultancy?
To assess the elements of consultancy that drive costs we need to look at the various types of services a consultant may provide.
Consultancy project – This is often around a specific area of your business strategy such as overall business vision, mission and strategy, sales growth strategy, organisation restructuring to align with your strategy or altered market conditions, investigation of a new area of business opportunity or supplier strategy – particularly in the world of COVID and BREXIT. The consultancy project is about creating and shaping the direction and plan of Change.
This type of service is often supplied in a kind of ‘iceberg’ format i.e. with only a part of the consultants’ activity being client-facing and therefore obvious to the client. You may actually not meet all of the consultants who are working on your project, and it’s unlikely you’ll get a breakdown of their time due to the unique nature of each project. The very big firms may use a very standardised model to apply to many client situations, but the medium and small consultancies will give you a very individual and bespoke service.
In this kind of consultancy product, you are not just paying for the structure and process of the consultants, you are paying for their specific expertise and experience eg it’s not just their time turning a particular screw, it’s knowing which screw to turn!
Project Execution – Whereas the Consultancy Project was about building the plan, Project Execution is about putting a plan into operation. You may ask yourself “why do I need a consultant for this?”. The answer is that not every business does, and it varies depending on the nature of the project. All change projects require focused, dedicated, resource or they will get marginalised and will not meet the original objectives. Sometimes, a badly resourced project will even leave the business weaker than if it had not been undertaken in the first place.
Any serious change project needs to be given the highest chance of success, so bringing in experts is a good move. The cost drivers in this one are obviously the time of the project and the consultants’ expertise is an essential element. Unlike the Consultancy Project, the Project Execution consultant will be working in your business and the majority of consultancy time will be visible. The outcomes, too, should have been defined very clearly in terms of financial targets, so the cost of this service is much more directly related to time spent, with the daily rate reflecting the level of expertise and experience required from the consultant.
Outsourced/contracted Service – I am using this as a catch-all expression to cover those services provided on a regular basis over an extended period of time. This may include the provision of an outsourced HR or Marketing function (either replacing or augmenting a business’ existing departments), or the supply of board leadership (eg CEO, Chair or NED) services.
The keys to this service are (1) that you’re getting a level of service that the business probably couldn’t afford if contracted on a full-time basis, (2) you’re enhancing your business with highly skilled people with experience from other businesses and industries, and (3) you are able to turn the level of service provision (and therefore cost) up and down, or even off, much more easily than if it was part of your own employee base.
The cost will be driven by the number of person-days of service provided, again with the daily rate reflecting the experience and expertise of the resource provided. It is a very easy investment decision to evaluate with a direct comparison between having your own resource and contracting an outsourced one, including the cost of scalability (up or down). However, you also need to factor into the calculation the potentially higher calibre of the outsourced version, or the greater breadth of experience.
3. What will you get out of consultancy? Value Creation
We have looked so far at the way in which different aspects of the various types of consultancy service affect the cost. However, don’t forget – you’ve engaged a business consultancy because you want your business to change for the better to a very significant degree. This is not just a cost decision. What are you getting in return? To give you some insight into what other decision-makers are looking for when they invest in consulting services, take a look at what they have listed as their “definition” of consulting in the survey referenced above run on 250 UK decision-makers.
We will look in the next section at how cost and benefit can be married up in different charging models, but let’s first consider some ways in which consultancy can bring benefits and add value.
Sales growth – It can be difficult to find the time you need and resource required to look beyond your existing markets, and growth within existing markets, using your current organisation, is tough. This is not because your own people aren’t good enough. It’s human nature to focus on what you know, and also to defend your position of knowledge leadership within an organization by shutting down new avenues of exploration suggested by other team members; after all, if you’re the sales director, this feels like an implicit attack on your ability to do your job.
An external consultancy can bring experiences of other sectors or countries beyond the expertise of your team. They can also provide the resource to do research and modeling, working with your sales director, rather than being seen as teaching them their job.
Supplier alignment – There is often far more attention paid to the demand side of a business (ie customers and markets) than the supply side (suppliers, supply chain and logistics). However, particularly in this doubly challenging time of COVID and BREXIT, the supply side is causing businesses at least as much of an issue as the demand side. Most companies’ supply chain or procurement departments do not have the capacity, or probably the experience, to create new, robust, supply lines, at the same time as renegotiating prices and working with logistics providers to get material to their factories and finished product to customers.
These can be highly specialised areas, to which an external consultant can bring their international and sector experience to bear. It is also a critical question of resource, and it needs to be handled with a great sense of urgency. A consultant can certainly supply that focused resource, and specific deadlines can be set according to your needs.
Aligned Organisation Structure – Defining your strategy across the various business functions is, of course, essential, but without the right structure and people in place, it will almost certainly fail. This is an area that definitely benefits from an external view, judging roles and individuals objectively and without any bias (which can be purely unintentional).
Changes to structure, especially those involving redundancies, need highly skilled and experienced handling, and this is a full-time activity during the project. It can also help people accept the change if an external consultant has assessed the organization, made the recommendation and is executing the plan. The company’s management can concentrate more on running the business.
Engaged and supportive funders – any major change will involve an element of funding, whether from internal or external sources. This can be a major drain on your FD’s time and they may not have the experience or contacts to undertake this aspect of the change program effectively. A consultant, on the other hand, can provide a ready-made set of contacts in the financing world and will be more experienced at how to pitch to funders.
Growth by Acquisition – this is a huge subject in its own right, but it is a route to growth that is often neglected by many companies. It is a great opportunity to make a step-change in size and to take a stake in a new market. There is a wide range of advisors and consultants who can assist in the acquisition process, legal and corporate finance being the usual ones. However, they only address part of the overall process which determines the ultimate success or failure of an acquisition. Consultants can also provide valuable expertise and resource in the pre-acquisition planning and the post-acquisition integration execution, particularly as it relates to major groups of stakeholders such as employees, customers and suppliers.
4. How do consultants charge?
Obviously, the type of consultancy service (see section 2) has a big effect on the way in which they are charged. For example, Outsourced / Contracted services will usually be charged on a monthly basis, as the service is delivered, and the daily rate will be fairly obvious. Project Execution services i.e. executing a pre-existing plan, may be charged in stages: a 30% on signing the contract, 50% on completion of a major milestone and the remaining 20% on the final closure of the project.
The most interesting service, in terms of charging, is the Consultancy Project. Some consultancies will charge a flat fee, possibly split between the beginning and end of the project, while others may charge a monthly retainer fee. These are very common and have the advantage that you know exactly what you are going to be charged from the beginning. The disadvantage for the client is that they pay the consultant regardless of whether or not the benefits of the project materialise.
A more interesting charging method is one in which the consultant offers to take a share of the risk in return for a share of the benefits. This is particularly applicable for consultancies whose service extends to assisting in project execution as well as the planning phase. After all, they can actively help manage the outcome, rather than rely on the client to carry out a plan effectively. For the client, it marries benefit to cost very effectively, thereby vastly increasing your chances of getting the outcome you were looking for in the first place.
So how does this risk / reward sharing actually work? Ideally, it should involve the following elements:
- Clear targets to be achieved by the project. These have to be very clearly and easily measurable, and to be identifiable in the financial statements (Profit & Loss or Balance Sheet) i.e. proof that the project has added value to the business.
- Firm agreement of the targets so that there is no argument about whether or not they have been achieved. As with most financial targets, they could be impacted (positively and negatively) by factors outside of the consultant’s control. Both consultant and client should look to minimise this possibility, but once set, both sides just have to accept the result.
- The sharing mechanism can be set as a percentage of the benefit e.g. any excess profit above an agreed target will be split 50:50 between client and consultant.
- The project may be focused on re-financing the business or perhaps making a successful acquisition. In this case, the consultancy fee may be a percentage of the value of finance raised or the value of the acquisition e.g. 3%-5% of the value of finance raised or acquisition value. In the case of an acquisition, it could include an element of the previous type of fee i.e. a percentage based on over-achievement of post-acquisition integration savings.
- In all of the above cases, it is good practice to use a hybrid model including an element of retainer fee, particularly during a long project – it would be unreasonable to ask the consultant to effectively work for nothing over a period of weeks or months.
5. How do you achieve a Win-win?
The best deals are ones in which both sides feel they’ve got a good deal. The client does not want to feel that they’re paying a huge fee with no certainty of benefit, and the consultant does not want to feel as if they are potentially working for nothing. Therefore, it is vital to establish clear financial objectives for any project and to link the costs with the benefit of achieving those targets. Flexibility of approach is very important in finding the right solution for both sides. This is usually more achievable with the small to medium consultancies rather than the very large ones where solutions and processes will have to be more standardised. It is also likely that the many one-person consultancies will be unable to afford to offer some of the hybrid risk/reward sharing models discussed above.
What’s going to be your first major business decision in 2021?
I hope this blog has given you some insight into what consultancy can bring to a business and some of the features that drive cost. The most important concept to understand is that both consultant and client want to increase the value of the business. The cost should be commensurate with the targeted increase in value, and the charging mechanism should maximise the potential to achieve that target.
The questions you now have to ask yourself are: “how can I change my business to increase its value dramatically in 2021?” and “can I afford not to do it properly?”.