OTHER METHODS OF GENERATING REVENUE IN CONSULTANCY


For the most part, revenue is generated by fees, which are related to the time spent on a project. A perennial concern in a consultancy practice is the creation of non-time-related income. The reason is simple: if all income is time related, then once you have established your fee rate, there is a theoretical maximum revenue you can get.

If the revenue is to be increased without taking on more employees, the options are to increase the fee rate or to increase the utilization. My experience of fee rates is that price is rarely the major determinant in the choice of consultant. Other factors being equal, clients will choose the consultancy quoting the lowest fees; the consultancy firms quoting, however, will attempt to ensure that other factors are not equal, but seek to impress through their grasp of the client's problem and the quality of their people. This leads to some tolerance of difference in fee rate; a client would rather pay £50,000 for a consultancy with which he or she was keen to work than £45,000 where the assignment results are expected to be indifferent. So, some increase in fee rate might be possible. There will be a market rate and it may be possible to command a premium; even so, this is unlikely to be much above 10–20 per cent.

The alternative method of increasing revenue is to increase utilization. Again, here there is an upper limit to the number of fee days. Once time has been allowed for annual and statutory holidays, say 30 days per annum, then the number of working days available is down to 230 per person. Out of this, time has to be allowed for:

  • sales and marketing;

  • product development;

  • administration;

  • training courses and conferences;

  • sickness.

The time spent on each of these will be distributed unevenly across the practice; some consultants will do little other than operating on fees. Others may spend their time primarily on selling (see Figure 4.5 for examples of the budgets for consultants with different roles). The point is that it is difficult to raise utilization to an average of more than 80 per cent without harm in the long term to the practice. Important tasks would be neglected. In practice, too, assignments do not fit neatly together - there are delays to their starting, which means that there is often waiting time for an individual consultant between assignments.

So, the control of fee rate and utilization offers only limited opportunities for increasing revenue. Consultancy managements usually ensure that there are tight controls on utilization; it is monitored frequently (often weekly) and forecasted so that sales efforts can be adjusted accordingly. Fee rates are regularly reviewed, too, so the scope to increase utilization and fee rate is limited in a well-managed practice. If the productivity of existing resources is optimized, how else can revenue be increased?

Payment of a Retainer

A retainer represents a step towards non-time-related fees. A simple arrangement is where a consultant reserves a number of days in a period for a client, in exchange for which the client will pay a retainer. If the client does not take the days, then the retainer is still payable. If the client wants more time than the contracted amount, this is subject to negotiation.

Suppose in the ICC case study (Chapter 6), the GM decides that he would like John Smith's services on average for one day per month, not to carry out a specific project, but to provide general advice and counsel. The GM might pay John Smith a retainer for a year of 12 days' fees. There would be rules about John Smith's availability - for example, it would not be in the spirit of the retainer for the GM to take nothing for the first 11 months and insist on 12 days in the twelfth. The rule might therefore be 'up to two days in any one month, and up to six days per quarter; a maximum of 12 days in any one year, additional days to be subject to negotiation'.

Retainers are attractive to a consultancy firm, as they represent a guaranteed fixed base workload. Their usefulness to clients, however, is restricted. Circumstances where they might be applied by clients are:

  • with a technical specialist;

  • to secure exclusive services (that is, to prevent the client's direct competitors having access to the specialist);

  • to secure consultancy services that are not project-based (for example, where a consultant might be used in a temporary, part-time, executive role by a client).

A consultancy practice might also use retainers to secure the services of key subcontractors.

Decoupling Price and Cost

Professionals typically charge a standard fee rate, irrespective of the value of the work they do, but occasionally the fee can be related to the value of the work - for example: 1) in mergers and acquisition work, a successful transaction is of considerable value to the parties involved - professional advisers may relate their fees to the value of the transaction; 2) in recruitment work, the fees may be related to the emoluments of the appointed candidate.

Sometimes fees will be success related. For example, again in recruitment, at least part of the fee will be conditional on finding a suitable candidate to fill the vacancy. There have also been consultancies that, in their corporate development work, have accepted an equity stake in the company as part payment of their fees.

In theory, consultancies might also receive payment based on the benefits that their assignment has produced. There are arguments against this:

  • It can be difficult to produce a satisfactory base case.

  • It may influence the consultants to produce recommendations biased towards optimizing their fees rather than the client's business performance.

  • Changes may not be the result of the consultancy project (for example, reduced costs can result from a decrease in business activity instead of improved performance).

  • Improvements may depend on the performance of client staff as well as the efficiency of the consultancy project.

  • There may be a long wait for the consultancy to be paid, as the benefits accrue.

If these points can be satisfactorily addressed, the consultancy charge might be based on the share of the benefits. Some professional organizations, of which consultants are members, may prohibit this basis of fees, and so this should also be checked.




The Top Consultant. Developing Your Skills for Greater Effectiveness
The Top Consultant: Developing your Skills for Greater Effectiveness
ISBN: 0749442530
EAN: 2147483647
Year: 2003
Pages: 89

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