$1 billion and counting: how consultants maximise fees
There is little public scrutiny on the value for money; how do consultants decide what to charge?
Many years ago, a friend joined a major consulting firm in a senior role. First day on the job, he was given a manual called 'Assessing Opportunities: Do we really want this job?'. He gave me a copy. Enough time has passed to keep him and the consulting firm anonymous, but the document is no less revealing into how this large consulting firm assessed its clients.
To give the firm its due, the document requires its staff to ask whether any potential assignment will deliver good results and value for the client. The firm must be convinced it can provide a solution to meet the clients needs and (in capital letters) "... FOR A PROFIT!"
This article accepts that most consulting assignments are defined and measured, and the client should understand the costs and other commitments required to complete the assignment.
But in the wake of the recent revelations that the Australian Government is spending over a billion dollars a year on consultants, the emphasis here will be on how the fees are calculated and justified.
Of course, many professional services - legal, architecture, accounting, financial advice, plumber, electrician - are charged on a time basis, so the lessons are universal.
What does the Government pay $1+ billion a year for?
In recent years, despite public service staffing caps and a loss of senior staff in an attempt to control costs, payments to a select group of consulting firms have surged. In March 2020, the Australian Audit Office reported that in the five years after the Coalition came to power in 2013-14, annual fees doubled to $647 million. It has since doubled again.
The Australia Institute recently issued a report questioning the loss of skills in the public sector. Senior Researcher, Bill Browne, said:
“It is worth reflecting on the rise of consultancy spending by the Federal Government, now exceeding $1 billion dollars a year. Compelling the work done by consultancies to be public would be an improvement on the status quo, although there is still the underlying issue that consultancies are doing an unprecedented amount of public work. In fact, the $1.1 billion spent on the largest consultancies last year could have employed an additional 12,346 public servants. It is not just jobs being lost to the public sector; knowledge and experience is being outsourced too.”
“Australia’s consulting industry (public and private) is the fourth largest in the world. By population, Australia’s spending on consulting is greater than that of any other country, and about double that of comparable countries like Canada and Sweden.”
The use of consultants is tied to reductions in departmental staff. The current Government has indicated it expects the public service to align its thinking with government policy, which reduces the potential for contradictory opinions. Prime Minister Scott Morrison said public servants are expected to “get on board and implement the Government’s agenda”. The Auditor-General highlighted the loss of public service expertise.
In October 2021, The Australian Financial Review reported that Accenture was awarded government contracts worth more than $340 million during the previous financial year, and Deloitte topped the Big Four list at $275 million followed by KPMG, EY and PwC. These five companies earned $1.2 billion in FY21.
Let’s explore the consulting manual from one firm on how fees should be charged, so anyone who is a client of a major firm knows what is happening on the other side.
Extracts from how to be a good consultant … FOR A PROFIT!
Before any assignment is accepted, the firm must be sure “the client is willing and able to pay for our services”. That’s a great start with a government contract as there is no doubt about paying capacity. Then:
“Explore whether the client has reasonable expectations about how much this assignment will cost and enough money available to achieve a satisfactory conclusion.”
Here are some questions to ask the client:
- Have you established a budget for this project?
- How were you hoping to fund this project?
- Let’s say you really can get the results you want, but not for ($ amount). What would you do?
If the client budget appears insufficient, it could be due to one of three things for 'you', the client:
- You don’t really believe the value we placed on the results.
- You don’t really believe we can deliver the results.
- You believe someone else can deliver the results for less.
It reads like a confrontational push to make the client willing to spend more. The instructions make it clear that the firm should walk away if there is not enough money to achieve the desired results.
But loss of the assignment is not accepted that easily. Clients should prepare to be hassled. The firm must understand how and by whom each key decision is made:
- Can you help me understand the steps you will take in order to make the necessary decisions?
- Who gets involved?
- What do they have the authority to decide or influence?
- What criteria will they use?
- What objections do you expect, if any?
And then this punch line: “In order for this to be a high quality decision, who has to be convinced this is a good idea?”
Then pages on assessing the competition, such as whether the client is talking to other organisations, how comparisons will be made, how do they know who best serves their interests?
And this: “Forget about us for a minute. Let’s assume you hadn’t approached us. Based on what you’ve heard and seen so far, which of the other firms seems to be the most on target in meeting your needs.” Would anyone reveal the answer to this question?
And: “Nobody is perfect. What seems to be missing from what we’ve discussed.”
And: “Given that ABC is offering a good solution, what would we have to do to be clearly superior?”
And: “I don’t know if we can get you the fee you want, but out of curiosity, let’s suppose I could. Then what happens?”
It's a world where a lot of time and effort is spent on agreeing and collecting fees, which must frustrate those from both sides who just want to get on with the job.
Ensuring services are paid for and value billing
Much of the document is devoted to project scope and ensuring the job and costs are fully understood. Consultants are discouraged from discussing fees early on, and “seek first to understand, then to be understood.” Fees can later be discussed including scope and timing but:
“Never reduce price/fee without obtaining something in return that can be construed as a value exchange.”
Fees are determined according to four main elements:
- The time we spend on the work
- The timescale over which the task is expected to be completed
- The value to the client
- The amount we are prepared to invest in the relationship
Here is a good part for moving away from depending on hours – value billing.
“Fees based on time are traditional in the consulting business and this method is always an appropriate benchmark. However, it has the drawback of focussing not on what we accomplished but on how long it took us. It also draws the client’s attention to our hourly rates which may seem very high.
Some clients are willing and perhaps are expecting to pay on the basis of value, rather than strictly on the basis on the time spent. In the past, value billing has been rare, and many consultants are hesitant to do it, at least where the value is higher than the actual time charges. But it is not unethical, and in fact it is expected in many other professional services.”
It would be revealing to learn how much of the $1 billion plus paid by the Government is done on time versus value, and how the latter was measured. The millions spent on consulting advice relating to the slow vaccine rollout would make fascinating reading on whether the job was delivered as expected.
Non-traditional pricing must be approved by Head Office, and if fees are discounted for strategic reasons, “the client should be advised, in writing, why we are making this investment.” In other words, you owe me one and we expect more profitable projects or an expansion of our relationship in future.
The firm’s objective is to achieve 100% recovery of time and expenses, but there are exceptions:
New client. "Bidding low might allow expansion of the business but builds expectations that future services will also be cheap."
Sophistication of client. “Some clients are skilful in using consultants, asking us to do only the tasks where we excel.” Well, you wouldn’t want to do a task where you are mediocre, would you? “Others ask us to do routine work that they are too busy to perform. If we accept those jobs at all, we should make sure the client understands how much it is going to cost.”
Client work style. Consider charging more if the client:
- loves being involved in the consulting project
- wants plenty of phone calls, meetings and ‘face time’
- needs a final detailed report or fancy presentation
- has a complex decision-making process requiring many presentations and revisions
- has a hard time making decisions
- always haggles over fees.
This is a great insight. Clients should not look as if they are enjoying the work or if they have a hard time making decisions or they will be charged more. Look out for unnecessary 'fancy presentations'. And: “If the client seems to be eager for a bidding war, watch out.”
Another aspect to watch is leverage, the number of junior staffers managed by each partner. The senior staff are the business 'finders', but they work on many projects at once, leaving the grunt work to 'grinders'. Many years ago, the bank I worked for assigned a project to an experienced partner and firm, and then a young graduate turned up on the first day. I was supposed to guide him through the assignment. The old saying came to mind: "A consultant is a person who borrows your watch to tell you what time it is."
Make sure to issue the full invoice
Then page after page on engagement letters, issuing invoices and collecting fees. “If you don’t write it down, you can’t manage it.” So record all time and expenses spent on client work, including:
- Project planning and brainstorming
- Time thinking about the project at home, on the road or elsewhere
- Time spend on project and client management activities.
All the record keeping and planning should be paid for by the client, including sitting on the toilet thinking about the project.
There are strict rules about not entering time and expenses properly, and in bold letters, there are no exceptions to this policy. You only get paid if you record it, and if the bill is for less than 100% of time and expenses, a write-off document must be completed and approved. To emphasise the value of the work, consultants must write in the invoice letter how the they saved the client time and money and how the assignment benefits the client’s business and our continuing relationship.
It's boom time
Consultants are not the only financial professionals enjoying record numbers during the pandemic. IPOs are soaring based on market optimism and a lack of investments, with about $770 million in fees paid to investment banks in FY21. Legal and accounting firms have so much business that they are struggling for staff.
Scott Turow is a best-selling American author and lawyer whose books have sold over 30 million copies in 40 languages. He draws on his professional background in an essay for the American Bar Association called 'The Billable Hour Must Die'. He says:
"Whoever says to a client that my billing system on its face rewards me at your expense for slow problem-solving, duplication of effort, featherbedding the workforce and compulsiveness - not to mention fuzzy math? ... But recognizing how far behind the eight ball we remain in the eyes of the public, should we really continue to engage in billing practices that even our clients, who know us best, have been telling us inspire distrust?"
And he adds that when someone is billing and working 2,200 hours a year, there's not much chance to pursue the experiences that nourish the soul.